Dodgy Turnbull drowning in negative gearing lies


By Leith van Onselen

Prime Minister Malcolm Turnbull appeared on ABC’s 7.30 Report last night where he kept the negative gearing lies flowing. Below is the extract of the exchange:

MALCOLM TURNBULL: Well let me just – let me give you the point I was – continue the point I was making about Labor. So at a time we need more investment, they’re increasing the tax on investments. Is that well thought out? I don’t think so. At a time when we want Australians to have a go and be enterprising, start new businesses, start small businesses, they are – they are – with their negative gearing policy they are going to prohibit anyone from offsetting an investment loss against their personal income unless it is a new residential property. So – so …

LEIGH SALES: There are countries overseas that have far less generous negative gearing policies than Australia. Their economics still tick over, their stock markets still grow, businesses still open up.

MALCOLM TURNBULL: Leigh … let me finish. So that means, under the guise of housing affordability, you would not able to not only buy an existing flat or a house and negative gear it against your personal income, you couldn’t buy a shop, you couldn’t buy a warehouse, you couldn’t buy an office suite. What’s that got to do with housing affordability? You couldn’t buy a portfolio of shares in public companies. What’s that got to do with housing affordability? You could not capitalise with a partner a private company to start a business and offset that against your income. Now, the reality is that most of us start off with only our human capital and we start off in life earning some money for ourselves in our profession, in a job and we leverage that – we borrow money and leverage that to start something else. Labor is saying you can’t do that anymore.

LEIGH SALES: But in your first interview with this program as Prime Minister you said that the first principles of the Turnbull Government would be the free market.


LEIGH SALES: So why are you now violating that principle by backing negative gearing, which is a government intervention that distorts the market?

MALCOLM TURNBULL: That is – that is so wrong, Leigh. I’m sorry to …

LEIGH SALES: It’s a government policy, it’s not free market.

MALCOLM TURNBULL: No – (laughs) Negative gearing is – is income tax 101. It’s not a tax concession at all. What it means is – it is a fundamental principle of tax law and has been forever that you can deduct from your income the interest expense of money that is borrowed to purchase an income-producing asset.

LEIGH SALES: It’s a government incentive.

MALCOLM TURNBULL: It is – it is a normal tax deduction.

LEIGH SALES: It’s not …

MALCOLM TURNBULL: The incentives – the incentives – there are incentives given. We’re providing incentives to invest in start-up companies. Superannuation is full of incentives. There are incentives to invest in certain types of projects – water projects, for example. Right across the country, there are tax incentives. Negative gearing is not an incentive, it is simply a basic income tax principle. Do you think …

LEIGH SALES: You’ve raised – you’ve raised housing affordability as well. You assume – you seem to assume Australians want housing prices to keep rising when housing affordability is an issue of great concern to many Australians who might like to see housing prices fall.

MALCOLM TURNBULL: Well, I don’t think it’s – well, I don’t think many Australians who own houses want housing prices to fall.

LEIGH SALES: No, but they want their kids to be able to afford them.

MALCOLM TURNBULL: Let me go on. The reason why housing is not as affordable or accessible as it should be is because we are not building enough houses. Now let me give you an example of what Labor’s policy would do. If you take – underlay this plan, the only housing that investors can invest in and deduct their losses against their income would be new housing. Now if you go out to the outer suburbs of Sydney or Melbourne you will find lots of new subdivisions and new houses and young couples will be buying house and land packages. And that’s – and they are the bulk of those buyers for that. Under Labor’s plan, they will now be competing with investors.

LEIGH SALES: Isn’t this going to my point that Labor is setting the agenda here because you are responding to their policy?

MALCOLM TURNBULL: But let me – Labor – well, they have put out a policy that is so ill-considered and so dangerous that it has to be responded to. But just let me come back into the city.

LEIGH SALES: Briefly ’cause I want to go through some other things.

MALCOLM TURNBULL: Yep. So we get into the city and we get close to the city and we have lots of apartment buildings. Most of those apartments are often tenanted, so people are renting them. The owners, naturally, are investors. Under Labor’s plan, those investors when they sell can only sell to home owners. So what will happen is the number of tenantable, rentable properties will contract. Rents will go up. People who can’t afford a home but need to rent will have fewer apartments to rent. And, of course, you will end up – because that will bring prices down, fewer new dwellings will be built. What we need is a comprehensive approach to cities, which is part of my government’s policy, which will ensure that when we invest in infrastructure in cities, we get outcomes that will deliver more housing availability – planning outcomes that will ensure more dwellings can be built, and hence, there will be more affordable housing.

Let’s debunk Turnbull’s lies one by one.

First, Labor’s negative gearing policy would only apply to “passive” investments, like owning an investment property or shares, so it would not impact direct business investment, which is “active” investment.

On this point, it is worth reminding readers yet again that in his 2005 tax policy paper, Malcolm Turnbull described negative gearing and the CGT discount as a “sheltering tax haven” that is “skewing national investment away from wealth-creating pursuits, towards housing”, and has caused a “property bubble”.


Therefore, it is highly contradictory for Turnbull to argue that Labor’s reforms to negative gearing would suddenly choke genuine productive investment, when this is already happening under the current rules. If you want proof, check-out the below chart:

ScreenHunter_11879 Mar. 07 10.09

Since the GFC, outstanding business loans have increased by only 10% in nominal terms whereas outstanding property investment loans have ballooned by nearly 80%. If there is one segment that is losing-out from the current tax structure it is productive business lending, particularly lending to small enterprises, which is being crowded-out by housing lending.


Turnbull is also conveniently silent on why current tax rules allow individuals to claim unlimited negative gearing deductions for property investments into perpetuity, but if they invest in a productive side business, they must meet all kinds of criteria in order to claim losses against their wage/salary earnings, including showing a profit in three out of five years.

Moreover, in his 2005 tax paper Turnbull admitted that “Australia’s rules on negative gearing are very generous compared to many other countries” and that “the normal deductibility principles do not apply to negatively geared real estate such that the taxpayer is not obliged to demonstrate that the negatively geared property will generate positive cash flow at some point in the distant future”.

Second, Turnbull’s claim that the reason why “housing is not as affordable or accessible as it should be is because we are not building enough houses” is a direct argument for Labor’s negative gearing policy, not against it. It is also precisely why this Coalition Government has backed foreign investment into newly constructed dwellings, while banning it from established dwellings. Again, here’s the chair of the foreign investment inquiry, Liberal MP Kelly O’Dwyer, explaining the benefits of this ‘new homes only’ policy:


“Currently the framework seeks to channel foreign investment in residential real estate into new dwellings in order to increase the housing stock for Australians to build, buy or rent. Foreign investment is encouraged in new dwellings whether they be apartments, units or homes because in addition to creating more supply, it also creates more jobs for the building and construction sector – all of which helps to grow our economy”.

So Turnbull’s opposition to Labor’s policy directly contradicts its own stance on foreign investment

Third, Turnbull’s faux concern about first home buyers of newly constructed homes being crowded-out by investors is laughable given this is exactly what has occurred under the Government’s existing negative gearing policy (see below chart).

ScreenHunter_12057 Mar. 16 16.06

It is precisely first home buyers that have lost as investors have piled into established dwellings, crowding them out and forcing them to be tenants. Labor’s policy would reverse this trend.

Finally, Turnbull’s claim that “the number of tenantable, rentable properties will contract”, “rents will go up” and “people who can’t afford a home but need to rent will have fewer apartments to rent”, is nonsensical.


Sure, there would be less “investment” (read transfer of ownership) in existing dwellings, but those homes would not magically disappear from the supply-demand equation. Rather, those homes would be purchased by an owner-occupier, thus reducing demand for rental properties by the same proportion as the fall in rental supply. Turnbull has completely ignored the fact that the pool of tenants will similarly decline as they become owner-occupiers.

More importantly, because Labor’s policy would channel negative gearing towards new builds, overall dwelling construction would increase, as will the supply of rental accommodation. And this extra supply would obviously lower rents, other things equal. It’s economics 101.

Again, if Turnbull truly believes his spin, then why does his Government champion foreign investment in newly constructed homes, but preclude it from established dwellings?


Your arguments make no sense, Mr Turnbull, and contradict your Government’s own policy on foreign investment and your previous written views on negative gearing and the CGT discount.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.