A Controversial Issue On The Australian Government And...

Negative gearing is a controversial issue and has been a hotly contested debate amongst the Australian government and Reserve Bank. In my opinion, negative gearing should neither be abolished nor stay the same. Instead, we need a tax reform of this policy. In doing so, there should be a limit as to how much loss a taxpayer can deduct from his negatively geared investment property. This limit should be no larger than one’s assessable income. This way, bias towards investments producing capital gains over income would be reduced. In addition, this deduction should be offset against a taxpayer’s rental instead of assessable income. Concept of negative gearing and relevant income tax provisions Negative gearing arises when an asset is†¦show more content†¦According to s6-5(1) , assessable income includes ordinary and statutory income. S8-1(1)(a) allows a taxpayer to deduct any losses incurred in producing assessable income. Taxpayers with negatively geared investment property would be able to deduct their net rental losses from their assessable income as rental income constitutes ordinary income arising from property; Adelaide Fruit and Produce Exchange Co Ltd v DFCT (1932) 2 ATD 1. Other fully deductible expenses include interest on an investment loan for an income producing purpose along with ongoing repairs and maintenance. Income tax consequences of selling property Assuming that the investment property has not been of main residence to the taxpayer, exemptions stated in s118-110(1) will not entitle the taxpayer to the full capital gains tax (CGT) discount as the dwelling has been used to produce assessable income. Based on s108-5(1)(a) a property is considered a CGT asset. CGT event A1; selling of property would be considered disposal of a CGT asset under s104-10(1). Disposal of property would result in a capital gain or loss calculated by sale of property less the asset’s cost base, which would make a taxpayer liable for CGT. The cost base under s110-25 of an asset is calculated as the sum of the purchase price plus incidental, ownership and title costs less government grants and depreciable items. Capital losses can be offset against capital gains, reducing the