Negative gearing has role to play in housing

HAVE you noticed the predictable bleating about negative gearing on rental properties now that prices have heated up in Sydney and Melbourne?

This sort of reaction has a history going back to 1985. It was then agitators ignored the obvious consequences, as they do now.

In 1984, the new Hawke Labor government listened and decided to end the long-entrenched principle of allowing investors to claim as an expense the interest paid on rental properties.

It was an unmitigated disaster. Luckily Paul Keating reinstalled the deductibility of interest as from the middle of September, in effect breathing life into negative gearing as an investment tool and avoiding an imminent accommodation Armageddon.

Naturally there was a flipside. Simultaneously, Keating introduced capital gains tax.

What property owners gained on the swings they lost on the roundabout.

In other words, investors would access tax relief from owning negatively geared property but when the property sold, they would cop a hefty tax bill.

This was to apply to all property purchased after September 19, 1985. And shares as well.

The Hawke government had opened a Pandora's Box.

Receipts from CGT soon proved an embarrassment of riches, prompting a number of concessions and tax changes through the 1980s and 1990s culminating in the position as it stands today.

The continuation of the deductibility of interest in property investment was proven long ago to be essential to the continued provision of housing for people in no position to purchase their own.

Heed those lacking a historical perspective wishing to end it, and the alternative will have to be an increase in expensive government housing along with the scrapping of CGT, New Zealand style.



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