Source: CoreLogic RP Data
At the moment, the issue of negative gearing is extremely topical due to the Federal opposition proposal to change the availability of negative gearing to new properties only. In data released last week, the Australian Tax Office (ATO) published their annual taxation statistics for the 2013-14 financial year. The latest data shows that over the year there was a substantial decline in net rental losses claimed. In fact, net rental losses haven't been this low in close to ten years. In 1999 the capital gains tax indexation was scrapped and replaced with a 50% discount on the capital gain if the asset is held for more than a year. Since that time we have seen an increase in net rental losses suggesting that this change has made rental income losses more attractive to investors.
Over the 2013-14 financial year the value of net rental losses was $3.719 billion which was down 34.2% from the previous year when there were net rental losses of $5.654 billion. Net rental losses peaked at $9.065 billion over the 2007-08 financial year which indicates that rental losses are now 59.0% lower than this peak. Lower mortgage rates clearly have an impact given that holding costs are lower and this has no doubt contributed to the value of rental losses having fallen. We would expect a further reduction in rental losses over the 2014-15 financial year considering that standard variable mortgage rates fell by a further 50 basis points over the 2014/15 financial year.The net rental data is split into two components, those that make a profit and those that make a loss. Focusing on those making a profit, there were 776,672 individuals that recorded a net rental profit in 2013-14, with the number increasing by 6.1% over the year to its highest number on record. These individuals made a total profit from their net rent of $7.248 billion which was an historic high and up 5.3% over the year. As a result, the average net profit by these individuals was $9,332 which was -1.0% lower over the year. The reason for the decline in the average net profit is most likely due to the fact that some of those that have shifted from making a loss to making a profit are making far smaller profits than those that were already established as making a profit.Chart 3
Turning to those individuals claiming a net rental loss, there were 1,257,301 of them in 2013-14 and they claimed a total of $10.967 billion worth of rental losses over the year. The number of individuals claiming a rental loss was -3.7% lower over the year which was the fewest claiming a loss since 2009-10. In value terms, losses were -12.5% lower over the year and at their lowest total value since 2009-10 as well. The average loss claimed was $8,722 which was the lowest it has been since 2005-06.
The taxation statistics also split out the proportion of individuals that were claiming a loss compared to those whose properties were neutral or returning a profit in each state and territory. Individuals with an investment property in Queensland were the least likely to be neutral or positively geared (30.7%) while investors in New South Wales were the most likely to be neutral or positively geared (47.5%).Chart 5
Focusing only on taxable individuals, the data shows that those on the lowest income band, more than half of them claim net rent and it is the only income band shown where on average they are seeing a rental profit. This is probably reflective of retirees or those close to retirement positively gearing investment properties to provide them with an income source. In terms of number of individuals, far more individuals on lower incomes claim net rent however, this is by virtue of far more individuals overall are on lower incomes. If you look at the percentage of individuals claiming net rent across the income ranges you can see that the proportion is much higher for the higher incomes (except for less than $18,200). As the income range gets higher you can also see that the average net rental losses increase significantly. This indicates that the benefit from negative gearing tends to be greater for those that have higher incomes, conversely, the lower income earners are more likely to have their investment properties either positively or neutrally geared.
The taxation statistics show that the lower mortgage rates are reducing the value of losses claimed on rental properties. With mortgage rates currently lower than they were in June 2014, it is reasonable to expect that the value of rental losses will continue to decline. Interestingly, since June 2014 we have also seen the level of investor participation in the market has hit record high levels and has since sunk back to decade average levels. Given this, we would expect that over the coming year the number of property investors to increase quite substantially at the same time as the value of losses to fall.It is important to also note that there is a significant shortcoming to all of this data. Because it is all based on net figures, the data is assessed once the deductions have been made. Particularly in the case of the income brackets, we don't have a clear indication of how many people have shifted into a lower taxation bracket due to the deductions they have been able to make.
Although there has been a lot of debate about the tax burden negative gearing creates and changes to negative gearing policies, this data shows that the actual value of these losses has fallen substantially and is likely to remain much lower as long as interest rates remain at low levels. While any policy changes may be seen as making access to the housing market more equitable, the financial benefit to the Government from such changes is likely to be limited.
This means that you get the 'real' valuation of your real estate with no hidden agendas.