Three cents for TAASs... what's negative gearing cost?

We noted the other day that Tenants Advice and Advocacy Services cost about three cents a day for each renter household... and that to get a service that's properly funded to do duty advocacy at the Tribunal and get more specialist Aboriginal advocates to cover the State, as recommended to the NSW State Government, it'd cost a bit under five cents a day. And all of this is tenants' money.

Which got us wondering: what's Australia's uniquely generous tax treatment of negative gearing worth to landlords, in terms of tax saved? That is to say – what does it cost the rest of us, in tax revenue forgone?

As discussed previously, the Australian tax system allows landlords to deduct the costs of a rental property (interest, etc) from their income from all sources, not just income from the rental property. In other words, a net rental loss reduces a landlord's total taxable income, and hence the tax they pay. As far as the taxman is concerned, it's as if the part of their income they've put towards those costs was never received in the first place (while those of us who save by putting a part of our income in the bank get taxed on it).

And, also as discussed previously, most Australian landlords (64 per cent) do post a net rental loss in their yearly tax returns. On the latest figures, there's 1.1 million of these net loser landlords, and their total net rental losses came to $10.1 billion for the year (2009-10).

So that's $10.1 billion in landlords' incomes that the taxman doesn't see. If he did, how much tax would be raised from it?

We can answer this, in very rough and ready terms, by reference to the following table (Table 2.6) from Tax Stats 2009-10, which breaks down the net loser landlords by tax bracket.

Five tax brackets, and the (2009-10) marginal tax rates for each are, respectively, zero, 15, 30, 38 and 45 per cent. We'll assume that the income would have been taxed at the relevant marginal rate – and note: this is a big assumption. In real life, including this income could cause a landlord to go up a tax bracket, and hence pay tax at a higher rate – one reason why this is a rough and ready calculation.

Here's the Brown Couch's back-of-the-envelope calculations, from tax bracket 1 (ie $6000 or less) to 5:

1. For each of these very low-income landlords, the average net rental loss is $10 755 pa, but on the basis of our assumption above, they're not paying tax on their income anyway, so the tax they save is zero (which goes to show how generous that assumption is).

2. Average net rental loss here is $7 411 pa. Marginal tax rate is 15 per cent, so tax saved is $1 112 pa, or $3.05 per day.

3. Average net rental loss: $7 907 pa. Marginal tax rate is 30 per cent, so tax saved is $2 372 pa, or $6.50 per day.

4. Average net rental loss: $10 289 pa. Marginal tax rate is 38 per cent, so tax saved is $3 910 pa, or $10.72 per day.

5. Finally, for net loser landlords at the big end of town, the average net rental loss is $20 763 pa. Marginal tax rate is 45 per cent, so tax saved is $9 343 pa, or a very handy $25.60 per day.

As we said, this is all tax revenue forgone by the taxman and, hence, a burden borne by the rest of us. In total, it amounts to $2.79 billion for the 2009-10 year. Or, on average, $6.88 per day for every net loser landlord.

As we also said, it is a rough and ready calculation. If you factored in the cases where the deducted income would have otherwise put the landlord into a higher tax bracket, the amount of tax revenue forgone would be higher. If you factored in that some net rental losses would otherwise be deducted from realised capital gains, it would be lower. If you factored in that by not allowing net rental losses to be deducted against other income, landlords would not borrow so much to spend on rental properties, and the amount would be lower... but houses would be less expensive too.

But one is still left strongly with the image of a tax system that stuffs dollars into the pockets of landlords every day, while a State Government cuts a valuable service for tenants for the sake of a few cents.