The claim

"In terms of how I have described my attitude towards negative gearing, I have always understood that for the vast majority of Australians who use negative gearing they are modest income earning Australians, nurses, teachers, police," Treasurer Scott Morrison told the National Press Club in February.

"Two thirds of those who use negative gearing have a taxable income of $80,000 or less. Seventy per cent own just one property, and 70 per cent have a net rental loss of less than $10,000".

Are the vast majority of Australians who use negative gearing on a modest income? ABC Fact Check investigates.

The verdict

Mr Morrison's claim is selective.

Australian Tax Office data shows that one in 10 Australians who files a tax return is negatively geared in terms of rental property.

Data provided by Mr Morrison's office, based on Treasury calculations, showed 67 per cent of the people who use negative gearing have taxable incomes of $80,000 or less.

This was backed up by Fact Check's analysis of ATO statistics.

However, as 82 per cent of all taxpayers have taxable incomes below $80,000, it is not surprising that most of the negative gearers fall into this category.

As this category represents only 67 per cent of negative gearers, it is clear that these taxpayers use negative gearing proportionately less than taxpayers with higher income.

Put another way, only 8 per cent of people with taxable incomes less than $80,000 use negative gearing, compared with more than double that proportion among people with taxable incomes above $80,000.

Similarly, people with taxable incomes over $80,000 receive 42 per cent of the negative gearing benefit, but they only represent 33 per cent of all negative gearers.

Finally, those with a total income (including negative gearing benefit) of $52,000 a year or less — an income more in line with the definition of modest as a "moderate" or median income — represent 59 per cent of all taxpayers, but only 40 per cent of negatively geared taxpayers.

Only 4 per cent of these people use negative gearing.

When the negative gearing benefit is removed by taking out their rental losses, they represent 33 per cent of people who use negative gearing.

Negative gearing

Negative gearing is a tax treatment that applies to the income people make from rental properties.

A rental property is negatively geared if you have to borrow money to buy it and the rental income, after deducting all the other property expenses, does not cover the interest on the mortgage.

This net loss can be used as a deduction against other income earned, for example a salary, before tax is paid on it.

The Government's tax discussion paper released in March 2015 notes that this strategy is only financially effective where the taxpayer expects a future capital gain to more than offset this loss.

Negative gearing doesn't just apply to investment properties.

Australia's tax system allows expenses resulting from all types of investments to be used as deductions against overall income.

Who uses negative gearing?

Australian Taxation Office (ATO) data shows that of the 12.78 million Australians who filed a tax return, 10 per cent (1.26 million) were negatively geared in terms of rental property, which meant they recorded net losses on rental properties.

The data shows that around 82 per cent of people who filed a tax return have a taxable income of less than $80,000 and around 8 per cent of them use negative gearing.

In contrast, 18 per cent of tax filers earn more than $80,000 but 18 per cent of them use negative gearing, more than double the proportion of those earning less than $80,000.

Of the three professions highlighted by Mr Morrison, the ATO tax statistics show that police were most likely to use negative gearing, with 23 per cent (13,090) recording net rental losses, followed by 14 per cent (55,795) of teachers and 12 per cent (37,165) of nurses (table).

Number who filed a tax return % of all taxpayers Number who use negative gearing % who use negative gearing in each category All taxpayers 12.78 million 100 per cent 1.26 million 10 per cent Taxable income below $80,000 10.41 million 82 per cent 838,675 8 per cent Taxable income above $80,000 2.37 million 18 per cent 421,850 18 per cent Nurses and midwives 302,190 2.4 per cent 37,165 12 per cent Teachers* 386,920 3.0 per cent 55,795 14 per cent Police 57,945 0.5 per cent 13,090 23 per cent

SOURCE: ATO tax statistics, individual tables, *includes school principals, early childhood, primary, secondary and other school teachers

Negative gearing by taxable income

Fact Check's analysis of the ATO statistics found that 66.6 per cent, or 838,675 of all those using negative gearing had taxable incomes below $80,000, in line with Mr Morrison's statement.

Miranda Stewart, from the Tax and Transfer Policy Institute at the Australian National University told Fact Check it wasn't surprising the majority of negative gearers had taxable incomes below $80,000 because the majority of taxpayers were in that bracket.

"The numbers of negative gearers may be high below $80,000 but the proportions of them in each tax bracket gets higher as taxable income rises," Professor Stewart said.

Fact Check's analysis showed that those earning taxable incomes over $80,000 disproportionately use negative gearing — at a rate that is more than double that of people earning less than $80,000 (18 per cent versus 8 per cent).

A Treasury analysis in the 2015 tax discussion paper shows how the proportion of people with negatively geared investment properties increases with increasing taxable income band.

"Taken together, these two lines on the chart highlight the fact that although the majority of negatively geared tax filers are in the lower income bands, tax filers in the higher bands are more likely to take advantage of negative gearing strategies," the analysis notes.

Graph showing the number and proportion of people in each income bracket who negatively gear. ( Treasury )

Professor Stewart said the large number of taxpayers with negative taxable incomes who were negatively gearing showed that it was a strategy being used as a tax shelter.

"If there is a uniform rule for everybody, the benefit does go to the top end," she said.

Under Australia's progressive tax system, people with higher incomes pay more cents in the dollar in tax.

This means that they stand to gain a greater benefit than people on lower incomes by applying a rental loss against their other income.

Modest income-earning Australians

Mr Morrison did not define "modest income-earning Australians" but he said that "two thirds of those who use negative gearing have a taxable income of $80,000 or less".

Professor Stewart told Fact Check that average male full time earnings were about $82,000.

"I don't think average full time male earnings is modest," she said.

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"By definition it's average and much higher than many workers get."

Professor Stewart said the median wage was more like a "modest" income and directed Fact Check to the ABS statistics on median employee earnings.

The most recent data shows that the median annual cash earnings for all earners, male and female, full-time and part-time, was $52,052.

Unlike Mr Morrison's claim, which refers to taxable income after the negative gearing loss has been taken into account, this figure relates to wage and salary income before any tax deductions.

Negative gearing by total income

Mr Morrison referred to taxable income, which has already been reduced by the negative gearing benefit.

Neil Warren, a professor of taxation at the University of NSW business school, told Fact Check that it was more informative to look at the total income of negative gearers, rather than taxable income, and to take out their net rental losses.

In its statistical publications, the ATO uses “total” income to include income from things like salary and wages and also net rental losses or gains on property investments.

The statistics use “taxable” income to refer to “total” income with deductions, like work-related expenses and charitable donations, removed.

On that basis, Fact Check used the ATO's sample unit records and calculated that the proportion of people who negatively gear and have a total income of less than $80,000 after taking out their rental losses is 56 per cent.

Using a more conservative estimate of a "modest" total income of less than $52,000, around 40 per cent of people who negatively gear are in this total income bracket.

Only 4 per cent of all the people in this income bracket are using negative gearing.

Taking the net rental loss out of their income, around 33 per cent of people who use negative gearing have a total income less than $52,000.



Negative gearing benefit

Professor Warren said the other relevant analysis was the value of the negative gearing to different income groups.

"When he (Mr Morrison) says 70 per cent have a rental loss the other question is what is their share of the negative gearing," he said.

"Do 70 per cent of people have 70 per cent of the negative gearing, or do they have 30 per cent?"

Fact Check's analysis showed that while two thirds of negative gearers have taxable incomes less than $80,000, they share 58 per cent of the net rental losses to offset against their income.

Those with taxable incomes above $80,000 have a proportionately larger share of the net rental losses.

A recent Grattan Institute analysis showed that the top 10 per cent of income earners received almost 50 per cent of the tax benefit from negative gearing when taxable incomes were considered before rental losses were taken out.

Properties and losses

Mr Morrison also said that "70 per cent own just one property, and 70 per cent have a net rental loss of less than $10,000".

The tax statistics don't show how many properties are owned by people who use negative gearing.

The only information available includes those who made a net rental profit and are therefore not negatively geared.

An ATO analysis of tax statistics in 2010-11 showed that 73 per cent of people with an interest in property owned just one.

Similarly, Mr Morrison's spokeswoman told Fact Check that in 2012-13 1.43 million of the 1.98 million people with investment properties owned just one property, which also includes those who made a profit.

She said the ATO does not report data on how many properties are owned specifically by negative gearers.

Fact Check's analysis showed that 70 per cent of negative gearers had rental losses of $10,000 or less.

The low rental losses claimed by the majority of negative gearers show that most are not gaining a significant benefit from negative gearing.

Footnote

Since Mr Morrison's speech to the Press Club, he has erroneously claimed in Parliament that "some two-thirds of those who have a taxable income of $80,000 and less invest in negative gearing".

This fact check demonstrates that 8 per cent of those who have a taxable income of $80,000 or less invest in negative gearing.

Sources

Editor’s note (March 3, 2016): Responding to feedback from readers, Fact Check has calculated the proportion of negative gearers who have total incomes below $80,000 and $52,000 that don’t include their net rental losses. This information has been included under the heading ‘Negative gearing by total income’.

Editor’s note (March 7, 2016): Responding to further feedback from readers, Fact Check has further clarified the information under the heading ‘Negative gearing by total income’. This does not change our verdict.