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We should be encouraging self-sufficiency

It seems wealth creation has become a dirty joke in Australia. For months, there have been attacks on the money accumulated in superannuation; now Labor, the Greens and even the Reserve Bank have upped the ante by calling for a review of negative gearing.

It’s an attack, not so much on the wealthy, but on middle Australia. Contrary to the spin, Australians who are using negative gearing to increase their wealth are not millionaires flouting the tax system – the majority of them earn less than $80,000 a year and are only buying a single investment property.

Let’s think about a typical couple with secure jobs and earning $80,000 a year each. They are about to turn 50, have just paid their house off, and are well aware there’s unlikely to be much of a pension available to them when they retire.

The options available to them are cash, property and shares. Cash is particularly unappealing, with rates at historic lows and likely to fall further. They are terrified of shares, which they regard as a bit of a punt and are becoming increasingly wary of super, due to the barrage of calls to change the rules.

The only option left for them is property. They are not interested in non-residential property, where vacancies of a year or more are common, so their choice of asset to build a portfolio for their retirement is residential real estate.

They decide to bite the bullet and borrow $450,000 at 5%, secured by a mortgage over their existing home, to buy a property for $450,000. Repayments of $3560 a month will have the property paid off in 15 years when they want to retire.

In Year One, the net income from the property will be $18,000, and the interest for the first year on their loan will be $22,500. Hence they are negatively geared to the tune of $4500 and should qualify for a tax refund of around $1250 each when depreciation allowances are taken into account. The total cost to the taxpayer is just $2500 – hardly the stuff that grand tax schemes are made of.

Now fast forward to Year Five, when their net rents are likely to have increased to $21,000, while their loan is down to $339,000. Their interest deduction for the year is just $16,950.

Lo and behold, they are now positively geared. In fact, the surplus rents may well push them into a higher tax bracket, unless our squabbling politicians have got their act together and agreed to personal tax cuts in that time.

By the time they get to 65, the debt should be paid off and the property could be worth $670,000, assuming capital growth of 4% per annum; producing rents of $24,000 per annum assuming annual increases of 3%.

Let’s hope by now they’re feeling better about their employer-paid superannuation, because they’re going to need it. They’re well outside pension eligibility, but the rents from the property probably won’t be enough for them to live on, particularly with increasing maintenance costs as the property ages. Once they exhaust their superannuation, they’ll be forced to sell the house to provide enough funds to live on. This will generate a hefty capital gains tax bill.

Let me stress that this is not the kind of strategy I recommend – I much prefer the flexibility and growth potential of a diversified share portfolio. However, the couple in question are typical of many Australians in their tax bracket. Instead of being attacked, they should be commended for trying to be self-sufficient, and for the substantial contribution to taxes they will make in the future.

Addendum from the Editor

As background to the negative gearing debate, I asked a suburban accountant about his client's income and expenses on investment properties. This practice is a small operation with a few staff in western Sydney, doing basic accounting work in the same way as thousands of other small firms. He sent me the table below.

NW Table1 240715b

NW Table1 240715b

Although this is a tiny sample, it shows how different the experiences are. In cases where loans are repaid, there is strong positive net income. But others with maximum gearing, depreciation and interest in advance create sizeable deductions. In most cases, there is either net income or a small deduction.


Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. See

July 25, 2015

Based on your examples moderate income earners would benefit sufficiently if negative gearing were quarantined to the asset (i.e. instead of reducing taxable wage income it reduced capital gains on sale). That would more importantly remove incentives for the worst excesses at the top of the income scale.

Peter Taylor
July 25, 2015

Some first home buyers could probably afford to buy a home rather than rent if they had the option of a tax deductible home loan with the understanding they would pay capital gains tax when its sold. Yes I know their property is not income producing but it would level things up a bit.

It seems tax payer money can be used to assist investors buy overpriced property which can be occupied by someone who is given rent assistance to be able to afford the rent while the next house could be occupied by a first home buyer who gets a grant to assist them to buy. I say overpriced because I am not sure the investor would buy at current prices without the negative gearing.
What other industry chews up so much taxpayers money ?

jeffrey pringle
July 24, 2015


I think you are am amazing speaker and keep things very common and very simple which is a wonderful thing and I try and keep my advice in a similar format. However, I work as a tax agent and check probably close to 7000 tax returns a year. Your example in regards to real estate is off the mark. The majority of properties I deal with are close to twenty thousand dollars a year in losses initially and and to top this, most are signed up to interest only loans and those that are not, even after having the property for up to close to 10 years, I have most of the property is still not positively geared.

To be honest, property is what I consider to be a one of the worst investments for the simple fact is that most people are taken in by seminars, sold sub standard investments at top prices and with little room for any capital or rental appreciation and at the current market most are trying to sell the people but cannot sell for what they paid for.

Its a bloody shame that people can still do these seminars without any form of licencing or regulation.

July 24, 2015

The problem is not whether there is net positive income years down the track, but is at the time of purchase when negative gearing helps the investor push the price out of the range of the proposed owner occupier. Considering the median (not mean) Australian wage is around $53k or $106k for a couple, why are we giving those on $160k pa who already own a house the tax break?

Massively simplistic, but suely it is better for each family to retire with one house than have some with two houses (one of which was subsidised by the tax system) and some families with none.

July 24, 2015

Graeme, we are giving them a tax break because they are taking a risk! It's that simple. Any business gets a tax break for taking a risk by borrowing money etc. There is something called the risk/reward ratio which indicates that unless people are compensated for taking a risk, then they simply won't do so; that is take a RISK and be compensated for doing so.

July 24, 2015

Peter, I partially agree with you. If we compensate people for taking a risk to do something useful like financing a business or even constructing new housing, that's fine. However it's not so good when the vast majority of this risk taking only serves to push up the price of existing housing. Decreasing the compensation in this case and hence dissuading some from taking the risk seems a good outcome to me.

Obviously having policy hit the right targets is critical. I'm sure the Reserve Bank would love to have monetary policy stimulate the general economy without elevating capital city house prices.


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