Jump on the bandwagon.Negative gearing claims soarGeorge...

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Negative gearing claims soar
George Megalogenis
December 31, 2005

THE use of negative gearing to reduce taxes has rocketed, with part-time working mothers and young singles battling to make ends meet taking up the tax break.

The practice has become so widespread that property investors in every income group between $15,000 and $500,000 are now claiming more deductions in total than they are declaring in rental income.

The popularity of the tax break has reduced the federal Government's revenue by $2.6 billion.

More than 100,000 low- and middle-income earners joined the ranks of the negatively geared at the height of the property boom, and their presence in the system has created a headache for the Government as it considers tax reforms.

Reducing or removing the existing gap between the top income tax rate of 47c and the top capital gains tax rate of 23.5c - as Liberal backbencher Malcom Turnbull has called for - would not address the problem of negative gearing further down the income tax scales.





The latest official data, crunched by The Weekend Australian, confirm that the halving of the capital gains tax in September 1999 was the trigger for the surge in negative gearing.

As property prices rocketed, and more people joined the housing market for the first time in search of quick capital gains, the Government was caught in a tax pincer of lower rental yields and higher mortgage repayment costs.

The last financial year of the old rules, 1999-00, saw the typical property investor declare a rental profit of $226.85, because their income exceeded deductions.

By 2002-03, the latest year for which figures are available, the average rental loss was $979.56. That translates to an average tax reduction of $23.20 a week, achieved through negative gearing.

The handout to property investors is expected to be higher still in 2003-04, when the Australia Taxation Office says total deductions jumped by another 20per cent to $17.8billion, while rental income rose by only 12per cent to $15.2billion.

The $2.6billion revenue loss in 2003-04 is the highest yet. In contrast, before the capital gains changes were introduced, the tax office was routinely in the black.

When deductions are higher than income, a taxpayer is said to be "negatively gearing".

Among the big movers were property investors with taxable incomes between $15,000 and $20,000. Their average rental profit of $1220.72 turned into a loss of $200.49 between 1999-2000 and 2002-03. This rung of the tax ladder is dominated by part-time working mothers.

In the battler rung, where taxable incomes are between $25,000 and $30,000, the average rental profit of $197.09 switched to a loss of $597.85 over the same three-year period.

Australia has the highest rate of landlords in the developed world. The proportion of taxpayers with investment properties rose from 13.31 per cent to 14.27per cent between 1999-00 and 2002-03. In raw numbers, the ranks of the landlord class grew by 106,783 to 1.232million.

The total number of taxpayers declaring rental losses jumped by 138,567 to 758,464 in that time.