SAUL ESLAKE

Economist

SAUL ESLAKE

‘Welcome to my website …
I’m an independent economist, consultant, speaker,
and Vice-Chancellor’s Fellow at the University of Tasmania’

Negative gearing simply a form of ‘tax avoidance’


Housing, Publications, Taxation | 31st March 2016

Saul Eslake | The New Daily | 23rd March 2016

In a recent interview with the ABC’s Leigh Sales, Prime Minister Malcolm Turnbull defended negative gearing as “income tax 101”, by which he went on to explain as “a fundamental principle of tax law and has been forever that you can deduct from your income the interest expense of money that is borrowed to purchase an income-producing asset”.

This is quite a common proposition put forward by those who wish to defend the practice. It allows individuals who borrow finance the acquisition of an investment asset to offset the excess of interest they pay on those borrowings over the income the investment produces, in any given year, against their other income (for example, from wages and salaries) to reduce the amount of income tax they would otherwise be liable for.

They argue that this simply allows individuals to do what businesses can – offset the costs of ‘doing business’ (including financing costs) against taxable business income.

• Revealed: Australia’s negative gearing hot spots
• Labor’s negative gearing aims echo Coalition housing changes
• ABS figures show a tale of slowing housing prices

However, it ignores a very important difference between the tax treatment of companies and individuals. Companies don’t get the 50 per cent tax discount on capital gains which individuals have done since 1999 (nor did they get the CPI inflation adjustment to the cost base of assets which individuals did between 1985 and 1999).

Once upon a time, Mr Turnbull appreciated this difference.

In a speech to a conference co-sponsored by The Australian newspaper and the Melbourne Institute of Applied Economic and Social Research in September 2005, he described negative gearing as a form of ‘tax avoidance’, one of the few open to PAYE and other ‘unincorporated’ taxpayers.

0316negative-gearing

A month earlier in a paper co-authored with the ANU’s Jeromey Temple, Mr Turnbull observed that “Australia’s rules on negative gearing are very generous compared to many other countries”, noting that “the normal deductibility principles do not apply to negatively geared real estate such that the taxpayer is not obliged to demonstrate that the negatively geared property will generate positive cash flow at some point in the distant future” (emphasis added).

People are, of course, entitled to change their minds – especially when, as Maynard Keynes is supposed to have said, the facts change.

But the only relevant fact that appears to have changed between 2005 and today is that Mr Turnbull is heading a Coalition government, rather than being a backbencher in one, and he is confronting an Opposition advocating changes to negative gearing, unlike the Labor Opposition in 2005.

In their 2005 paper, Mr Turnbull and Dr Temple argued “the concessionary taxation of capital gains encourages people to invest in a manner which turns income into capital and, as in the case of negative gearing, allows them to deduct losses at, say, 48.5 per cent and then realise gains and pay tax at effectively half that rate”.

They cited then Reserve Bank Governor Ian Macfarlane and other commentators as claiming “this divergence in the taxation of income and capital coupled with negative gearing has contributed to the asset bubble in residential real estate”.

The only relevant things that have changed since then are that the top tax rate is now effectively 49 per cent, that capital city residential property prices are almost 75 per cent higher than they were then, and that Ian Macfarlane is no longer Governor of the Reserve Bank.

Malcolm Turnbull
Malcolm Turnbull has previously said that negative gearing is ‘tax avoidance’. Photo: Getty
As Mr Turnbull acknowledged, most other countries with personal income tax regimes similar to ours don’t allow negative gearing in the way that we do. The US removed it (for investment properties) as part of a broader package of tax reforms in 1986 – with no apparent adverse consequences for the level of investment in the housing market.

And two of Mr Turnbull’s closest political soulmates – New Zealand’s John Key and Britain’s David Cameron – both recently introduced changes to their countries’ tax regimes explicitly designed to dampen speculative investment in housing.

New Zealand has subjected investment properties bought and sold within two years to income tax at the investor’s full marginal rate, with effect from 1 October last year. And last year’s UK Budget provided that, from 2017 onwards, landlords will no longer be able to deduct the cost of their mortgage interest from their rental income in calculating their taxable income.

Mr Turnbull would do well to follow the example set by these, electorally successful, centre-right Prime Ministers, as well as the inherent logic of his own opinions of a decade ago, rather than regurgitating the self-serving propaganda of parts of the property industry.

Saul Eslake is a leading Australian economist. He worked as the Chief Economist at the ANZ for 14 years and has worked at Bank of America-Merrill Lynch. Between 2009 and 2011, he was the Director of the Productivity Growth Program at the Grattan Institute.

SPEAKING ENGAGEMENT

Speaking Engagement | Boardroom Advisory | Commissioned Report | Expert Witness



Saul Eslake spoke to Zurich Australia executives and staff at their ‘Accelerate’ conference in Sydney on 9th May 2024, covering short- and longer-term trends in major ‘advanced’ economies, China, India and Australia, with a bit of geo-politics thrown in.



“You are the best economic thinker in the country hands down”

Sheryle Bagwell, recently retired Senior Business Correspondent (and sometime Executive Producer),
ABC Radio National Breakfast


“Just want to congratulate you Saul on the unbelievably good set of slides you just presented, possibly the best I have ever seen. You have set the bar very high.”

Dr Joe Flood, Adjunct Fellow, RMIT University, Pandemicia


“Thank you very much for your excellent presentation for the Economic Society today. It is always a great pleasure to hear your eloquent, up-to-date and comprehensive talks.”

Andrew Trembath, economist, Victorian and Australian Government agencies


Request Speaking Engagement


WHAT'S NEW

Most Recent Articles, Talks and Presentations


The Importance of Productivity – and What to Do About It
Economic Policies, Productivity, The Australian Economy
29th March 2025


The 2025-26 Federal Budget – An Assessment
Economic Policies, The Australian Economy
27th March 2025


What might and might not be in the budget
Economic Policies, News, Recent Media Interview, The Australian Economy
24th March 2025


The Impact of President Trump’s ‘trade war’
Economic Policies, Recent Media Interview, The Australian Economy, The Global Economy, US Economy Video
18th March 2025


Potential Risks in the Australian Share Market
Economic Policies, Economic Video, Recent Media Interview, The Australian Economy, The Global Economy
18th March 2025


Questions for Australia’s Defence in a Changed World (Part 3)
Australian Society and Politics, Economic Video, Security
17th March 2025


Victoria joins the ranks of so-called ‘mendicant’ states
Australian Society and Politics, Economic Policies, News
16th March 2025


Erratic US Trade Policy
Economic Policies, Globalization, Recent Media Interview, The Global Economy, US Economy Video
15th March 2025


Questions for Australia’s Defence in a Changed World
Australian Society and Politics, Economic Video, Security
14th March 2025


Questions for Australia’s Defence in a Changed World (Part 2)
Australian Society and Politics, Economic Video, Security
14th March 2025


Podcast: Tasmania’s Debt Dilemma
Economic Policies, Economic Video, Tasmania
13th March 2025


The impact of Trump’s tariff and other policies
Economic Policies, News, Recent Media Interview, The Global Economy, US Economy Video
13th March 2025


What could be in the Federal Budget 2025-2026?
Australian Society and Politics, Economic Policies, News, Recent Media Interview, The Australian Economy
12th March 2025


Tasmania’s Debt Dilemma
Economic Policies, Tasmania
12th March 2025


The real meaning of last November’s US elections is becoming clearer – the American people voted for this
Australian Society and Politics, News, Security, The Australian Economy, The Global Economy
9th March 2025


NEWS

TV, Radio & Print Media


What might and might not be in the budget
Economic Policies, News, Recent Media Interview, The Australian Economy | 24th March 2025

Victoria joins the ranks of so-called ‘mendicant’ states
Australian Society and Politics, Economic Policies, News | 16th March 2025

The impact of Trump’s tariff and other policies
Economic Policies, News, Recent Media Interview, The Global Economy, US Economy Video | 13th March 2025

What could be in the Federal Budget 2025-2026?
Australian Society and Politics, Economic Policies, News, Recent Media Interview, The Australian Economy | 12th March 2025

The real meaning of last November’s US elections is becoming clearer – the American people voted for this
Australian Society and Politics, News, Security, The Australian Economy, The Global Economy | 9th March 2025

Werribee voters send messages to both major Victorian political parties
Australian Society and Politics, Economic Policies, News | 9th March 2025

Review of the case for privatization of Tasmanian Government business enterprises
Economic Policies, News, Recent Media Interview, Tasmania | 6th March 2025

Tasmania’s Public Finances
& the Independent Review of Tasmania’s State Finances (Aug, 2024)

News, Recent Media Interview, Tasmania | 14th February 2025

How Victoria became one of Australia’s ‘poor states’
Economic Policies, News, Publications, The Australian Economy | 25th November 2024

Negative Gearing
Economic Policies, Housing, News, Recent Media Interview, Taxation | 26th September 2024

Tasmania’s State Budget 2024 – 2025 with Leon Compton
News, Recent Media Interview, Tasmania | 13th September 2024

Solutions to Australia’s Housing Crisis
Australian Society and Politics, Housing, News, Recent Media Interview | 11th September 2024

Read more

VIDEO

Most Recent Multimedia


TESTIMONIALS

What Others Say


Australian Minister for Housing, the Hon. Clare O'Neill MP on ABC Q&A, September 2024

“We are lucky as a State to have an economist of your calibre willing to readily make yourself available to give us a clea r perception of where we are at and the direction we need to go for a better future”
Diplomatic Representative, August 2024

“You are one of the best at what you do in the world”
Gail Fosler, Chief Economist, The Conference Board, New York, December 2002

“I have never known an economist to have such a knowledge of world economic facts and to be able to bring to bear so much information in answering a question without notice”
Charles Goode, Chairman, ANZ Bank, July 2009

“Saul Eslake is … a highly regarded independent economist with the highest degree of integrity"
John Durie, Columnist, The Australian, July 2009

“… one of the few people in this world who can have so many oranges up in the air at the same time but still manage to catch them"
Andrew Clark, journalist, Australian Financial Review, November 2008

Read more

LINKS

Useful Links


Below is a list of links I’ve found useful under the following broad topics

Read more