How Much Does Negative Gearing Really Cost Australia?
Following the Government’s decision to revise the Stage 3 tax cuts to provide greater benefits to lower income earners, calls for broader tax reform have intensified. In particular, renewed attention has been directed at negative gearing and its perceived cost to the Federal Budget.
So how much does negative gearing actually cost Australia each year? Insight can be drawn from the 2023–24 Tax Expenditures and Insights Statement (TEIS), which, somewhat confusingly, reports figures relating to the 2020–21 financial year.
What Is a Tax Expenditure?
A tax expenditure arises where the tax treatment of a particular activity or class of taxpayer differs from the standard tax benchmark.
Tax expenditures can include:
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Tax exemptions
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Certain deductions
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Rebates and offsets
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Concessional or higher tax rates for specific taxpayers
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Deferrals of tax liabilities
The figures in the TEIS are provided on a revenue-forgone basis. This reflects current usage of tax concessions and does not take into account behavioural changes that may occur if a concession were altered or removed.
As a result, these figures cannot be relied upon as estimates of the actual revenue impact if a tax expenditure, such as negative gearing, were abolished.
Rental Property Deductions in the TEIS
The TEIS provides a detailed breakdown of rental property deductions claimed by Australian investors.
Overall Rental Deductions
According to the ATO:
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Around 2.4 million rental property investors claimed deductions in the 2020–21 income year
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These deductions related to expenses such as interest, capital works and property-related costs
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Total rental deductions claimed were $48.1 billion
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These deductions resulted in a total tax reduction of $17.1 billion
How Much Relates to Negative Gearing?
Not all rental deductions arise from negative gearing.
Rental Losses and Tax Benefits
Only around half of rental property investors, approximately 1.1 million people, reported a rental loss.
These rental losses:
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Totalled $7.8 billion
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Generated a tax benefit of approximately $2.7 billion for the 2020–21 income year
This suggests that negative gearing represents a relatively small portion of the overall rental property tax concessions.
Breakdown of Rental Deductions
A closer look at the nature of rental deductions shows:
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More than 50% of deductions related to “other rental deductions”, such as property maintenance and council rates
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Interest expenses accounted for approximately 39% of deductions
The fact that only half of rental property investors negatively gear their properties suggests that removing negative gearing alone may not generate the level of budget savings some advocates expect.
Who Benefits From Negative Gearing?
Further analysis of the $2.7 billion tax benefit from negative gearing provides insight into who benefits.
Income Distribution
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Around 80% of the negative gearing tax benefit went to individuals earning above the median income, defined as above $41,500
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Approximately 37% went to individuals in the top income decile, earning more than $128,000
While individuals earning over $128,000 may be considered high-income earners, this classification can be misleading where that income supports an entire household as the sole or primary income source.
Age Profile of Claimants
Although the TEIS does not provide direct data on family circumstances, age data offers some context.
According to the ATO:
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More than half of the total negative gearing tax benefit went to individuals aged between 40 and 59
Many in this age group are likely to have families, with a significant proportion being primary or sole income earners. This calls into question the common narrative that negative gearing overwhelmingly benefits only the wealthy.
The Growing Cost of Rental Tax Concessions
Despite these nuances, the broader cost of rental property tax concessions continues to rise.
The tax reduction from rental deductions is projected to increase from $17.1 billion in 2020–21 to $28.2 billion by the 2026–27 income year. This makes rental property deductions the second largest tax expenditure, behind only concessional taxation of employer superannuation contributions.
What This Means Going Forward
As the cost of rental property tax concessions continues to grow, pressure to reform negative gearing is likely to intensify. While the data suggests the issue is more complex than it is often portrayed, the scale of the concession ensures it will remain a focal point in ongoing tax policy debates.
Understanding the real figures and who they affect is essential for informed discussion as future reforms are considered.
Speak to one of our accountants if you have any questions about the changes in tax for 2023.
