It turns out Bill Shorten could have won the last election.
Labor is widely believed to have lost the 2019 election after having a controversial policy of limiting new negative gearing arrangements to only newly built properties and halving the 50% capital gains tax deduction.
The negative gearing policy – which refers to the popular practice of using rental property losses to reduce tax bills – was particularly damaging because it was seen as attacking aspirational voters trying to get ahead.
Negatively geared investors are hoping to make up for their short-term income losses of paying more in loan interest than they get in rent with a lower tax bill and more lightly taxed capital gains.
Falling interest rates make negative gearing difficult
As it turns out, the dramatic fall in interest rates since then has greatly reduced the ability to use negative gearing and the number of Australians using it is shrinking rapidly, so the Labor proposal would have had a minimal impact.
Data from the Australian Tax Office shows that of the 2.2 million taxpayers who owned at least one rental property, only 1.3 million declared a net rental loss in 2018-19.
Given that these figures are fairly old and that interest rates have continued falling since then, it is highly likely that the number of negatively geared properties has continued to fall, even as property values jumped significantly.
It is not hard to see why negative gearing is rapidly disappearing, with gross rental yields on real estate sitting around the 4% mark – that is well above the interest rate on many loans.
Even with other rental deductions such as fees, depreciation and capital works, it is getting harder to actually run a negative gearing strategy and the losses and tax effect are likely to be lower.
That means many more landlords are neutrally geared or making taxable rental profits.
Only half of landlords now negatively geared
Even the ATO figures that are a few years out of date now showed this trend, with only 58.6% of landlords claiming a net rental loss – the first time that number has fallen below 60%.
Indeed, it was an impressive 69.6% in 2007-08, at a time when mortgage rates were in double figures.
If the trend is continuing, which it is fairly safe to assume, by now only around half of all landlords are claiming negative gearing losses and many of them will be those with several rental properties.
Shorten reforms would have had little effect
That means that the planned Shorten tax reforms would have had a very marginal effect on investor behaviour and revenue – especially given that existing negative gearing landlords were not going to be touched by his plan and many new investors would have struggled to accrue negative gearing losses anyway.
However, the second arm of the since dumped Labor policy would have gathered some serious revenue over time, had Shorten prevailed at the election over the seemingly surprised “I believe in miracles” victor Scott Morrison.
The booming property and share markets have built in a veritable mountain of taxable capital gains since the election so a policy to get rid of the 50% discount would have had a serious effect.
Getting rid of capital gains tax discount would have been huge
While capital gains only accrue when a taxable investment is sold, the scale of those gains and the large effect of a 50% discount would have made big inroads into raising tax revenue over time.
It just goes to show that predicting the future is terribly difficult, given that not many people would have thought property yields could have eclipsed investment loan rates.
It also makes the new Labor tax policy, which is due to be released before the next election, even more interesting to watch out for.
It could well be that negative gearing returns as a common investment strategy as interest rates normalise down the track, although at the moment that seems like it will be years away.