If say for argument's sake that negative gearing is changed and one is no longer able to offset a loss of say $1000 from property against other income(eg salary) then after tax the property investor has a $1000 loss which has to be funded from own pocket. Previously, assuming a marginal tax rate of 30c/dollar, there would be tax refund of $300 and $700 loss from own pocket, now a $1000 loss with no negative gearing. Rents will be increased to cover additional $300 loss if market conditions allow.
On the capital gains tax side most of the $1000 loss(relating to interest, rates) are holding costs and will increase cost base by say $900. Using discount method there will be $450 less gain to tax.
The loss from negative gearing will simply be quarantined until the property is sold.
Renters will suffer from increased rents, property investors will have a cash flow problem in the short term and a $300 gain to ATO in short term will mean a loss in capital gain revenue in long term.
This whole argument of banning negative gearing makes no sense at all!! What happens when property becomes positively geared after say year 5-10 does the gain then become tax free and quarantined(like the earlier loss in year 1-5) as well? Ridiculous isn't it?
