Negative gearing of home loans has become an election issue.
For those readers (like me) who find topics about finance as exciting as warm custard, here is a definition -
Gearing simply means borrowing money to buy an asset. In the case of property, you have taken out a loan to purchase a property. Negative gearing means that the interest you are paying on the loan is more than the income. As a result, you are making a loss.
But why, you ask, would you buy a property and run it at a loss? Wait – there’s more.
If you do this, you can claim the loss as a tax deduction. Now that’s a trick. It means that you’re paying less tax than I am, when I bought a unit and paid cash for it. So, I’m subsidising your investment.
Financially it makes sense; ethically, not so much.
There is one very basic concept implicit in the process which seems to have been ignored in the political debate.
That concept relates to the definition of a "home". Perhaps I am old fashioned, as I've always considered a home as a place to live. You know, as referred to in Maslow's hierarchy of basic needs - a place of shelter.
Negative gearing looks at "home" in a different fashion. It sees a home as an investment, not a place of shelter.
It also considers this same home as a tax dodge.
Now that process, claiming a deduction for the purchase of a home that the owner is living in sounds to me, reasonable enough. For this owner, the home is indeed a place of shelter.
But consider a different scenario. In this case, a property investor has five homes, and has made a great deal of money from the property market. This same investor is treated by the ATO in exactly the same way as a first home buyer. But for this owner, the home is something else entirely. It is an investment.
That is not reasonable. Why should my hard-earned tax dollar contribute to this individual's accumulating wealth? What is also not reasonable is that first home buyers, in Maslow’s terms, are being priced out of their capacity to seek shelter.
A bit strong, you say? Not really, negative gearing, amongst other things, puts upward pressure on home prices. So one segment of the population, property investors, are being subsidised by the taxpayer to keep another segment out of the market.
It does, and will continue to do so under the Coalition's negative gearing policy.
It needs to be tweaked. You should only be able to negatively gear your place of residence.