Fact Check: Negative gearing used most by higher income earners

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By Leith van Onselen

ABC Fact Check has debunked the Coalition’s and property lobby’s incessant claim that negative gearing is used primarily by ‘ordinary mum and dad’ middle-income earners with taxable incomes below $80,000:

Miranda Stewart, a professor at the Tax and Transfer Policy Institute at Australian National University, told Fact Check that “using taxable income as the measure has already incorporated the negative gearing or other deductions that a taxpayer has”.

“It’s not a very good indicator of who benefits from negative gearing because it already incorporates it”…

Grattan Institute budget policy and institutional reform program director Danielle Wood says that Mr Frydenberg’s use of taxable income was “highly misleading” when analysing negative gearing “because people who negatively gear use losses on their investment income to reduce their taxable income”.

“This explains the surprisingly high number of people with no taxable income owning loss-making property investments — their declared losses are so large they have reduced their taxable incomes to zero”…

They suggested removing the effects of negative gearing from a person’s total income and applying a threshold to that figure.

On this measure, only 52.3 per cent of negative gearers have an income below $80,000.

This is out of proportion with the number of taxpayers below this level — 76.4 per cent of all taxpayers have an income below $80,000.

Conversely, 23.6 per cent of taxpayers have an income above this level, but they account for 47.7 per cent of all negative gearers…

Above $180,000, there are 9.5 per cent of negative gearers, compared to 3.7 per cent of taxpayers — a figure 2.57 times greater.

And above $245,000, there are 4.5 per cent of negative gearers, compared to 1.7 per cent of taxpayers — a figure 2.64 times greater.

“It is clear that negative gearing is disproportionately used by high-income Australians,” Ms Wood told Fact Check…

And as the income threshold is raised, the proportion of taxpayers above it who negatively gear in comparison with the proportion of taxpayers gets larger, indicating that people with higher incomes are more prolific users of negative gearing…

Ms Wood told Fact Check that not only is negative gearing more likely to be utilised by high-income Australians, but “the tax benefits high-income earners gain from negative gearing are also much bigger.”

Fact Check has calculated the share of the benefit, that is, the reduction in taxable income, of negative gearing for each income group, as well as the difference between the amount they paid in tax on their taxable income, and the amount they would pay on their taxable income without negative gearing…

The graph below shows that people who earn a total income before negative gearing of above $80,000 receive 61.8 per cent of the net rental losses, despite representing only 47.7 per cent of negative gearers.
It also shows that the 52.3 per cent of negative gearers below $80,000 only account for 25.9 per cent of the benefit of reduced tax. The 47.7 per cent above $80,000 account for 74.1 per cent.

Once again, as the thresholds increase, the disparities between the share of negative gearers and the net rental loss and tax benefit increase.

The 9.5 per cent of negative gearers above $180,000 account for 19.1 per cent of the net rental losses, and 26.2 per cent of the reduction in tax paid.

And above $245,000, 4.5 per cent of negative gearers account for 12.4 per cent of the net rental losses, and 15.8 per cent of the reduction in tax paid…

Experts and academic research have broken down this topic in different ways, showing that negative gearing disproportionately benefits higher-income earners.

Ben Phillips, who was then principal research fellows at the University of Canberra’s National Centre for Social and Economic Modelling (NATSEM) and is now the director of the Centre for Economic Policy Research at Australian National University, made a salient point about median incomes in a fact check for The Conversation in 2015.

Associate Professor Phillips wrote that “typically, people with negatively geared properties have significantly higher incomes than people without property investments”:

“The median income for negatively geared investors is A$60,000 per year, compared with $40,000 for non-investors.

“A similar gap (50%) exists at the top end of the income spectrum. The taxable incomes of the top 10% of earners with negatively geared investments is around $150,000 compared to $98,000 for non-investors.”

And Curtin University academics Helen Hodgson, Alan Duncan and Rachel Ong ViforJ, along with Griffith University’s John Minas, calculated earlier this year that the mean or average tax saving due to negative gearing for the highest-earning 25 per cent of negatively geared investors is a figure more than four times that of the lowest-earning 50 per cent.

Ms Wood told Fact Check that there should be a broader discussion about whether all Australians are well-served by negative gearing.

“Negative gearing and the 50 per cent capital gains tax discount distort investment decisions, make housing markets more volatile and reduce home ownership.

“For every taxpayer that negatively gears, nine others do not, and they pay more tax to subsidise the minority of negatively geared investors,” she said.

Another negative gearing lie blown-out of the water. As was the case with the lie claiming abolishing negative gearing would force-up rents.

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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.