Time to take action on negative gearing

The federal government needs to tighten the reins on negative gearing as the tax break increasingly distorts the housing market, one property analyst warns.

Real estate website OnTheHouse.com.au reports that recent estimates from ratings agency Moody's show negative gearing boosting property prices by nine per cent. On The House consulting analyst John Edwards said it's time the federal government took action.

“The volume of deductions being claimed is probably in the order of $20 billion per annum plus,” said Mr Edwards, who cautions that with some 1.25 million-plus Australians benefiting from negative gearing, scrapping the tax strategy is not the best way forward.

“Negative gearing is a necessary mechanism, in effect acting as a subsidy for people who are renting and encouraging the provision of rental stock for people who cannot afford to buy,” he said.

“However, there are increasingly cases where it is being allowed by federal government authorities when it should not be, and this is distorting the market, causing higher house prices and making it harder for first-time buyers.

“Simply removing negative gearing would result in property being treated differently from other asset classes, which in itself could have long-term negative effects,” he added.

Mr Edwards believes the government should rather take steps to correct the market imbalance caused by negative gearing. These include instructing the ATO that transactions geared past an untenable level and producing tax losses annually for an unreasonable period of time, say five years, be challenged under Part IVA of the Income Tax Assessment Act – the part dealing with tax avoidance.

The Tax Commissioner, he adds, should issue a general tax ruling that any party investing in residential property borrowing in excess of 80 per cent would be subject to scrutiny.

Mr Edwards said On The House are calling on the federal treasury to work with the ATO to clarify the current situation when it comes to negative gearing, and to take steps to correct the way it is being enforced.

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