The latest Australian Tax Office stats are out and they show that negative gearing was in retreat during the pandemic.
The data, covering the financial year from July 2021 to June 30, 2022, shows landlords making money hand over fist. They made a collective $118 million — on average a profit of $2,571 per landlord. For comparison, in 2014 they lost a collective $69 million — on average a loss of $1,717 per landlord.
You can’t negatively gear a property that’s making money! So the great negative gearing tax deduction strategy was much less used in 2021-22. More than half of landlords slipped into profit-making territory, far more than in 2014.
Meanwhile, the number of people claiming rental income deductions fell. But why?
The negative gearing tax strategy got caught up in the pincers of the two great trends of the pandemic — rising rents and falling interest rates. Landlords found themselves with higher rental income and lower outgoings. And that was only in 2021-22. I’m very interested to get the 2022-23 data next year! The higher rents were flowing through even more strongly in that financial year, although the higher interest payments were biting as well. It’s not yet clear how that nets out.
So what’s really going on?
Negative gearing is a tax move you can use if you are losing money on your investment property. You pay a mortgage and do some maintenance on the property and if that is worth more than the rental income from the property, then you make a loss on that property in that financial year. Say it’s $2,000. You are allowed to offset that against other income.
So if you lose $2,000 on your rental property and you have other taxable income of $100,000 a year, your overall taxable income is $98,000. That saves you some tax overall, reducing your net loss on the rental property to, say, $1,300.
That’s why negative gearing makes owning rental properties more attractive.
You sometimes hear that negative gearing is a great big cheat code for property investors.
I’m not sure I share that view. In Australia, we levy income tax on the individual and we make that person add up (most of) their income and losses before we make them pay tax.
Property doesn’t get special treatment. If you make a loss in investing and have other income that year, you can net those off against each other too. Making a loss on property means you charged an amount for rent that didn’t cover your expenses.
Why would people own a property only to have it lose money every year? The answer is they are hoping for capital gains. You buy an apartment for $80,000 in 1990 and sell it in 2024 for $2 million, for example. However, if you sell the investment property you pay capital gains tax on the increased value (after the 50% CGT discount, which is perhaps the real villain in the property market).
