Joe Hockey’s negative gearing lies grow

By Leith van Onselen

Despite being schooled last month by the Grattan Institute’s John Daley and last week on this blog, Treasurer Joe Hockey continues to ignore the evidence on negative gearing.

Yesterday, in response to evidence presented by The Australia Institute and on this blog, which comprehensively proved that negative gearing losses are claimed primarily by the rich, in turn lowering their tax bills, Joe Hockey yesterday disputed these findings. From The Australian:

“I read a story this morning that said, that suggested, that rich people get most of the negative gearing so-called pie. Well, it’s not right. In fact, most people who ­access negative gearing are in fact middle-income Australians,” Mr Hockey said on radio.

I recognise all politicians fib, but Joe Hockey’s denial around negative gearing is palpable. One can only wonder at what role his own multiple investment properties play.

Still, his latest porky pie does behove me to once again call him out by showing the evidence on who the primary beneficiaries of negative gearing are: higher income earners.

First consider the ATO statistics, which show negative gearing by “taxable income”. Now it is important to note that taxable income is what is left after deductions like negative gearing are removed, so it is not exactly a reliable measure. For example, if someone earning $90,000 a year in 2011-12 (the latest available ATO data) claimed the average negative gearing loss of $10,894 that year, then their taxable income would be reduced to $79,106, thus making them appear to be a lower income earner than they actually were.

Nevertheless, what the ATO statistics for 2011-12 showed was that the number of negative geared taxpayers was significantly under-represented at the lower taxable income levels and over-represented at the higher taxable income levels (see next chart).

ScreenHunter_7212 Apr. 27 07.22

The picture gets even worse when one considers the share of total negative losses claimed at each taxable income level. As shown below, higher taxable income earners claimed an even higher share of the negative gearing losses in 2011-12 (see next chart).

ScreenHunter_7213 Apr. 27 07.25

So, based purely on the ATO statistics, which are flawed due to negative gearing’s lowering of taxable income, Joe Hockey’s claim that most people who ­access negative gearing are in fact middle-income Australians is wrong. The use of negative gearing increases with income, and the value of losses claimed even more so.

Of course, the ABC’s Michael Janda already debunked Hockey’s claim last year when he used Household Income and Labour Dynamics in Australia (HILDA) data to show that a whopping 60% of investment housing debt is held by the top fifth of income earners and that investment housing loans are more than twice as common amongst the top 20% of income-earning households than any other income group (see next chart).

ScreenHunter_7214 Apr. 27 07.31

The bottom 20% of taxpayers, by contrast, owed just 2% of investment property debt, according to the HILDA data.

And then there is The Australia Institute’s data released yesterday, which showed that more than half of the $7.7 billion of tax benefits derived from negative gearing and the capital gains tax (CGT) discount flow to the top 10% of income earners:

…one third (34%) of the benefits of negative gearing were captured by the top 10%, while a staggering three quarters (73%) of capital gains discount went to the top 10%.

ScreenHunter_7244 Apr. 28 13.45
ScreenHunter_7245 Apr. 28 13.45

Negative gearing reduces tax revenue by $3.7 billion and the capital gains discount by $4 billion…

The majority of the lost revenue accrues to high income households, with 56 per cent going to the top 10 per cent of income households and 67 per cent going to the top 20 per cent.

By comparison relatively little flows to low income households with just four per cent going to the bottom 20 per cent of households. The bottom half of Australian households only get 13 per cent.

The evidence is irrefutable. Negative gearing, and its partner in crime the CGT discount, are egregious tax lurks that flow predominantly to higher income earners.

[email protected]

Comments

    • The problem is, as the article shows, that you cannot take advantage of the lurks unless you income is already fairly high. And the higher it is, the greater the advantage that you get.

    • The money is of more value in the hands of a clever individual than the government, however, I’m starting to wonder how clever the current property investors are… sounds like the government is funding the same people it will need to bail out…

  1. It would be nice if the Greens attacked this fool in parliament in this. I suppose they have their own agenda not wanting to upset their inner urban elite voters

      • No mention of negative gearing in their housing policy. Some talk other places that suggests they might be against it. But its not in the policy. I think they have gradually decided to put politics before sense on this one. OR they are learning to keep unpopular policy quiet.
        Not a great sign.

  2. “If you repeat a lie often enough it becomes truth.” With help from the Property Lobby!

  3. Thanks UE.
    Do not doubt Australia’s national economic narrative is now conducted on this blog. Remarkably, it is mainly the work of two heterodox economists.
    A cheerio from me to state and federal Treasuries, politicians, academics and thinkers everywhere whose day is not complete without a peek at the evidence.
    And the FIRE sector trolls? These pygmies deserve to be drowned in a bucket of water for the damage they do.
    Don’t Buy Now!

  4. “most people who ­access negative gearing are in fact middle-income Australians”

    He may be literally correct.

    Sure the benefits disproportionately benefit the very rich but use (or “access”) of negative gearing is widespread.

  5. Leith, while I agree that those benefiting from NG are over represented in the higher income brackets, I’m not sure the data you provided proves Hockey to be lying when he said, “most people who ­access negative gearing are in fact middle-income Australians”. Does the absolute number of people, with incomes under $80k, accessing negative gearing, outnumber those above?

    • carlosthedwarf

      The word “most” is the important part to Joe, because that also means the most votes are sitting with middle income earners, and he’s not doing anything to lose them.

    • BB. The median (middle) taxable income was just under $54k in 2011-12. So why are you even using $80k as the benchmark for “middle Australians”.

      Second, the ATO tax stats are misleading because NG reduces one’s taxable income. This has the effect of understating NGer’s incomes. Hence the significant number of NGers claiming losses in low taxable income brackets (e.g. under 20k).

      • Do you think when referencing “middle-income Australians” Hockey meant only those on exactly $54k? I think he was using the term to differentiate from those on high incomes. What would you consider to be a high income? I don’t think $80k is high.

      • I will repeat it again for you, seeing as you do not understand: the ATO tax stats are misleading because NG reduces one’s taxable income. This has the effect of understating NGer’s incomes.

        A NGer with a taxable income of $80k in reality earns (on average) much more than this. It’s that simple. So why do you continue to quote $80k taxable income as being a middle income earner? It is nonsensical.

      • “The median (middle) taxable income was just under $54k in 2011-12. So why are you even using $80k as the benchmark for “middle Australians”.
        Bingo! $80k income puts you in the top 20% of taxpayers.
        …..and that’s not even counting the poor bludgers not earning enough to pay tax (or don’t they count anymore?)
        Why has no one else (i.e. the plodding Chris Bowen) picked-up Hockey’s gross misrepresentation?

      • I didn’t say $80k was a benchmark for middle income earners (I said below). Personally I would consider $35k-100k middle income earners, those below ($35k) would be low, those above ($100k) high. The definition of these terms are open to personal interpretation (Hockey didn’t say “income earners at the exact Australian median” as much as you are trying to force that into his mouth).

        I do understand that the ATO stats might be misleading, but you are using them yourself to prove a point, don’t you find that ironic? The bottom line is I don’t think your conclusions in this article are fair.

      • @BB

        But on the other hand those on higher incomes benefit significantly more in real terms due to the higher tax rate they are on. Just like the super concessions.

        Your interpretations of the conclusions are incorrect, not the conclusions themselves.

      • Sorry flyingfox I can understand how you misunderstood, but I meant the conclusion that Joe Hockey is lying. I agree in principle with most of Leith’s arguments in this article and the many others he’s written, that benefits are skewed in favour of those on upper income levels (especially so for $100-150k as per Leith’s charts).

        Though I would expect that to be the same for just about any tax break, it stands to reason that those with the largest tax bills stand to benefit the most from deductions & are in the best position to be investing excess capital to do so.

      • @BB

        “I read a story this morning that said, that suggested, that rich people get most of the negative gearing so-called pie. Well, it’s not right. In fact, most people who ­access negative gearing are in fact middle-income Australians,” Mr Hockey said on radio.

        My interpretation of his comments is that middle income earners get an equal share of the pie. Hence I would say he is perpetuating a lie.

    • BB,

      Nothing but semantics. Hockey knows how his words will be interpreted by most. So what he said was meant to mislead, and there is a adjective for that!

  6. Hockey’s mandate for maintaining negative gearing is that it provides more accommodation at affordable rates.

    This is rubbish.

    Landlords use these government sanctioned tax dodges for tax minimalisation and to obtain capital gains. (Not for social services)

    The strategy in using these tactics results in vacated properties remaining vacant for extended periods of time while the landlord fishes for the highest paying tenant by advertising with above market rents.

    The landlords are financially sustained for lengthy periods of time doing this due to the end result of having a lower tax bracket at the end of the day (Or reaping higher capital gains).

    In some cities (Perth in particular) the number of vacancies has risen by 78% since October 2013, but rents have fallen by less than 8% over the same period. (Source REIWA)

    Landlords have ample capacity (Lower tax brackets and capital gains) to leave properties vacant while they attempt to seek high rents. This is what is happening in Perth. As the mining boom fades into the red Pilbara sunset and vacancies rise as former employees pack their shovel and dog in the back of the ute and head back over to the east states, landlords advertise at boom time rents hoping to snag an ignorant tenant. Evidence shows that its only after 3-4 months of advertising at high rents, that the lower tax bracket is reached and cash flow becomes mandatory rather than optional, then rents being to slowly melt.

    So getting back to Mr Hockey’s porky pie. NG does nothing to provide affordable accommodation. Rather, it exacerbates the issue.

    • I personally know of two brothers who have purchased property and rent to each other. they live in each others house and claim NG benefits. And the “rent” they pay each other cancels out.
      Of course they are not allowed to be doing this but they are.
      They have been doing this for at least 2 years. My accountant mate keeps telling me they cant be doing this and if they are they will get pinged and done over by the ATO. But that hasn’t happened yet and i don’t see why it would. The ATO cant audit everyone. The fact is if people are careful they can get away with rorting the system.

      • It is debatable whether this is allowed under the existing rules. In fact it is debatable is standard negative gearing is allowed under the existing rules. The tax code is a dog’s breakfast. Is the arrangement does with the primary purpose of avoiding tax? If so, it is not allowed.

  7. Again, are these graphs taxable income or assessable income? It’s impossible any bank would lend to anyone with an assessable of less than $20k.

    I remember Peter Martin on The Age stating that 1/4 of the people on <20k are in fact earning >$200k and had their taxable income reduced to <$20k via negative gearing and other deductions.

  8. Hockey said “most people who ­access negative gearing are in fact middle-income Australians.”

    You own chart shows that the majority of Australians using negative gearing have a taxable income of less than $70,000. That does nothing to refute Hockey’s statement, and if anything, it supports it.

    I don’t like negative gearing, and his statement doesn’t tells the whole truth, but his statement is hardly a lie.

    • Rubbish. The median (middle) taxable income is less than $54k, not $70k. Also, as stated in the article, the ATO tax stats are misleading because NG reduces one’s taxable income. This has the effect of understating NGer’s incomes.

      • Median weekly full time earnings are currently $1,360 according to the ABS (ie $70,000 per annum). Your figures are being dragged down by part time employees working a handful of hours a week.

        The majority of people using negative gearing have a taxable income of less than $70k. While the ATO figures are a little misleading as deductions (including NG deductions) are factored in, its completly incorrect to assert that use of NG is largely constrained to the rich.

      • [email protected]

        Who cares about all these stats? Positively geared investment properties generating a taxable income are added to a taxpayer’s taxable income therefore why shouldn’t NG investment properties generating taxable losses be deducted from a taxpayer’s taxable income?

      • @pliniosam well why not leverage so much? property that is a drain on your cashflow is by definition a poor investment (it produces a loss)… speculation on future rent increases / interest rate slashes / price increases is nothing but speculation. the tax payer should not be funding speculation.

      • [email protected]

        Andy, an investment property with a negative cashflow doesn’t necessarily make a poor investment if the property is increasing in value. I can understand why you are against NG?!

      • Andy, an investment property with a negative cashflow doesn’t necessarily make a poor investment if the property is increasing in value.

        Broadly speaking, property shouldn’t increase any faster than inflation unless there’s some other problem.

        I can understand why you are against NG?!

        Because it’s a tax evasion tool.

  9. To those that ‘benefit’ ( directly and indirectly) from this ‘tax’ arrangement, it’s a box of gold that they must think is hidden safely in a box in the shed where people who might wish to find, will not likely look. These folks are the ‘in’ crowd and guard their treasure as one would expect. The ‘out’ crowd, who are astonished daily at how property values have evolved in AUS, may not ‘get’ the details on why things are as they are, but they can intelligently conclude that ‘things’ don’t seem to line up and the ‘feeling’ that something sneaky is in play. It may ultimately take the Hurst-Airheart “Jaws of Life” to open this box and expose the contents to all, but I think you have a corner of the lid up already. PS ‘Relentless’ gets noticed and is always respected! Nice work!

  10. I’d love to see these same graphs as the bottom 3 graphs except per household wealth decile rather than household income decile.

    My suspicion is that NG benefits would be slightly less skewed (but I could be wrong), and that CGT discounts would be even more skewed.

  11. @BB @ Outsidetrader

    Negative gearing, and its partner in crime the CGT discount, are egregious tax lurks that flow predominantly to higher income earners.

    Please read the conclusion again…no where does it say that it is not used by middle income earners. However they do not benefit form it anywhere near as much as the top income earners. NG and CGT pervert the progressive tax system hence by design it will greatly benefit the higher income earners.

    The middle income (myself included here) idiots (but not here) can “use” it all they want…

  12. Hockey sees the >1 Million income earners (per year) as the rich “high income earners”

    He sees the 500 > 100K a year as middle income earners… he falls in between that and he doesnt want to be referred to as a “high income earner” so he changed the category requirements. Hence Hockey is a “middle income earner” so he can say he understands the middle income / working class group.

  13. Whats the difference between a politician and a computer ?
    You only have to punch the information into a computer once.

  14. ‘One can only wonder at what role his own multiple investment properties play.’
    Which is entirely relevant contrary to Joe’s Q&A aspersions.

  15. Lets outlaw negative gearing. Its outrageous that poor people are allowed to buy assets and earn income from them. Poor people should be kept poor, reliant only on their insecure casual employment contracts and welfare payments. Assets should only be owned by rich people who can afford to fund the outgoing cashflow without reducing their standard of living. That way the poor people are better off, we reduce inequality, and money is transferred from the rich to the poor … oh no, wait. that doesnt sound right, I think there is a flaw in my argument.

    • Yes spot on – – and while we’re at it we should outlaw the 50% capital Gains Tax & make it 100% !

      It’s imperative we ALL pay as much Tax as possible to the Govt for them to spend (waste) as they like.
      We deserve to pay full Tax on our earnings & then again Tax on any savings we undertake. If we then make a profit we should pay FULL tax again. Make sense doesn’t it ????? ( Wankers)