According to official ATO records, 30% of all Australian residential dwellings receive rental income. The other 70% of dwellings are occupied by the owner (whether mortgaged or debt free).
For as far back as history books can take us, Australian governments have not had the capacity to fund properties that make up the rental pool for what has become the fastest growing population in the developed world. Governments are flat out trying fund essential infrastructure such as roads, hospitals, ports, and public transport.
Approximately eighty (80) years ago, the then federal government came up with an initiative to encourage those private citizens in Australia who did have some capacity to fund property/s that would add supply to the growing demand on Australia’s rental pool.
The incentive effectively treats such (investment) properties as a ‘business’ in that there is an asset which receives income. Just like a more conventional business, the owner is entitled to claim all expenses associated with running that business. Big companies like Coles, BHP, and Commonwealth Bank claim their expenses as do small businesses like the local hairdresser.
Property investing is essentially a business which provides accommodation / shelter. Over the years, the term ‘negative gearing’ has been adopted.
With more and more financial pressure placed on government budgets each year and a reluctance to increase taxes to raise more revenue, governments have become increasingly less able to contribute funding to add extra properties to Australia’s rental pool.
Official ABS data dates back to the early 1980s. Between 1984 and 2005, the public sector (governments) were responsible for funding only 5.2% of all dwellings supplied. That means that the private sector (aka ‘mum-and-dad investors’) funded the remaining 24.8% of the total 30% of properties in Australia’s rental pool.
Fast forward to the most recent decade (2006 – 2015), the public sector’s contribution to Australia’s rental pool has shrunk even further to a miserable 2.9%.
The tax policy applicable to accommodation businesses (property investment) is consistent with all other businesses and share investing (refer margin loans).
Moreover, there is eighty (80) years of Australian history to highlight the importance of negative gearing to Australia’s economy. Not only does the tax policy play an important role with easing pressure on rental accommodation, it also encourages mum and dad Australians to invest. Households that don’t invest sufficiently during their forty-five years spent actively in the workforce (age 20 – 65 years), place added pressure on government budgets by becoming reliant on a taxpayer-funded pension for their remaining twenty-five years (age 65 – 90 years).