AFFLUENCE: What Australians who use negative gearing have in common most

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Malcolm Turnbull’s attempt to paint negative gearing as a boon for all Australians may have just hit a brick wall.

Since Paul Keating’s failed attempt to overhaul Australia’s negative gearing system in the mid-1980s, the tax concessions that accrue to property investors have taken on sacred cow status within Australia’s personal income taxation system, and more latterly, the political debate.

And again, in just the past month, debate on any changes to negative gearing has been stifled.

That came after Labor’s announcement that it would repoint negative gearing toward new property construction, away from the current system which overwhelmingly favours investment in established properties, saw the government retreat to its corner and decry the policy as a house price wrecker.

“The Labor Party’s negative gearing policy and its wind back on the capital gains discount – its increase in tax on capital gains – is a very dangerous one,” prime minister Turnbull said the week after the policy was released.

“It’s been very, very poorly thought out… the consequence of it will be a decline in property prices, every home owner in Australia has a lot to fear from Bill Shorten.”

While the prime minister is running his house price crash angle, treasurer Scott Morrison says Labor’s plans hit the many average Australians who use negative gearing to build wealth – police, nurses, and teachers.

Recently at the National Press Club Morrison said:

“In terms of how I have described my attitude towards negative gearing, I have always understood that for the vast majority of Australians who use negative gearing they are modest income earning Australians, nurses, teachers, police.”

He doubled down saying:

“I know the Labor Party doesn’t agree with that and there are probably some in this room who don’t agree with that, but the figures speak for themselves. Two thirds of those who use negative gearing have a taxable income of $80,000 or less. 70 per cent own just one property, and 70 per cent have a net rental loss of less than $10,000. It is one of the few opportunities that people on modest incomes have to try to get ahead.”

But Morrison’s attempt to paint negative gearers in the guise of John Howard’s battlers doesn’t ring true according to Martin North, principal of Digital Finance Analytics (DFA) and former managing consulting director at Fujitsu Australia.

North, who provided Business Insider with an exclusive copy of the results of DFA’s March 2016 Household Survey (which includes 26,000 households) said that he decided to pull data “to examine the distribution of negative gearing”.

The DFA survey stratifies respondents by age and income types. This stratification then includes further cross-sectional cuts for borrowers, non-borrowers, active and not active in the property market.

Looking at age first, the DFA survey shows “households of all ages may use negative gearing, but more than a quarter are aged 50‐59”.

In the younger cohort, the survey shows “a number of young affluent households active aged 20‐29, especially using an investment property as an alternative to buying their own place to live”.

As it moves up the age bands, the survey shows “a strong representation by the more affluent segments, including mature stable families and exclusive professionals.

“In later life, wealth seniors are also active, especially in the 60‐69 year bands.”

Looking at income bands, the survey shows that “as income rises, we see a mix of households using negative gearing.” But the survey also says “there is a greater proportion of households in the $100‐$200k band,” and “segments highlighting the strong presence of exclusive professionals and mature stable families”.

North said that “the picture is quite striking” when he looked “specifically at borrowing households using negative gearing, as compared to all households in the segments”.

In our most affluent segment – exclusive professionals – nearly half are using negative gearing for property investment. Wealth seniors and mature steady state families are also well represented.

But the most striking observation is that among young affluent households, more than half are geared. Other segments are less represented.

Affluence is the theme that jumps out as the common feature of Australian negative gearers, the survey shows.

“We see a concentration in the more affluent segments, and other segments where negative gearing hardly exists,” the report shows.

Our survey suggests that negative gearing, whilst it is spread across the income bands, is indeed concentrated among more affluent households. Four segments, exclusive professionals, mature steady state, wealthy seniors and young affluent households contain the lion’s share of negative geared investment property.

The report notes that these users are at very different “life stages, have different income profiles, and different strategies”.

But even though negative gearers may be at different stages of life and have different profiles, the report highlights it is affluence that sets the majority of Australian negative gearers apart from the rest of the population.

“The current settings are not correct,” North’s report says.

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