Trevor Boucher. Tax principles and negative gearing.

I just wish that current comment about negative gearing would pay some attention to tax principles. Tax principles? Yes, they do exist.

A person who negatively gears a rental property has two objectives in mind: getting a rental return and reaping a capital gain on disposal.

The interest paid out is in pursuit of both objectives but the difficulty of apportioning it to each of those objectives means that the whole of the interest is charged against income, even income from other sources.

The excess interest over rents received could by legislation be quarantined to future rental income, or held for deduction against the capital gain on disposal.

Money has a time value. Deduction of excess interest against current income provides a present benefit but the tax impact of the capital gain is deferred until the gain is realised. Meanwhile the person’s wealth increases as the property’s value rises.

Taxing capital gains helps to redress the imbalance. But that redress has been damaged by the fiscal vandalism represented by taxing only half of a realised capital gain.

A dollar is a dollar is a dollar. Whether a dollar receipt comes from personal exertion or from property investment it carries the same taxable capacity.

Remove the fifty per cent capital gain discount and negative gearing loses some of its shine.

Trevor Boucher was Australian Commissioner of Taxation 1984-93. This was followed by two years as Australia’s Ambassador to the OECD.

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