1.3 million Australian property investors might be quaking in their boots, with the RBA backing a review of negative gearing.
For those of you who don't know much about negative gearing, it's the ability of individual taxpayers to claim their net rental losses against their personal income.
In other words, the expenses incurred by the property investment be it loan interest, cleaning, agent's and strata management fees, advertising, repairs, insurance, rates and maintenance of the property aren't covered by the rent received, results in a net rental loss.
I should also note that property investment can also be neutral or positively geared. In simple terms, the rental income matches or exceeds the property expenses. Individuals are liable to pay additional tax on positively geared rental property.
According to the ATO, $12 billion was claimed in the 2012-2013 year, down from $13.8 billion the previous year, thanks to record low-interest rates.
But the RBA is concerned that negative gearing is distorting our property market. Thanks to record low-interest rates, investor are able to borrow more to buy an investment property. It also means property investment has a lower hurdle allowing more investors to borrow to buy property. Add in the 50% discount on capital gains for investments held for 12 months or longer, and the RBA says that makes property investment more attractive than other asset classes.
It's not the first time negative gearing has been questioned. David Murray's Financial System Inquiry raised the same issue, suggesting tax breaks for housing increased speculation in the property market, which raised the risks to the stability of our financial system.
Australia and New Zealand Banking Group (ASX: ANZ) CEO Mike Smith has also backed plans for a review of the incentives, as has Bank of America Merrill Lynch economist Saul Eslake and John Daley from the Grattan Institute.
And it's clear the Australian Prudential Regulatory Authority (APRA) has become concerned, with investor loans hitting 40% of all new lending. Australia's big four banks, including ANZ, National Australia Bank (ASX: NAB) and Westpac Banking Corp (ASX: WBC) have either begun taking action to limit investor loan growth setting lower loan-to-valuation ratios (LVR) or intend taking action.
Beware the power of incentives
But Treasurer Joe Hockey and Prime Minister Tony Abbott have ruled out making any changes to the property tax rules. According to Fairfax media, Mr. Hockey himself has an impressive portfolio of four properties while politicians from both sides of politics have been outed as keen property investors. According to property authors, Lindsay David, Paul Egan and Philip Soos, federal politicians collectively own 541 properties, worth an estimated $350 million. On average, each federal politician owns 2.4 investment properties.
Foolish takeaway
Upsetting 1.3 million voters, your party colleagues and 1 in every 3 politicians who own property investments would not be a great move by a government struggling to stay ahead in the polls and looking for re-election next year. Don't expect any changes to negative gearing – no matter how loud or urgent those cries become – which is a pity.
A review should at least be considered – whether it results in any changes or not.
