Negative Gearing: Tax Rule or Property Villain?

Negative gearing is back on the chopping block… or at least back in the headlines. In this episode, Jules and Ripehouse GM (and long-time investor) Ian Dowson break down what negative gearing actually is, why it exists, what happened when a government tried to remove it, and what today's proposed changes could really mean for investors, rents and affordability.

You'll hear:
• A simple explanation of negative gearing and how the tax offset works
• Why private investors carry Australia's rental market – and the 1980s "rents went bonkers" lesson
• How possible limits or changes could affect prices, rents and who can still buy investments

Book a free chat with the Ripehouse team: https://ripehouseadvisory.com.au

Transcript

SPEAKER_01 0:00

Negative gearing. Depending on who you listen to, negative gearing is either the reason property prices are so high or it's the only thing keeping the rental market alive.

SPEAKER_00 0:10

I feel like sometimes negative gearing gets spoken about like it's this magical power that evil property investors or rich property investors use to game the system.

SPEAKER_01 0:20

But it's just it's the easiest sell out there in terms of to demonize property investors, right? Like in terms of if the average person's out there going, well, my rent's too high or buying a property's too high. Well, it's easy to just point the finger and say, well, it's not because we haven't built enough property or we haven't stimulated the economy enough, it's because of those bloody property investors who are just making it difficult for everybody else. So I think it's a lot of deflection more day, I think.

SPEAKER_00 0:48

They tried stripping it out in the mid-80s, things didn't go so well. Were you aware of what happened at that time?

SPEAKER_01 0:54

Basically, what happened was the rental market went bonky. Every few years in Australia, the same topic comes back into the headlines: negative gearing. Depending on who you listen to, negative gearing is either the reason property prices are so high, or it's the only thing keeping the rental market alive. Now the debate is back again with reports. Treasury has been modeling potential changes to negative gearing as part of a broader tax reform discussions, including possibly the limit of the number of properties investor can negatively gear. And joining me today is our special guest, not Mark Davis for a change, but our general manager at Ripe House Advisory, Ian Dowson. Ian's typically running the day-to-day behind the scenes here at Ripehouse. However, he's at a very experienced property investor himself with over two decades in property. Dauso, great to have you back.

SPEAKER_00 1:53

The conversation's back, isn't it, Jules? It's back in the news. Uh people are talking about it. I don't know whether to get concerned or if I should just yawn because it does appear like this conversation is one that is on repeat.

SPEAKER_01 2:07

Yeah, I feel it's like as we get closer to May every year, budget time, it just they wheel it out again. It's just it's the same headlines really for every it's negative gearing, it's capital gains, tax, it's all the standard stuff that gets reeled out time and time again. I feel like there must be a glutton in the time of space where they've run out of headlines or or events to roll out. So we just we roll out with this one.

SPEAKER_00 2:30

And I think it does perform well from a clickbait uh point of view as well uh for the uh for the news media also. But uh but Jules, what is negative gearing? So talk to us about that. What is it for someone who's listening there going, I hear this negative gearing thing all the time. What is it?

SPEAKER_01 2:45

Yeah. So I guess the most simplistic term will just keep it for property space today, because there's other avenues as well. But negative gearing is essentially the loss of income on an asset to offset the uh, I guess, your income. So let's just use it real simplistic here. Let's just say an individual has $100,000 of income that they make, and once they calculate all the running costs, so that's the interest that they pay on the loan, the rental income they're receiving, all the other running costs, so you know, rates, water insurance, maintenance, property management fees, all of those things. Yep. Yep. And they get to the end and they go, well, we put all those together actually at a loss. That's negative gearing. And what they're able to do is they go, Well, if I've made $100,000, but I've lost $20,000, you now will be taxed at the assumption that you've made $80K of a wage. So again, I don't know the actual numbers, but let's just say if you were making $100,000 and you were supposed to be taxed $20,000, but you at $80,000, you were supposed to be taxed, say, $16,000, you'd get a 4K tax refund, just in that simple example there, which is not the right numbers for anybody listening. But uh yeah, that's essentially what negative gearing is. It's offsetting your losses to reduce your taxable income.

SPEAKER_00 3:58

I feel like sometimes negative gearing gets spoken about like it's this um magical power that uh property investors, evil property investors or rich property investors use to game the system. But it's just part of the tax system, isn't it?

SPEAKER_01 4:13

It's part of the tax system, but it's it's the reason it's been designed for what a lot of people aren't aware of is private investment is what drives rental properties across Australia. Like so people think, well, Australia is a country where we've got free education, healthcare, you know, access to just about anything and everything we want. So we must have a huge network of social housing, which they might have in some other countries where it's actually not the case. You know, over 80%, it's probably closer to 90% of rental stock on the market is coming from private investment. So it's kind of a little bit there in terms of the government going, well, we're not putting in the infrastructure or the costs to make rental stock available. So we're gonna let the average person allow them to go do it. We'll give them a tax kickback for doing so. And then also what they're probably hopeful along the way is that that investment will grow their wealth over a period of time and they become less reliant on pension and other things as time goes down the right. So there's there's a method to the madness because most people are just saying, well, why don't I just go out and buy an investment property and uh I'll save on tax and do all those things.

SPEAKER_00 5:23

There is a methodology behind it. Yeah. It's not uh you invest in property, you get this magical negative gearing, and then all of a sudden you're making money because of negative gearing. I think there's a misconception there sometimes. Jules, they tried stripping it out in the mid-80s, 1985. They uh wasn't even born then, just down this quietly. Yeah, yeah. They changed it. The Hawke uh Keating government uh pulled it out. Things didn't go so well. Do you were you aware of what happened at that time?

SPEAKER_01 5:50

Yeah, it's done a little bit of research on it as well. And basically what happened was the rental market went bonkers. There was barely any rental stock. Rental prices went absolutely through the roof. And it probably just goes back to my point before in terms of, you know, the private investment is what's providing rental property. So if you take that ascent incentive away, it'll have some, I guess, uh the cane toad effect we like to call it Dowso. Um for cane toads were brought here to get rid of uh one problem and they become a problem in itself. So that's that's what happened. I mean, credit to them. They probably implemented change wanting to get some kind of equilibrium there in terms of wealth distribution, but they realize it wasn't working, it was causing a bigger problem, and they just got got rid of it and got back to it.

SPEAKER_00 6:34

Yeah, and it's hard not to think that uh history is potentially on the verge of repeating itself again, but uh we won't dig into that uh rabbit hole uh straight away. I think we've got another podcast coming up we can we can have a chat about that. But um we sort of touched on it in the opening, but why does why does this debate, why does this discussion keep uh reappearing? Like why does it keep uh keep coming up?

SPEAKER_01 6:55

Yeah, well I think if we maybe if we just go back to kind of politics for a moment, what is the average person out there kind of crying poor about in most most cases, right? They they want to they want to have housing affordability is always in the headlines. And uh so that's something where, you know, politicians, for better or worse, they need to be seen that they're doing something to try and stifle housing affordability. So and then I guess there's a bit of a perception out there that it's the wealthy the ones that are capitalizing on this and they're the ones manipulating tax. And you, as the average worker who doesn't have it, um you're missing out on something that somebody's getting access to as well. There's also at the moment we're we're we've got a huge amount of debt now, particularly off the back of COVID, which it's no one's real fault, a once-in-a-lifetime pandemic. But our government, most governments are c are carrying a lot of debt at the moment. I think we're nearly a tr the trillion mark or something like that. So they're looking at it in ways, well, what can we do to kind of get this debt back down? And I think it's it's the easiest sell out there in terms of to demonize property investors, right? Like in terms of if the average person's out there going, well, my rent's too high or buying a property's too high, well, it's easy to just point the finger and say, well, it's not because we haven't built enough property or you know, we haven't stimulated the economy enough, it's because of those bloody property investors who are just making it difficult for everybody else. So I think it's a lot of deflection more than anything.

SPEAKER_00 8:22

Yeah. And in your opinion, if they did uh look to remove it or restrict it again, what do you think, or do you think that actually has any impact on property affordability? What what do you see would would actually occur?

SPEAKER_01 8:36

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SPEAKER_00 10:32

Yeah. I think y you could see uh potentially a a retraction in price initially. As a lot of as a lot of investors exit the market, you might see a bit more stock uh coming on. But once that gets gobbled up, and we've actually seen this occur in the Victorian market, right? You know, where we actually saw a lot of investors exiting, price maybe stagnated for a little while. Investors actually realized that there was an opportunity to go in there and buy it at a at a good number. And now that that has normalized and that has tightened again, now we're seeing those prices to increase. So I think we could see something uh similar there. The other thing that I do wonder about if negative gearing gets taken away, the wanton willingness to leverage uh potentially becomes less. Who can still invest in property if lending or leverage isn't so much of an issue? It's the people with a lot of cash. So then all of a sudden, you're now putting uh property in the hands of, again, the most wealthy. Um So I don't know. I I think um yeah, there's potentially a few things that can go on there. And the cane toad effect uh or the uh but I think, yeah, that that cane toad principle again, I think we could see some uh unintended consequences.

SPEAKER_01 11:45

Well, I think you just need to look at you know, our super our retirement fund here in Australia is one of the most powerful in the world, right? And it's it's kind of lauded by other countries. A lot of that heavy lifting has come off the back of property and and investing through there as well. So like there's a there's a catch 22. It's like, well, do you want to demonize investors but then you know potentially impact what those retirement funds look like as well? Because that all comes at a cost, right? Everything comes at a cost, whether it's healthcare, whether it's education, whether it's pensions, everything comes at a cost, and you've got to weigh up what's more important or if there's some kind of equilibrium. And I think this is not a shot at the government. They're trying to come in and make changes to make it fairer for everybody. But you know, what might help one is going to have that cane tote effect as you touched on.

SPEAKER_00 12:34

And Jules, for investors that are listening to this and they're sitting there, they maybe have one or two properties, or even they're thinking about going into property investment uh for the first time, should they be concerned about this chat around changes to negative gearing?

SPEAKER_01 12:48

Look, I think the concept of investing in general hasn't changed for you know a hundred hundred or hundreds of years, right? In terms of you talk about you buy good quality assets, you hold on to them for a period of time, and you allow them to appreciate in value. Now, policy changes come and go all the time. You know, we're talking about the Keating stuff back in the 80s. There always are going to be changes, but you know, we realistically, economics 101 is supply and demand. Yeah. We are critically low on supply and we're really struggling to get anywhere near building targets, which still even hitting those building targets aren't enough for what we need. And demand is really, really high. And we're a country that's got good population growth internally and externally. We're not a country that has a death tax. So, you know, wealth typically stays within the system. People migrating in and normally highly skilled also have assets behind them as well. So it's not really gonna change anything fundamentally. If anything, all it might change, like if we just kind of loosely touch on let's just say there's a limit on properties. Well, it's just gonna change behavior. Instead of buying properties in as a jointly as a couple, well, it might be like, well, I'm gonna buy one in my name, you buy one in your name, and all of a sudden we've still got four. If it's limited to two properties, well, then we go, well, we're not gonna buy the $500,000 property, we're gonna buy two million dollar properties. So there's I think I guess the the reality is a lot of this is just noise in the media for most parts, which sometimes I guess is coming from from somewhere, right? It's making these in general not making it up on the fly. But the fundamentals of buy good quality assets, allow time and compounding to take care of it, it's not gonna change anything. It just might change structure and behavior to a degree.

SPEAKER_00 14:30

Yeah, yeah. And uh and I think also too, sometimes the conversation around these types of things is to potentially take noise and focus off other matters. So yeah, so they're just they just become noisy, uh noisy background information. But um Absolutely.

SPEAKER_01 14:45

Well, I guess uh thanks for you uh steering the ship again today, Ian. And I guess for anyone listening, if there's one takeaway from today, it's this. Negative gearing is a tax rule. It's not a property strategy. It can help improve cash flow and tax efficiency, but it's not the reason property markets move. Population growth, housing supply, borrowing capacity, long-term demand are the real drivers. And while governments will always debate tax policy around housing, the biggest mistake investors make is letting political headlines dictate long-term decisions. If you're serious about building a property portfolio and you want someone to give you a sanity check and check your strategy, your borrowing capacity, or your current position, you can book a call with either myself or Mark from ALIC via the links in the show notes. As always, thanks for listening and we'll catch you on the next podcast. Bye for now.