The claim

Treasurer Josh Frydenberg, in keeping with his predecessor Scott Morrison, has attacked Labor for its policy to restrict tax concessions for negatively geared investment property.

In a doorstop interview in Melbourne in early November, Mr Frydenberg told journalists: "And we know that two-thirds of those who use negative gearing have a taxable income of under $80,000".

Sorry, this video has expired Watch Mr Frydenberg make the claim

Mr Frydenberg has made this claim before — in an opinion piece for The Australian, Mr Frydenberg said that "many of those accessing negative gearing are people that the public would not necessarily consider rich".

"About two-thirds of those with negative geared properties have a taxable income of less than $80,000 ..."

Is Mr Frydenberg's claim correct, and is it a valid analysis of the issue? RMIT ABC Fact Check investigates.

The verdict

Mr Frydenberg's claim is misleading.

Experts contacted by Fact Check took issue with Mr Frydenberg's use of taxable income to define wealth, due to the very nature of negative gearing, which is a tax deduction that reduces taxable income.

They suggested removing the effects of negative gearing from a person's total income and applying a threshold to that figure.

On this measure, only 52.3 per cent of negative gearers have an income below $80,000.

This is out of proportion with the number of taxpayers below this level — 76.4 per cent of all taxpayers have an income below $80,000.

Conversely, 23.6 per cent of taxpayers have an income above this level, but they account for 47.7 per cent of all negative gearers.

So those on an income below $80,000 are much lower users of negative gearing than those on an income above it.

And as the income threshold is raised, the proportion of taxpayers above it who negatively gear in comparison with the proportion of taxpayers gets larger, indicating that people with higher incomes are more prolific users of negative gearing.

Taxable vs total

In making his claim, Mr Frydenberg referred to "taxable income".

As Fact Check has previously written, a rental property is negatively geared if you 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 rental loss can be used as a deduction against other income earned, for example a salary, before tax is paid on it.

As such negative gearing reduces the amount of tax an individual must pay by reducing their taxable income.

Miranda Stewart, a professor at the Tax and Transfer Policy Institute at Australian National University, told Fact Check that "using taxable income as the measure has already incorporated the negative gearing or other deductions that a taxpayer has".

"It's not a very good indicator of who benefits from negative gearing because it already incorporates it."

The following graph shows how those who use negative gearing push themselves into lower income deciles.

It shows the difference in their total income before and after rental losses are taken into account, though it does not show final taxable incomes, which take into account other deductions such as donations, work expenses and dividend deductions.

The chart shows that after negative gearing is taken into account, the top three deciles lose 6.09 percentage points worth of negative gearers to lower deciles.

It also shows that some taxpayers from the highest income decile move to the lowest and second lowest income deciles after negative gearing.

Grattan Institute budget policy and institutional reform program director Danielle Wood says that Mr Frydenberg's use of taxable income was "highly misleading" when analysing negative gearing "because people who negatively gear use losses on their investment income to reduce their taxable income".

"This explains the surprisingly high number of people with no taxable income owning loss-making property investments — their declared losses are so large they have reduced their taxable incomes to zero."

Who are you calling rich?

Mr Frydenberg referred to "people that the public would not necessarily consider rich".

Roger Wilkins, the Deputy Director (Research) of the Household, Income and Labour Dynamics in Australia (HILDA) survey, told Fact Check that the term "rich" is a subjective one.

"... there is a tendency for most people to think they are around the middle of the income distribution. Even a sizeable proportion of those in the top income quintile think they are around the middle of the income distribution," he told Fact Check via email.

"The implication is that a person's notion of what constitutes being rich depends on their own income — the higher a person's own income, the higher their assessment of the income required to be considered rich."

Indeed, a study conducted by the Australia Institute in 2014 found that most Australians perceive income circumstances which closely resemble their own to be "average".

"More than 80 per cent of people in the low-and-middle-income groups (up to $100,000) think that the average household income is either in their band or the one just next to it. The number falls off substantially though for those whose household income is $100,000 or more. Many of these people are aware that they are unusual in terms of income distribution," the study said.

This means that each member of the public is likely to perceive wealth differently according to their circumstances.

Professor Wilkins said that there is no expert definition of what is rich, but that someone in the top 1 per cent in terms of wealth or income would qualify.

"In 2015-16, the minimum (personal) income required to be in the top 1 per cent (of all people aged 15 and over) was $245,000," he said.

As Mr Frydenberg made his comments in the context of those the public would consider "rich", Fact Check has assessed his claim based on three thresholds:

$80,000 — The figure Mr Frydenberg used

$80,000 — The figure Mr Frydenberg used $180,000 — The figure the government itself has used in the past to impose a budget repair levy for "high income earners"

$180,000 — The figure the government itself has used in the past to impose a budget repair levy for "high income earners" $245,000 — The figure highlighted by Professor Wilkins

Updated figures

Fact Check has examined this issue in relation to similar claims made by then treasurer Scott Morrison and then assistant treasurer Kelly O'Dwyer in 2016.

To investigate those claims, Fact Check analysed the Australian Tax Office's tax statistics, including the 2 per cent sample file, for the 2012-13 financial year, which was the latest release available at the time.

The sample file contains disidentified tax return information of 2 per cent of taxpayers, including their net rental loss, which is the tax item related to negative gearing for property.

Tax statistics for subsequent financial years until 2015-16 have since been released, so this analysis has been updated below with the latest figures.

Professor Stewart said that reinstating net rental losses to total income, whilst keeping in net rental surpluses for taxpayers that have them, is a way of analysing total income as if it had been denied the policy of negative gearing.

"Then you can work out how many people under [certain thresholds] have this net rental loss," she said.

This is an analysis that Fact Check performed previously, finding that 56 per cent of negatively geared investors earned under $80,000 when their net rental loss was added back to their total income in 2012-13.

Using figures from the 2015-16 sample file, Fact Check has constructed the following graph, which shows that this figure has fallen to around 52 per cent.

In terms of taxable income, around 62 per cent of negative gearers earn under $80,000, constituting a small overstatement on Mr Frydenberg's part.

The graph shows that above each of the three income thresholds identified by Fact Check the proportion of negative gearers is far greater than the proportion of taxpayers.

Those above $80,000 total income comprise 47.7 per cent of those who use negative gearing, but just 23.6 per cent of taxpayers — more than double the proportion.

Above $180,000, there are 9.5 per cent of negative gearers, compared to 3.7 per cent of taxpayers — a figure 2.57 times greater.

And above $245,000, there are 4.5 per cent of negative gearers, compared to 1.7 per cent of taxpayers — a figure 2.64 times greater.

"It is clear that negative gearing is disproportionately used by high-income Australians," Ms Wood told Fact Check.

Negative benefits

Ms Wood told Fact Check that not only is negative gearing more likely to be utilised by high-income Australians, but "the tax benefits high-income earners gain from negative gearing are also much bigger."

Fact Check has calculated the share of the benefit, that is, the reduction in taxable income, of negative gearing for each income group, as well as the difference between the amount they paid in tax on their taxable income, and the amount they would pay on their taxable income without negative gearing.

These calculations were checked by the Grattan Institute's Ms Wood, though she said there would be some caveats regarding the difference in tax, so the numbers wouldn't be "totally precise", but she noted that the results were similar to calculations that the institute had performed on previous years' tax statistics.

Professor Stewart also noted the calculation would not be precise, saying that neither modifications to tax offsets, nor the effect of the phase-in of the Medicare levy would be included.

She added: "You're assuming no behavioural change if you do a calculation like that, because [a taxpayer] might decide that it's not worth owning this rental property, if you can't negatively gear it."

"So you're assuming he still has the property, it's just that he's denied the rental loss."

The graph below shows that people who earn a total income before negative gearing of above $80,000 receive 61.8 per cent of the net rental losses, despite representing only 47.7 per cent of negative gearers.

It also shows that the 52.3 per cent of negative gearers below $80,000 only account for 25.9 per cent of the benefit of reduced tax. The 47.7 per cent above $80,000 account for 74.1 per cent.

Once again, as the thresholds increase, the disparities between the share of negative gearers and the net rental loss and tax benefit increase.

The 9.5 per cent of negative gearers above $180,000 account for 19.1 per cent of the net rental losses, and 26.2 per cent of the reduction in tax paid.

And above $245,000, 4.5 per cent of negative gearers account for 12.4 per cent of the net rental losses, and 15.8 per cent of the reduction in tax paid.

What do the experts say?

Experts and academic research have broken down this topic in different ways, showing that negative gearing disproportionately benefits higher-income earners.

Ben Phillips, who was then principal research fellows at the University of Canberra's National Centre for Social and Economic Modelling (NATSEM) and is now the director of the Centre for Economic Policy Research at Australian National University, made a salient point about median incomes in a fact check for The Conversation in 2015.

Associate Professor Phillips wrote that "typically, people with negatively geared properties have significantly higher incomes than people without property investments".

"The median income for negatively geared investors is A$60,000 per year, compared with $40,000 for non-investors. "A similar gap (50%) exists at the top end of the income spectrum. The taxable incomes of the top 10% of earners with negatively geared investments is around $150,000 compared to $98,000 for non-investors."

And Curtin University academics Helen Hodgson, Alan Duncan and Rachel Ong ViforJ, along with Griffith University's John Minas, calculated earlier this year that the mean or average tax saving due to negative gearing for the highest-earning 25 per cent of negatively geared investors is a figure more than four times that of the lowest-earning 50 per cent.

Ms Wood told Fact Check that there should be a broader discussion about whether all Australians are well-served by negative gearing.

"Negative gearing and the 50 per cent capital gains tax discount distort investment decisions, make housing markets more volatile and reduce home ownership.

"For every taxpayer that negatively gears, nine others do not, and they pay more tax to subsidise the minority of negatively geared investors," she said.

Principal researcher: Matt Martino

Sources