David Feeney is fully entitled to negatively gear his property. What's not clear - and what should concern voters - is why he and Labor want to prevent others from doing exactly what he does, writes Sinclair Davidson.

The denizens of Twitter and Facebook are having a lot of fun at David Feeney's expense. I must admit I've not been above it myself - after all, I too often forget that I'm a multimillionaire.

Forgetting to declare he owned a multi-million-dollar house might get him into some trouble with the custodian of the Parliamentary asset register, but that shouldn't be a hanging offense. It might not be so wonderful for Feeney's career though.

Former NSW premier Barry O'Farrell forgot to declare a $3000 bottle of wine and had to resign. I like to think that many Australians thought that incident to be a somewhat trivial offense. So too here - not having declared the house isn't the issue that should concern voters.

What is going to get Feeney in trouble is that he is "negatively gearing" the property. The ALP have chosen to make negative gearing an issue at the July election. It must then come as something of a blow that an ALP senior frontbencher and power broker is pursuing that very investment strategy.

Feeney is not a rorter simply because he negatively gears. Many thousands of Australians negatively gear their investment properties - and other investments too. At the very least, however, he is a hypocrite.

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The ALP had hoped to benefit from the general community's lack of understanding as to what negative gearing actually is to score political points. That opportunity is now gone - every politician running for office at the July election is going to be asked two questions: Do you have an investment property? Are you negatively geared?

Many, if not most, will answer "yes" to those questions. Journalists shouldn't forget to ask if the politician's spouse is negatively geared if any politician answers "no" to those questions.

There remains much community misunderstanding about the very notion of negative gearing. Here is a recent exchange of views between University of Tasmania Vice-Chancellor's Fellow Saul Eslake and me on the topic.

The thing to focus on is that negative gearing is about taxation and the ability to pay, not economic incentives to invest. This is Tax 101 not Econ 101. Expenditure incurred in the production of taxable income is deductable. This is a stock standard feature of our tax system, and many other economies' tax systems.

This isn't an esoteric principle - in 2010 the High Court ruled unanimously that a student could deduct her textbooks from her income as she had to be enrolled as a student to access the Youth Allowance that the government insists be treated as income.

At the time tax law expert Miranda Stewart described the case as follows:

On one level it just applies normal principles that expenses incurred by a taxpayer in gaining assessable income are deductible.

Negative gearing works in exactly the same way.

The best way to think of negative gearing is that being a landlord is an unincorporated business. The landlord makes a massive investment in an income-producing asset and then rents it out. The investment price is determined by conditions in the housing market and interest rates and the like, while rental prices are determined by supply and demand conditions in the housing rental market.

Like many small businesses the landlord will lose money in the early days. Businesses can normally carry losses forward and deduct them against future profit before paying tax on those profits. But because the business is unincorporated, in Australia, the landlord can offset the loss against other income they have that might be taxable.

The first point to note is that this is simply a matter of timing. The loss is going to be offset against other taxable income at some point, either in the present or in the future.

The second point to note is that Australia is one of the few countries that allows investment losses to be offset against non-investment income. Some observers point to this feature and then argue that we are the only in the country in the world that has negative gearing. No, we are the only country in the world that calls this policy negative gearing.

Let's imagine that Australia adopted the rule that investment losses could only be offset against other (future) investment profits. What would happen is that losses would be carried forward until profits earned and then deducted, or until the asset (property) was sold. Then the losses would be deducted from the capital gain, and then the capital gain would be discounted and taxed.

So the notion that the deductibility of expenditure incurred in the production of taxable income is a "loss" to the government is simply not true - it would never get that "income" under any tax regime Australia is likely to adopt.

What the ALP is proposing is effectively an increase in taxation for landlords that don't invest in new properties - making it impossible for landlords to carry forward losses like any other business would, or offset those losses against other income (either now or in the future) as any other business would. The mistake the ALP has made is to think of negative gearing as a business incentive - it is no such thing, it is a tax principle.

This brings us back to David Feeney. He is fully entitled to organise his affairs according to the law of the land. As far as I can see, he has done so.

He can only stop negative gearing by either selling his property, or by massively ramping up the rent that he charges. But rental prices are set by the market and he may be unable to do that.

It's not clear, however, why he should want to prevent others from doing exactly what he does. The hypocrisy of a multimillionaire tweeting about housing affordability being undermined by negative gearing is what might bring him undone.

Sinclair Davidson is Professor of Institutional Economics at RMIT University, a Senior Research Fellow at the Institute of Public Affairs, and an Academic Fellow at the Australian Taxpayers' Alliance.