Has Treasury dismissed negative gearing as a target for discretionary action?

The release of the latest Treasury Tax Expenditure data has coincided with informed government leaks about further cuts in superannuation tax concessions. Whether the timing is deliberate or not, it’s difficult to avoid the conclusion that Treasury has joined the ranks of government spin doctors.

Measuring tax expenditure is a highly subjective exercise involving assumptions about what a standard tax system would be. These assumptions allow Treasury to decide what areas it will target and which it will ignore.

Three exceptions from what income tax purists would consider as desirable in a comprehensive income tax system are the treatment of gifts and bequests, fluctuating incomes and tax deferral arrangements such as negative gearing.

Treasury has included in its document capital gains tax expenditures ranging from $40 billion in 2007-8 to $38.3 billion in 2015-16. What the value of the tax-free transfer of gifts and bequests would be does not rate a mention. Death and gift taxes are judged not to be part of a tax system. Similarly, while the spotlight is focused on the super concessions, there’s no indication of the annual revenue cost of negative gearing.

The latest ATO tax statistics for 2009-10 report gross personal rental income of $28 billion. This is offset by interest deductions of $18.4 billion and other deductions of $14.5 billion to yield an overall reduction of $4.8 billion in taxable income that year. As with death duties, has Treasury dismissed negative gearing as a target for discretionary action?

Even the analysis of the superannuation tax concessions does not clarify what has been happening. Overall, due to government cut-backs, the measured tax expenditures have fallen from $39 billion in 2007-8 to $31.8 billion in 2012-13.

All the attention has been focused on Treasury’s assumed blow-out in cost to $45 billion in 2015-16. A large part of the explanation for this is the forced increase in employer contributions via government legislation and also due to an assumed increase in fund investment earnings.

A clear indication of the negative impact of the cuts is provided by the estimates of tax expenditures on self-employed contributions. These have fallen from $1.7 billion in 2008-9 to $1 billion in 2012-13 and are projected to fall to $0.8 billion over two years. If money that would have been used as self-employed super contributions is diverted to negative gearing strategies, the losses to revenue will not be reported in the Treasury document.

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Daryl Dixon

Executive Chairman

Daryl Dixon is one of Australia’s foremost investment experts and a well known writer and consultant. He has provided trusted advice to thousands of personal clients over more than 25 years and is an acknowledged expert in the areas of tax, superannuation (including public sector superannuation), social security and investments.

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