- While Labor resists calls to change Australia’s system of negative gearing and the Greens push for changes, there’s a chance change could come from somewhere else altogether – Australia’s legal system.
- As surprising as it might seem, the legal precedent that allows one million Australians to negatively gear investment properties can be challenged.
The problematic precedent
- The general deduction section allows taxpayers to deduct from assessable income any loss or outgoing to the extent that “it is incurred in gaining or producing your assessable income”.
- Where such expenses are only partly related to gaining income, the section allows that part of them be deducted, with the rest not.
How Janmor Nominees played out
- In court, the Tax Office argued that the loss shouldn’t be allowed as a deduction because the property wasn’t really rented out.
- This meant it didn’t deal with the more important question of whether negative gearing losses were incurred in gaining or producing assessable income.
Losses need to be in pursuit of income
My respectful opinion is that the judgment can’t govern negative gearing as it is usually practiced today, and for that matter, could not have governed it as it was usually practiced back in 1987. In the standard negative gearing situation, the taxpayer who incurs a rental loss after deducting rental expenses is seeking three things:
rent
capital growth for the purpose of making a profit
use of the loss to reduce other taxable income to reduce tax owed.
- The first of the three advantages (to obtain rent) satisfies the deduction test – it is connected to the pursuit of an income.
- Regardless of purpose, the courts have held that, to be deductible, expenses need to be objectively “incidental and relevant” to earning income.
- Again – objectively – interest expenses are only partly directed at obtaining rent; they are also directed at obtaining tax deductions and capital growth.
The Tax Office ought to seek a ruling
- The Tax Office would get complaints.
- The Tax Office regularly tests the boundaries of deduction provisions by bringing cases to the courts, even where political sensitivities are involved.
- It is a criticism to which the Tax Office might not have a ready answer.
Dale Boccabella does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.
