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The borrower may be an ordinary Aussie battler on less than the top marginal rate of tax but still keen to have a tax saying
SOME academic commentators and the social welfare lobby regard negative gearin as primarily a tax avoidance device. They were thus disappointed when the Coalition's tax reform package did not even mention the subject.
First of all, some background: negative gearing is the situation when an investment is purchased with the assistance of borrowed funds and where the rental or dividend income (after the deduction of expenses) is less than the interest commitment in the course of a year.
For income tax purposes, such negative net income can usually be offset against any positive income from other sources.
Many critics feel that this is unfair. They therefore call for the `abolition' of negative gearing. Presumably, they really mean that they want a change to the tax rules, rather than the literal abolition of negative gearing itself.
It may not always be realized, but borrowing in order to undertake productive investment actually helps economic growth because value is being added.
Inevitably, there will always be some investments which have lower returns than the interest bill on the loans undertaken in order to acquire the investments concerned-for example, because of start-up periods or because things did not work out as planned. This economic fact of life has nothing whatsoever to do with tax.
A typical property investment, for example, may start off with a large loan and low rent. As time goes by the loan is paid off and the rent increases. Overall the investor makes a profit and the tax office gets its share of this.
Actually, there is not as much loss of revenue to the authorities, even in the early years of a transaction as most critics believe, because for every dollar of interest claimed as a tax deduction by a borrower there is a corresponding dollar of interest assessable to a lender.
Admittedly, the same rate of tax will not always apply to both legs of the transaction, so there is no doubt some leakage of revenue in practice. In some cases,...