David Murray’s sweeping review of the Australian financial system has delivered a blow the sector. His 44 recommendations included the rethinking of 13 taxes; among them the contentious tax offset of negative gearing.

For investors negative gearing is a popular tax arrangement. In a nutshell – if the owner of a property spends more than they make from rents then the loss can be offset against other taxabe income (such as wages or salary). This allows an investor to write off such items as interest on mortgage repayments, upkeep on the property and rates.

Furthermore, while offsetting the amount they pay for the investors are free to gain large amounts from improvements in the price of the property.

However, the flip side is that by attracting so many investors into the market it artificially raises the price of homes, thereby squeezes out first home buyers.

As David Murray put it: It “distorts the allocation of funding and risk in the economy” and my “adversely affect the outcomes in the financial system.

“The tax treatment of investor housing, in particular, tends to encourage leveraged and speculative investment,” says the report.

Calllum Pickering, from Business Spectator, agrees “… most Australian property investors don’t really care about rental yields. They are in it for the capital gain – which is the very definition of speculative activity.”

As such, negative gearing can only be seen as a tax break that benefits the already wealthy.

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