Rising interest rates are likely to result in more investors using negative gearing and capital tax deductions, which are both “bad policies”, according to mortgage broker Mark Bouris.
The Yellow Brick Road founder says negative gearing and capital tax deductions are encouraging people to buy property for the tax break, which he does not consider sound economic policy.
Bouris says ending them altogether could be a ‘death knell’ for any government who tried it, but he says they could at least try to “work around the edges”, such as reducing the level of discount on the capital gains tax.
“Two years ago it wasn’t an issue”, Bouris said. “But now it’s becoming an issue again as interest rates have more than doubled, and now interest rates will exceed rents in more cases than there were two years ago. It’s going to become a big issue”.
“Negative gearing and capital gains discount on investment property is not good policy”, Bouris added.
“It gets people to buy real estate for the wrong reason. You’re buying real estate for the tax break, so I don’t see it as good economic policy”.
“Perhaps they can work around the edges on it – change the discount rate – instead of being 50% discount on the capital gains tax, make it a little less or something. But try and pull away from it”.
Bouris is correct. But there is no way the Albanese Government will touch these policies after losing both the 2016 and 2019 federal election on these issues.
The big issue for the federal government is that the cost of negative gearing to the budget will swell this tax year and the next, courtesy of the Reserve Bank of Australia’s (RBA) aggressive interest rate hikes.
For the average Australian on a $500,000 mortgage, their monthly repayments would soar by around $1,000 per month or $12,000 per year after the latest rate hike from the RBA:
According to the latest ATO Taxation Statistics, there were nearly 2.3 million Australians declaring “net rent” in their tax returns, with 1.2 million of those negatively geared (i.e. claiming a rental loss):
Given mortgage interest payments have risen so rapidly since April 2022, the ATO is staring down the barrel of billions of dollars in extra negative gearing deductions in this year’s tax returns and the next.
