Gerard Rennick People First Party

There’s no bigger fallacy used in financial planning than negative gearing.

The process works like this.

An investor borrows a large sum of money knowing that the interest expense will exceed the net rental income (rental income less rates, maintenance etc).

This results in a tax loss of which the marginal tax rate x the loss will be refunded by the taxpayer to the investor who got this deduction by paying interest to the bank.

The investor hopes to recoup the loss by achieving a capital gain over a period of time on the property that exceeds the net tax cost of interest.

So for every $1 spent on interest, assuming a top marginal tax of 47 cents, the investor is betting that the capital gain earned will exceed the net tax loss of 53 cents .

As the table in comments show, even if the capital gain growth exceeds the cost of interest by 4% it will take 17 years for the net tax loss to be recouped.

Given that mortgage interest rates are around 6% it’s a heroic assumption to assume house prices will grow consistently by 10% for the next 17 years.

Borrowing large sums of money to make a tax loss is also financially risky.

There’s nothing wrong with borrowing money, but not to the extent you are losing money on your investment. If you lose your job or other income streams, the ability to maintain your loan will become difficult as the rent alone will not cover mortgage payments.

If you take a big picture view of negative gearing it is essentially a transfer of wealth from taxpayers to banks.

Five of Australia’s six biggest companies are banks. Taxpayers should not be subsidising them through negative gearing. They already suck up way too much of Australia’s prosperity as it is.

There is also a large degree of hypocrisy around negative gearing. The same people who support it are in many cases the same people who are against high immigration which contributes to driving capital gains.

The way best way to kill suboptimal financial decision making is to lower the rate of income tax regardless of income source.

It’s why PeopleFirstParty.au will keep advocating to cut income taxes.