With the changes in time, each and every organization needs to pay tax on their earning as per the applicable laws and regulations. Taxation, as known to everyone is a compulsory payment that is made to the government on any kind of income made or gain realised by a person. There is no immediate return that a person realises from the payment of tax. The only benefit is in the form of investment in public services that is made by the government for the benefit of the whole country. Due to no immediate and direct benefit, people since ages are looking for ways to reduce the tax implications by hook or crook. Some methods to reduce the tax liability are however legal and maintained in tax laws. One such method offered by the Australian tax laws is of Negative Gearing. It is the process to lower down the tax payment and reduce the cash outflow in effective way.
Negative Gearing as the name suggests does the gearing of what is negative. This concept works on the negative that is created by the investments. The motive of making any investment is to earn profits, but when the costs of carrying those investments overweigh the income generated by them, they become loss generating assets. Negative gearing works by helping the tax payer to set off his taxable income being rental and other income including salary and wages with the investment expenses by claiming them as deductions. The expenses incurred as interest on loan taken to acquire the investments can be claimed and the capital expenses can be deducted over years in form of depreciation. It is used as strategy by the people to lower down the overall tax payment
For Australia, negative strategy is a very popular approach followed by the investors. Negative gearing has allowed them to reap the benefits of the short term losses that the investors face in the investments made by them. This benefit is mostly attained by the top layer of income earners in Australia. Apart from this there are several arguments that are being put in the favour and in against of the removal of the negative gearing system
Negative gearing is proposed to be removed by a number of people. Many statements and arguments have been promoted by people in the favour of removal of negative gearing. The main statement that people raise for the support of the removal of negative gearing forms the ground of fairness. It is debated that the benefit of negative gearing is availed by the top 10% tax payers of the country who represent the rich section, this way they are able to reduce their tax implications and save more. In the end this makes the rich more rich and poor more poor. The gap between the both is widened
Further, because of negative gearing, the mind set of people while investing is to select those propositions on account of which they are able to save their tax liability and not those investment options which make them generate high profits. The point of view of the people on account of negative gearing is to make investments that can reduce tax implications. The traditional base of getting a higher return with the help of investments is being ignored completely. Due to negative gearing, people have started investing more in the house properties, and as an ultimate result the overall costs for the tenants rises as they are not having any bargaining power
The investments price for the house property rises with the wealthy people investing a lot in the same. This is because there is a rise of demand of investment property. Due to this, the availability of house property for the first home buyers suffers because the prices of the properties get inflated because of this rising demand. A false bubble is created in the market that paves a way for the entry of the speculators in the property market. As far as the implications on the government revenue are concerned, the treasury of government face a downward trend due to the application of negative gearing. The revenues collected by the government are decreasing gradually every year as many investors are entering investment market just to reduce the overall tax liability. This calls a blot on the development programmes that government want to initiate as there is no fund availability with the government to commence any of them. Moreover, the public service facilities also face less development.
If the substance of the tax laws is to be seen, then the concept of negative gearing is digging a negative approach on the whole concept. The investment loses, or the interest expense on the loan taken, or the repairs made etc. are not the business expenses of any tax payer. They are only related to the rental income that the tax payer generates. Due to the deduction of the expenses allowed from the salary income or the other income of a tax payer, the basis of taxation is lost. The expense which is not being incurred to earn a certain income is illogically allowed to be deducted from the same. All these provide a strong foundation to take a step to remove the negative gearing system.
Removal of negative gearing is being opposed on several grounds. Negative gearing is providing the investors with a safer side to make investments as the headache of loses being prevalent is ignored with the investor getting an option to utilise that loss in reducing the taxable income. This way the person is able to reduce his tax liability and get compensated in an indirect way with the loss that was observed. If there were no negative gearing then the investments would have declined as nobody would have been interested in taking a 100 percentage of risk
Further, if the negative gearing is removed, then people shall start looking for alternate ways to get higher earning out of the investments made by them. E.g. if a person has invested in a house property and that is laid on rent, then in order to reduce those expenses that are overweighing the earnings, the investor shall go on for increasing the rent that is realised out of that property. If this happens, then there will be a problem for people to find sober accommodation at decent rates. To overcome this, the government intervention might be required to help in this crisis.
The crux is that, if the negative gearing is removed, then the market of property investment in the country is going to suffer a huge setback. The investment in the rental properties is the main area that is going to be affected. As nobody is ready to take risks of the rising interest rates after the investment is made, or the falling rent prices after the property is laid on rent, or the risky costs of undertaking a major repair to the investment property after it is bought. Further, by reducing the tax liabilities through the losses made on investment property, the investors are able to save the wealth they have generated. Therefore, the presence of negative gearing in economic has direct and direct positive impact on the economic growth and increased business values
All the above discussions form a debate on whether the removal of negative gearing should be supported or be voted against for. Any decision to remove the same shall bring a lot of changes and those are required to be managed efficiently to fill the gaps left for further oppositions. That is the only way in which the policy makes can deal with the difference in the opinions that the country faces right away. However, there should be proper rules and set process which should be accepted by everyone without any discrimination. It will not only strengthen the implemented taxation program but also increase the output of the process system in effective manner. It is analyzed that negative gearing is used by individual for being able to reduce his tax liability and get compensated in an indirect way with the loss. It is very much understood that if there were no negative gearing then the investments would have declined as nobody would have been interested in taking a 100 percentage of risk. Somewhere, negative gearing provides positive impact for the economic growth of the country. The main crux is that to overcome this, the government intervention might be required to help in this crisis by strengthening the negative gearing provisions.
References
Blunden, Hazel.,. Discourses around negative gearing of investment properties in Australia, Housing Studies, (2016), 31(3), pp.340-357.
Cho, Yuno., Li, Shuyun,.May. and Uren, Lawrence.,. Negative Gearing Tax And Welfare: A Quantitative Study For The Australian Housing Market., (2017)., 33(3), pp.34-37.
Davidson, Peter. and Evans, Ro.,. Fuel on the fire: Negative gearing, capital gains tax & housing affordability (2015), ACOSS Papers, p.29.
Freebairn, John.,. Taxation of housing. Australian Economic Review, (2016) 49(3), pp.307-316.
Grudnoff, More., Who’s getting negative? The benefits of negative gearing by federal electorate. (2015).,34(3), pp.37-47.
Jacobs, Keith., A discussion on negative gearing and its implications for housing., (2016).,44(3), pp.47-87
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