Nation of landlords lines up for $15bn tax deduction

17 July 2004

Negative gearing tax deductions on rental properties have soared to almost $15 billion, after 220,000 new landlords lodged claims for the first time.

The Australian Tax Office has revised its estimate of rental claims for 2002-03 by $1.2 billion to $14.9 billion.

Landlords claimed $1.2 billion more in rental deductions than they declared as rental income, prompting the Tax Office to strengthen its compliance operations. "Total deductions have increased by just over 9 per cent," said Elizabeth Goli, first assistant commissioner for personal tax. "We have been given additional resources in the budget, particularly for capital gains tax and rental audits."

About 18,000 landlords will receive letters questioning their claims, up nine-fold on the previous year. Unsatisfactory answers to those letters will lead to audits. The $1.2 billion negative gearing gap is twice as large as any previous year and will spotlight two controversial elements of tax policy, negative gearing and the 50 per cent discount for capital gains tax, introduced in 1999.

Negative gearing enables landlords to borrow and claim their interest expenses beyond what they earned in rent. The rules are thought to be more generous here than in comparable countries.

The tax issues were highlighted recently by the Productivity Commission and the Reserve Bank over concerns they encouraged speculation for tax gains rather than expected rental returns, distorting investment decisions and inflating property prices.

Rental claims exceeded declared income for the first time in 2000-01, after capital gains tax changes. They have grown 27 per cent in three financial years since the changes, and 47 per cent since 1997-98, the first full tax year after the Howard Government was elected.

The number of rental claimants is up by 100,000 to 1.34 million since the 1995-96 financial year. The amount they have claimed has increased by $4.7 billion.

Ms Goli said increasing numbers were entering the rental business for the first time.

The Tax Office will send out 37,000 letters pointing out common mistakes, up from 15,000 last year. It will also publish a rental property booklet listing housing items that can be claimed for depreciation.

The office is likely to double the number of audits on rental claims after recently finding 85 per cent of audits had led to amended assessments.

 

Reproduced from Sydney Morning Herald newspaper.