OPINION: Attacks on negative gearing are poorly aimed
FOR months we have been subjected to attacks on the money we've accumulated in superannuation, now Labor, the Greens and even the Reserve Bank have upped the ante by calling for a review of negative gearing.
Contrary to the spin, Australians who are using negative gearing to increase their wealth are not millionaires flouting the tax system - the majority of them earn less than $80,000 a year and are only buying a single investment property.
Let's think about a typical couple earning $80,000 a year each.
They are about to turn 50, have just paid their house off, and are well aware there's unlikely to be much of a pension available to them when they retire.
The options available to them are cash, property and shares. Cash is particularly unappealing, with rates at historic lows, they are terrified of shares and are becoming increasingly wary of super.
They decide to bite the bullet and borrow $450,000 at 5% to buy a property for $450,000. Repayments of $3560 a month will have the property paid off in 15 years.
In Year One, the net income from the property will be $18,000, and the interest for the first year on their loan will be $22,500. Hence they are negatively geared to the tune of $4500 and should qualify for a tax refund of around $1250 each when depreciation allowances are taken into account. The total cost to the taxpayer is just $2500.
Now fast forward to Year Five, when their net rents are likely to have increased to $21,000, while their loan is down to $339,000. Their interest deduction for the year is just $16,950.
Lo and behold, they are now positively geared. In fact, the surplus rents may well push them into a higher tax bracket.
By the time they get to 65, the debt should be paid off and the property could be worth $670,000, assuming capital growth of 4% per annum; producing rents of $24,000 per annum assuming annual increases of 3%.
I much prefer the flexibility and growth potential of a diversified share portfolio. However, the couple in question are typical of many Australians in their tax bracket.