Negative gearing is a tax shelter which allows investors to claim depreciation and interest on houses and apartments they buy and offset that against any personal income they earn in their own name.
By taking what is essentially a commercial transaction – buy to rent – and allowing it to be offset against personal PAYG and other income, Australian taxpayers who buy investment properties are able to access a taxpayer subsidy on personal income tax payable for the purchase of the property as an investment.
The higher the marginal tax rate of the buyer, the bigger the subsidy available as lower incomes and lower marginal tax rates mean that a smaller percentage of interest and other costs can be offset against income.
It’s a system that former treasurer Paul Keating tried to do away with back in 1985 and indeed for a short time it ended. But since the re-imposition of negative gearing it’s become a sacred cow of the Australian taxation system.
But as property prices around the country boom, especially in Sydney and Melbourne, negative gearing and investors are locking younger Australian’s out of the market.
Take the latest data from the ABS, released yesterday, which shows that investors as a percentage of total finance reached the second highest level of the past 30 years at 40.3% of all loans advance in July.
The only time this percentage was higher was back in October 2003 when the last housing boom ended.
The flipside of this voracious investor appetite is the fall in the percentage of first home owners of housing finance at 12.2% – the lowest since the ABS began collecting records in 1991.
If this data doesn’t prove the distorting impact that the tax shelter that is negative gearing is causing in Australian housing then little will.
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