The Deloitte report, Mythbusting Tax Reform, said it is a myth to claim that negative gearing is a horrible tax loophole that should be closed.
“The blackest hat in Australia’s tax reform debate is worn by negative gearing. Yet negative gearing isn’t evil, and it isn’t a loophole in the tax system,” according to the report.
“It simply allows taxpayers to claim a cost of earning their income. That’s a feature of most tax systems around the world, and a longstanding element of ours too.”
The report acknowledged that negative gearing is being over-used – this was attributed to low interest rates, easy access to credit, heated property markets and problems in taxing capital gains.
“Sure, the rich use negative gearing a lot, but that’s because they own lots of assets, and gearing is a cost related to owning assets – no smoking gun there.”
However, Deloitte said it is wrong to claim that ditching negative gearing would send rents soaring, which is a claim often made by those who oppose ending the tax break.
“By lowering the effective cost of buying, negative gearing long since raised the demand for buying homes that are then rented out,” the report said.
“Yet the impact on housing prices of negative gearing isn't large, meaning that the impact of it – or its removal – on rents similarly wouldn't be large.”
Deloitte said that interest rates have a far larger impact on house prices than taxes.
The favourable treatment of capital gains also has a larger impact than negative gearing, according to the report.
[LinkedIn: Should negative gearing be retained or scrapped?]