This week’s RP Data Property Pulse delves into the 2011-12 taxation statistics which were released by the Australian Tax Office (ATO) last week. Specifically we are going to look at property investment.
Negative gearing is widely used and available across a range of investment classes in Australia. It is most widely recognised and discussed relating to residential property investment. Negative gearing allows the owners of investment to offset any costs associated with their investment against their taxable income. As you will see, some of the most common deductions for residential property are: rental interest, capital works and other costs such as strata levies and depreciation.
Over the 2011/12 financial year there were 9,799,820 taxable individuals in Australia. Of these individuals, 19.3% or almost one in every five owned investment properties. As the first chart shows, the proportion of Australian’s that own an investment property is trending higher although there was a slight fall over the most recent year. In 1993/94, 12.9% of taxpayers owned an investment property compared to 19.3% over the most recent year.
Another factor which is interesting to track over time is the proportion of investment property owners that are negatively geared. As you can see from the second chart, the proportion of investors reporting a net loss on their property(ies) has increased from just over half (51.0%) in 1993/94 to 66.8% in 2011/12. Once again you can see that the proportion of negatively geared investors has eased slightly over the most recent year. Less than a third of all owners of residential investment property are actually producing a net profit from that investment.
The 2011/12 taxation statistics show that gross rent from investment properties was recorded at a record high $33.999 billion. Looking at the deductions claimed from this amount: $24.177 billion was claimed in rental interest deductions, $2.167 billion was claimed in rent capital works deductions and $15.351 billion was claimed in ‘other deductions’. As a result, the net rental losses on investment property over the 2011/12 financial year were recorded at $7.859 billion. Although this is a large sum, it has reduced from its peak of $9.064 billion in 2007/08.
Over the 2011/12 financial year, 629,230 individuals recorded a gross profit from their investment properties with the total profit recorded at $5.939 billion or $9,439 per investor per annum. Conversely, 1,266,540 taxpayers claimed a loss, with total losses reaching $13.798 billion. On a per person basis, this equates to $10,895 per annum.
Negative gearing is always an extremely contentious issue. It is a feature of the tax system which is fairly unique to Australia. If you look at data from the 2011 Census is shows that the Government only owns and rents out around 4.1% of total housing stock. Conversely dwelling approvals data shows that a very small proportion of new housing approvals are granted to the public sector. These two figures suggest that the Government has little interest in building or managing rental accommodation. Given this, negative gearing is seemingly in place to encourage developers to build new rental accommodation and private individuals to act as landlord for those who aren’t in a position to own their own home. Unfortunately, housing finance data shows that very few investors actually purchase newly constructed homes with most choosing to invest in pre-existing housing stock. The second aim, to have private citizens as landlords certainly works as detailed by the above analysis.
Negative gearing is always a politically very sensitive topic and there are often calls to remove negative gearing benefits. Although it may make sense to do so, or to make negative gearing only available to newly constructed properties, politically it would likely be unpopular. Furthermore, if negative gearing was to be removed the Government would likely have to play more of a role in constructing new homes and managing a portfolio of properties. On balance, they probably see that foregoing almost $8 billion in taxation revenue is more cost effective than developing and managing a greater proportion of new housing stock.
Article by RP Data senior research analyst, Cameron Kusher