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BFCSA: Record 1.3 million landlords cash in on negative gearing as shake-up looms

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Record 1.3 million landlords cash in on negative gearing as shake-up looms

The Australian 12:00am April 17, 2019

Ben Butler, Michael Roddan

 

A record 1.3 million property owners are running at a loss and claiming negative gearing for their investments, far outstripping the 856,000 who either break even or declare a profit, new Australian Taxation Office figures show.

The figures paint a picture of a rental market in which investors are getting older, with nearly a quarter now over 60, and with the broader market increasingly reliant on negative gearing.

They follow a warning from tax commissioner Chris Jordan that property investors are on the ATO hitlist due to a large number of questionable claims for deductions and come amid a fierce election battle over negative gearing.

In the latest batch of tax statistics the ATO for the first time has provided detailed breakdowns of the age and taxable income of property investors.

The ATO figures also reveal a widening gap between the number of individuals negatively gearing their portfolios and those who do not.

The statistics show that between 2000 and 2017, the most recent year for which data is available, the number of individuals negatively gearing their portfolios has more than doubled, from about 631,000 to about 1.3 million.

Over the same period, the number of investors breaking even or making a profit has climbed by a relatively modest 60 per cent, from about 532,000 to about 856,000.

The statistics do not reveal what income property investors had before they deducted mortgage interest and other rental property expenses in order to determine their taxable income.

They show that the number of investors who had a taxable income of $18,200 or less — the threshold which in the financial 2017 year attracted no income tax — increased modestly from 286,615 in 2000 to 321,706 in 2017.

However, the number of landlords who had six or more properties and a taxable income of below $18,200 skyrocketed from 1246 to 3008 over the same period, after touching a peak of 3981 in 2008.

Over the same period, the proportion of investors who are 60 or older increased from about 15 per cent to about 23.5 per cent.

In 2017, slightly younger investors — those between 50 and 59 — made up 27.7 per cent of the ­market — while 26 per cent of property players were generation Xers aged between 40 and 49.

About 21.8 per cent were aged 30-39 and just 5.9 per cent were under 30.

UNSW Business School professor of economics Richard Holden said with record low interest rates sapping the returns available on term deposits, more older Australians were turning to investment properties for income streams.

“It’s all correlated. We’ve got this whole block of ageing baby boomers and they’re all moving into retirement at the same time. There’s only so many houses for them to buy up. You can see how that contributes to very high prices and very low gross rental returns,” Mr Holden said.

The figures follow the ATO sounding the alarm bell over the cost to revenue of negative gearing.

Last month, Mr Jordan said almost nine out of 10 tax returns related to property investment that it had audited contained “errors”, including deductions for interest when the property had actually been refinanced for private purposes, classifying capital works and repairs and maintenance and claims for holiday homes at times when they were not actually available for rent.

He said that with 2.1 million taxpayers claiming $47.4 billion in property deductions against $44.1bn in rental income, “you can get a sense of the potential revenue at risk”.

Labor proposes eliminating the negative gearing concession on new property investments, along with halving the current capital gains tax discount for assets held for longer than a year from 50 per cent to 25 per cent.

The Tax Institute’s senior tax counsel, Professor Robert Deutsch, said any effect of the negative gearing policy on the housing market was likely to have already occurred.

“My view is that whatever damage is going to be done to the market by the introduction of the negative gearing policy has already been factored into the market. I don’t think it will have much more of an adverse consequence,” Professor Deutsch said.

“If it comes to pass then people will need to revise their portfolios and take into account a changed tax environment — which they do all the time.

“That’s what we’re going to have to do,” he said.

However, BIS Oxford Economics principal property economist Geof Snell said that if the policy was introduced, “in the long run, prices are also likely to be affected as investors seek to compensate for lack of negative gearing benefits through higher yields”.

“Potential negative gearing changes on the horizon are quarantined to new dwellings only and, if unmitigated, this will likely lead to the ‘new car effect’ where there may be a much higher rate of depreciation in value for new houses and apartments upon resale,” he said.

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