While today the focus is on how changes to negative gearing will affect the nation's property markets, the original purpose of the tax practice was much different. In 1922, a tax bill of the pro-business government of Stanley Melbourne Bruce contained a provision that enabled a person to deduct all losses and outgoings from their assessable income. The focus was on business operators who might incur early losses. The property market didn't get a mention. From that point negative gearing - in the way it is understood today - became a part of the tax system. Property owners generally reported modest rental returns and landlords were largely higher income individuals with access to good tax advice.

This cosy arrangement started to fragment with the election of the Hawke government in 1983. Under treasurer Paul Keating, it immediately started looking at ways to modernise a tax system in line with the government's broader approach to the economy. Australia's top marginal tax rate hasn't been more than 50¢ since 1986. Credit:Fairfax Media Archive A tax white paper was promised ahead of the 1984 election and it was in its interim report that the seed of the idea to abolish negative gearing was planted. Keating, who described negative gearing as an "outrageous rort", sold the idea to cabinet as part of the government's wide-ranging overhaul of the tax system.

Axing tax shelters such as negative gearing would enable a broadening of the tax base. The $55 million expected to be raised in the first year after the change would help pay for a cut in personal income tax. "The government cannot continue to tolerate a situation in which the general body of taxpayers effectively subsidises the property investments of a particular group of, usually, high-income taxpayers," Keating reported to the cabinet. Two years later he was back before the cabinet where negative gearing was reinstated. The claimed revenue had not materialised. Instead of $55 million the Commonwealth had collected $11 million.

Investors avoided the financial pinch caused by the end of negative gearing by using other tax devices. Rents climbed in Sydney (and to a lesser extent in Perth) although they were stable in other capitals. Then Liberal leader John Howard had argued that axing negative gearing was "done in the name of levelling the tall poppies", hitting the "renting poor of the Australian cities". With the NSW Labor government facing the polls in 1988, the Hawke government abandoned the change even though Keating maintained that the economy needed more investment in tradeable goods and services rather than property. The debate around negative gearing quietened until the release of the Howard government's response to the Ralph review of business taxation in 1999.

It had advocated a cut in the capital gains tax, arguing that to do so would "enliven and invigorate" equity markets, encourage people to invest in shares and more broadly "achieve a better allocation of the nation's capital resources". The Howard government followed the advice, slicing capital gains tax. But within two years of that concession coming into operation something had happened to the rental market. Whereas landlords had been "positively geared" ahead of the change, the size of losses exploded with investors moving their cash into the property market to chase capital gains. Total rent collections turned negative in 2001-02. They have not been positive since, reaching a record $10.8 billion in 2008-09.

Losses have fallen but they are still a multibillion-dollar drain on the overall federal budget. Loading Tax Office figures show a substantial difference between landlords who are negatively geared and those who earn a positive return on their rental properties. In 2015-16, the most recent year for available data, there were close to three million rental properties around the country. Of those, 1.8 million lost money. The single largest expense claimed against the rent on a property is interest.

Of the 1.2 million positively geared properties there was $3.6 billion in interest claimed against half of them. Among those that are negatively geared, almost every investor claimed an interest cost, amounting to a total of $18 billion. Interest rate deductions have fallen since 2012. But with banks actively lifting rates on investors over the past 12 months that will turn around. The interaction between negative gearing and the capital gains tax concession has roused the interest of the Reserve Bank. As early as 2003, it used a submission to a Productivity Commission into first home ownership to note its interest in the effect of negative gearing on the property market.

The Reserve Bank argued property promoters were selling the tax advantages of negative gearing for real estate so that "resources and finance are being disproportionately channelled into this area". Its most recent research has suggested 76 per cent of Australians would be better off by abolishing negative gearing, with more people able to buy their own home. Politically, the issue was a grenade. Mark Latham copped a mighty spray from Peter Costello when, as Labor's new shadow treasurer, he suggested a change to negative gearing during an ABC Lateline interview in 2003. The Henry tax review of 2010, while not advocating an end to negative gearing, made clear it needed to change. Its research found highly indebted investors were being delivered a huge tax advantage that was ultimately footed by ordinary taxpayers.

A more "neutral" tax treatment around property, which included a change to the capital gains tax concession, would reduce the "crowding out" evident in property markets where investors out-bid owner-occupiers. Four years later, the financial services inquiry ordered by Joe Hockey noted that the interaction of negative gearing and the capital gains concession "encourages leveraged and speculative investment, particularly in housing". The tax system was funnelling problems into a housing market that itself was a significant source of risk to both the nation's banks and the Australian economy. It was around this time that shadow treasurer Chris Bowen started work on Labor's policy with a primary aim of raising revenue to deal with the budget bottom line. Shadow Treasurer Chris Bowen. Credit:Alex Ellinghausen

Housing affordability was also part of the picture as he and senior members of the ALP frontbench worked through a variety of options. These included a cap on the number of homes that could be negatively geared, a cap on the value of total deductions and even full abolition over a seven year period. The final speech of Joe Hockey to Parliament in late 2015 emboldened the ALP. The former Liberal treasurer made a call for big cuts in personal tax rates that would be paid for by overhauling tax concessions. "In that framework, negative gearing should be skewed towards new housing so that there is an incentive to add to the housing stock rather than an incentive to speculate on existing property," he said. Labor announced its policy in early 2016. While the government went hard opposing the policy even then treasurer Scott Morrison conceded there were "excesses" around negative gearing.

Two-and-a-half years on, the property market has changed. Loading House prices in Sydney were climbing at more than 10 per cent a year. Over the past 12 months they have fallen by more than 5 per cent. Bowen says a change is necessary to the tax concessions around property. "The combination of negative gearing and the capital gains tax concession is a toxic elixir," he says.

The government is standing by negative gearing. Treasurer Josh Frydenberg says the policy prescription of Labor will prove devastating for the property market and to small-time mum-and-dad investors who may have one or two properties. "Labor’s policy will make sure that people who own their home will see the value of their home be less, and fall, and if they rent their home, their rent will go up as a result of Labor’s policy," he recently told Sydney radio. He and the government are targeting people who have entered the market in recent years and are now seeing the value of their investment fall. Many are also facing higher interest rates due to a tightening of lending standards that itself is government-endorsed policy. Treasurer Josh Frydenberg. Credit:Alex Ellinghausen