How much does negative gearing really cost the nation?


Since the government’s announced changes to the Stage 3 tax cuts to give lower income earners more benefits, the chorus of voices advocating for changes to other aspects of the tax system, such as negative gearing, has grown steadily stronger. So how much does negative gearing actually cost the nation each year? The answer to this can be gleaned from the 2023-24 Tax Expenditures and Insights State ment (TEIS) which confusingly contains figures relating to the 2020-21 financial year.

Put simply, a tax expenditure arises where the tax treatment of a class of taxpayer or an activity differs from the standard tax treatment or the tax benchmark. These expenditures include tax exemptions, some deductions, rebates and offsets, concessional or higher tax rates applying to a specific class of taxpayers, and deferrals of tax liability. The figures contained in the TEIS are estimates provided on a “revenue forgone” basis which reflects the existing utilisation of a tax expenditure and does not incorporate any behaviour response which might result from a change in or removal of the existing tax treatment. Therefore, the figures cannot be used as estimates of the revenue impact on the Federal Budget if the tax expenditure were to be removed (ie due to a policy or legislative change).

Keeping that in mind, the TEIS contains detailed breakdown of various categories including rental property deductions. It is estimated by the ATO that some 2.4m rental property investors claimed deductions for expenses associated with maintaining and financing property interests, including interest, capital works and other deductions. Collectively for the 2020-21 financial year, $48.1bn worth of rental deductions were claimed, resulting in a total tax reduction of $17.1bn. However, not all deductions are considered equal! Only around half, or 1.1m, of these rental property investors had a rental loss (ie negative gearing), which added up to total rental losses of $7.8bn and provided a tax benefit of around $2.7bn for the 2020-21 income year.