Negative gearing is a phrase used in Australian tax policy debates, typically in regard to rental property investments. It is claimed to be a tax concession that an investor can claim a tax deduction for interest expenses that contribute to a current loss on a rental property investment, and offset that loss against wage income for tax purposes. The deductibility of interest for tax purposes, though, is simply part of the general provisions of the tax act, ie that expenses incurred in earning of assessable income are deductable for tax purposes. So where does the myth that this is a tax concession come from?

It is also said, often in the same debate, that there is a housing crisis in Australia, including that there is a shortage of affordable rental accommodation. Basic economics tells us that a policy change that increases tax on investments in rental properties would make that situation worse, ie there would be less rental properties and rents would increase. So where does the myth that increasing tax on investments in rental properties will help with the housing crisis come from?

How can the policy debate in Australia on this issue have become so muddled? This paper seeks to address these questions.

Paul Tilley was an economic policy adviser to governments for 30 years, working mainly in Treasury but also the Department of Prime Minister and Cabinet, the Treasurer’s office and the OECD. He has since published two books: the first on the history of the Treasury, Changing Fortunes: A History of the Australian Treasury; and the second on the history of tax reform, Mixed Fortunes: A History of Tax Reform in Australia. He is also a Visiting Fellow at the ANU’s Tax and Transfer Policy Institute and a Senior Fellow at the Melbourne Law School.