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With negative gearing firmly in the spotlight, Deloitte has defended the tax strategy, claiming it is neither "evil" nor a loophole.
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Deloitte defends negative gearing
26 October 2015
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In the second of Deloitte’s Shedding light on the debate: Mythbusting tax reform reports, the firm looked at matters at the heart of Australian fairness – super, negative gearing and capital gains.
Deloitte defended negative gearing, declaring its bad reputation among many members of the public is unjust and undeserved.
“The blackest hat in Australia’s tax reform debate is worn by negative gearing. Yet negative gearing isn’t evil, and it isn’t a loophole in the tax system. It simply allows taxpayers to claim a cost of earning their income,” Deloitte said in the report.
“That’s a feature of most tax systems around the world, and a longstanding element of ours too,” Deloitte added.
The firm believes negative gearing is over-used, the report said, but put it down to three factors affecting the economy at this time: record low interest rates and easy access to credit; heated property markets; and problems in taxing Australia’s capital gains.
"Sure, the rich use negative gearing a lot, but that’s because they own lots of assets, and gearing is a cost related to owning assets: no smoking gun there," Deloitte said.
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The firm said those who argue the toss about negative gearing raise conflicting arguments on its impact on housing, with many claiming negative gearing drives property prices up, but ditching it would send rents soaring.
“Let’s start with a key perspective: interest rates have a far larger impact on house prices than taxes. The main reason why housing prices are through the roof is because mortgage rates have never been lower. And, among tax factors, it is the favourable treatment of capital gains that is the key culprit – not negative gearing," the report said.
“Equally, while negative gearing isn’t evil, nor would ditching it have a big impact on rents. By lowering the effective cost of buying, negative gearing long since raised the demand for buying homes that are then rented out. Yet the impact on housing prices of negative gearing isn’t large, meaning that the impact of it (or its removal) on rents similarly wouldn’t be large,” Deloitte concluded.
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