The sad state of business reporting

I am just staggered by the ignorance and laziness of very many journalists.  So many prefer to write unsubstantiated and personal opinions, while various rent-seekers get in their ears.

But I am particularly staggered by the quality of business reporting.  I see that Ian Verrender, having taken a redundancy payout from FauxFacts, has popped up at the ABC as its Business Editor.  Is this some kind of joke?

Verrender hates business with a passion and he never lets facts get in the way of his arguments.  His view of business people seems to be that they are rapacious and immoral, many of whom should be in jail.

And here is a little policy tirade from Business Spectator:

Actually, there are major holes in the existing tax regime that serve no policy purpose and which, if plugged, would benefit the budget bottom line by billions of dollars. The three main offenders are: negative gearing, superannuation tax concessions, and the salary packaging of vehicles owned by people who do not use them for work purposes.

The first, negative gearing, was introduced to increase the housing stock and thus to keep rents and house prices down. It has comprehensively failed to do that, and is thus just a way to shift tax burden from those who choose to invest in dwellings, to those who invest in other assets such as shares, bonds or gold. 

Yep, it’s an utterly pointless and unfair tax break that benefits some tax payers, and not others. And the last Labor government chose to ignore reform of this market-distorting tax because, well, it’s a political nightmare to correct.

Wow, where do you begin?  This guy knows absolutely nothing.  The ability to deduct the cost of investing applies to all classes of investment and always has.  Without it, there is double taxation – taxation of the revenue received by the lender and taxation of the cost of the encumbrance borne by the borrower.  Eslake and the Grattan Institute are completely wrong on this point.

(And on the author’s other two points, again, knowledge or insight have not got in the way.  For example, it was  Assistant Treasurer Shorten who changed the FBT rules to those currently in place and argued they were a great reform.)

The argument about negatively gearing was set out beautifully by one of Australia’s finest economist, Professor Bob Officer:

House prices attract everyone’s attention; we are all involved one way or another. On many measures Australian house prices are high relative to other developed economies. Many are arguing they are too high and threaten to collapse; some of these people have been arguing that way for almost a decade and still they have risen.

Among those in the too-high camp have been proponents of removing “negative gearing”, as at least a partial solution to their perception of a problem of a resource misallocation with adverse wealth distribution effects. It would be a big mistake, theoretically and practically, to target property with such an action.

One of the basic principles of optimal resource allocation in an economy is to treat all asset classes the same way when applying a tax.

Removal of negative gearing effectively double-taxes debt capital since the interest is taxed in both the hands of the borrower and the lender. In a similar vein, we have been there with a classical tax system that double-taxes dividends, but fortunately Australia has removed that flawed tax system.

To remove negative gearing on property that would result in a double tax on interest on debt is going backwards.

It is sometimes asserted that negative gearing does nothing to increase the supply of housing because most investment property is for established dwellings.

What causes negative gearing to suspend the laws of supply and demand? To the extent that negative gearing increases the demand by investors for housing, causing house prices to rise, resources will be attracted into housing, thus increasing the supply of housing.

There are studies suggesting that our relatively high house prices are a supply issue: that is, the lack of the release of land and the associated tax and regulatory cost of development cause the supply to be restricted because of the greater cost to adequately compensate for these imposts. But this has nothing to do with negative gearing. It is a separate set of issues.

 

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71 Responses to The sad state of business reporting

  1. hammy

    Negative gearing and dividend imputation are just two very destructive forms of tax evasion favouring the rich at the expense of the poor.

  2. Leigh Lowe

    The Hamster launches in with another epic fail.
    “Tax Evasion” is defined as breaking tax law to minimise tax payable.
    Which law is broken through negative gearing and dividend imputation?

  3. Baldrick

    Well he should fit right in at ‘their ABC’, where facts take a back seat to leftard activism.

  4. Good morning dear Hammy -

    Negative gearing and dividend imputation are Poverty and welfare dependency are just two very destructive forms of tax evasion favouring the rich at the expense of the poor.

    FIFY

  5. Zaphod

    Is the “age of entitlement” over, or not?
    Or, “only when it’s safe to do so.”?

  6. feelthebern

    Judith is too hard on Ian verrender.
    Whilst I don’t agree with the article he’s written, I think he was a fine journalist.
    He’s work in uncovering the croney capitalism during the gfc was great.
    One thing he is not is lazy.

  7. Tel

    I am just staggered by the ignorance and laziness of very many journalists.  So many prefer to write unsubstantiated and personal opinions, while various rent-seekers get in their ears.

    You you are saying that the people with opinions on buying and selling happen to be in the business of buying and selling their opinions.

    Don’t shock me so hard!

  8. Leigh Lowe

    I am just staggered by the ignorance and laziness of very many journalists. So many prefer to write unsubstantiated and personal opinions, while various rent-seekers get in their ears.

    The nadir was reached when Peter Martin bemoaned that people on a salary of $1 million were avoiding tax by transferring 9% ($90,000) into super, blithely ignoring what anyone with any financial nous knows – that contributions are capped at $25,000.
    When he became a laughing stock over this, did he apologise and the SMH issue a correction?
    Nup … just a surreptitious removal of the error … nothing further, your honour.

  9. You have to jump through some pretty farcical hoops to consider loan repayments ‘the cost of investing’.

  10. Actually, the way to do this properly is to eliminate the capacity to deduct the cost of interest from taxation everywhere.

  11. If double taxation is considered at problem, eliminate the taxation on interest income.

  12. Joe

    No. The proper way to do this is to get the government out of the affairs of people by scrapping all taxes and instituting a flat 15% G.S.T. across the board for everyone including businesses, collected by businesses with only the capital classes of land, buildings and company ownership exempt.

  13. Bruce of Newcastle

    The irony with Verrender’s brain-fart about negative gearing is that 40% of the price of a new house is taxes. Existing houses are price related to new houses because if new houses were cheaper people would be draw to buy them instead.

    So all negative gearing is doing is returning some of those taxes.

    So yes, I’d be fine with removal of negative gearing provided all the other taxes were also removed. That would also help owner occupiers too.

  14. Monkey's Uncle

    You have to jump through some pretty farcical hoops to consider loan repayments ‘the cost of investing’.

    If you need to borrow money in order to purchase an investment, the costs of servicing the loan are surely a legitimate expense to be deducted against any economic gains made on the investment. I don’t see what is so hard to follow about this. If that should not be a tax deduction, perhaps no other expenses should be either.

    P.S. Perhaps instead of writing three separate posts all consisting of just one sentence, you could consider combining them into one post. Alternatively, if you can only post one sentence at a time perhaps consider opening a twitter account.

  15. Squirrel

    ” So many prefer to write unsubstantiated and personal opinions…”

    I am variously amused, bored and infuriated by the stream of increasingly strident and tendentious articles from Gen X economic commentators on the theme of “everything that’s wrong with the world – and the economy, in particular – is the fault of the Baby Boomers”.

    There certainly are issues for debate and consideration regarding intergenerational equity, but too much of the commentary is selective, and detached from reality.

  16. mundi

    Of course it is a supply issue.

    However this still doesn’t explain why capital gains get a 50% tax discount.

    It also does not explain why a person cannot choose to negetive gear their own house, and then pay capital gains on it later.

    The problem is that the current system is open to abuse, particularly by the rich. The best way is:
    -You buy your brothers house. He buys your house. And you slip each other the payments under the table. You both negetive gear and save an absolute fortune compared to the smucks paying off their mortgage with after-tax $$$.

    Then you can just sell your houses to each other – at their original purchase price. So there is no capital gains tax to be paid. Then you just wait 2 years and sell it on open market as your residence – so again no capital gains tax is paid.

    You end up having negetive geared your house, plus paid not capital gains on its increase in value.

  17. Cato the Elder

    Mundi

    The 50% discount is a trade off for denying inflation indexation.

    The scheme you propose is a fraud on the revenue and would involve false declarations and other criminal activity. The possibility of fraud does not invalidate the system, so long as there is enforcement, which there is.

  18. Tel

    -You buy your brothers house. He buys your house. And you slip each other the payments under the table. You both negetive gear and save an absolute fortune compared to the smucks paying off their mortgage with after-tax $$$.

    The tax department will want to see the rent payments, and those are counted as income. They will be rather suspicious to see you owning a house with someone else living in it but paying no rent. If you jigger it down to exceptionally low rent they will probably deem it back up to market rates.

    If you do it legally and declare those rent payments are income, then I doubt you are going to be any better off, but at least you can get the floors and the roof done and claim the costs. You will of course end up paying CGT when you sell, so will your brother… thus the tax free improvement of roof and floors ends up getting taxed for the value it adds to the house.

  19. M Ryutin

    I have used negative gearing extensively over many years on smallish personal housing investment (usually never selling on moving unless I had to) but hardly have anything at all now. However, for anyone who wishes to dream about the ‘injustice’ of negative gearing ending (without affecting rental housing), I invite them to look at what happened when Keating got rid of it for a few months in late 80′s.

    There was a reason he couldn’t wait to put it back and that was an instant reaction by the builders of rental housing stock.

  20. Tel

    You have to jump through some pretty farcical hoops to consider loan repayments ‘the cost of investing’.

    Suppose a company borrows money to build a new factory. Where would you put those interest payments in the company ledger?

  21. Linden

    From where I stand Monday through to Friday, I see it regularly, older parents and even grandparents paying off bills and fines for their children grandchildren (grown up ones that is) even lumpy mobile phones, and all manner of things, because these 20 something year olds and and 30 something year olds prefer to bludge off of their family. Whats really sad about it, is the pathetic excuses given by the parent/grandparent when they make the payment, ‘oh I don’t what to see him/her get into trouble’!!

  22. Jim Rose

    why should a competitive market for infotainment supplying what expressive voters want be said to fail?

    Newspapers and TV stations increase readership and revenue by presenting factual and informative news. Competition forces news outlets to cater to their customer’s preferences beit for information or infotainment.

    Positive profits accrue to those media outlets who are better than their competitors. Their lesser rivals will exhaust their retained earnings and fail to attract further investor support.

    A supply-side model suggesting that newspapers weigh the rewards of bias—politicians’ bribes or personal pleasure—against the cost of bias—lost circulation from providing faulty news.

    All news outlets except Fox News’ Special Report and Washington Times received scores to the left of the average member of Congress as rated by Groseclose-Milyo. this liberal bias essentially disappears by excluding citations of the National Taxpayers Union from their analysis.

    Why do slighly leftist news outlets survive in competition?
    1. young females tend to be one of the most marginal groups of news consumers (i.e., they are the most willing to switch to activities besides reading or watching the news). This group often makes the consumption decisions for the household. Advertisers are willing to pay more to outlets that reach this group.
    2. Since young females tend to be more liberal on average, a news outlet may want to slant its coverage to the left.
    3. Newspapers sell space to advertisers tailor the way they cover politics to gain more readers.
    4. If the majority of journalists have left-of-center views, liberal news might cost less to supply than unbiased news! Owners indulge this if skilled journalists will trade salary for discretion.

  23. Linden

    All the issues around investments loans, interest rates when where and how they are applied, coupled with all the regulated government and local government and body corporate costs (biggest rip off of all time), is a bit mind boggling at times, (for me anyway) but I do know one thing for sure, over the last several years Australia has become a very expensive place to do business. And if you are in small business there’s no free lunch!

  24. Driftforge

    Suppose a company borrows money to build a new factory. Where would you put those interest payments in the company ledger?

    Costs of borrowing. But it doesn’t come off profits until after tax.

  25. Driftforge

    If you need to borrow money in order to purchase an investment,

    Then you can’t afford it, and you can pay the costs of doing so.

  26. Mr Wilson

    Sloan is quite correct; business reporting has never been worse.
    The problem is lazy left-wing newspaper editors who know nothing about business, many of them appointing left-wing business editors who can be relied on to parrot the papers’ political line.
    The second problem is overpaid, lazy business reporters who discovered years ago that they get paid the same irrespective of whether they rewrite PR handouts or break news.
    Business reporters are mostly broke, embittered types who think capitalism is evil.

  27. Tel

    Costs of borrowing. But it doesn’t come off profits until after tax.

    OK, suppose the same business rents the factory, also after tax? Or now it goes before tax?

  28. Grumbles

    I don’t understand the argument for removing it. Who is missing out and who is gaining?

    The Government collects tax on the rent from the owner, tax on the loan from the bank, tax on the capital gains of the owner. Are people forgetting that the banks pays tax? The owner is effectively losing large amounts of money to the bank in the form of interest, but the bank pays tax on this. No owner is going to be permanently negative geared on any given property.

  29. Grumbles

    As a side point, I often see the issue of Churches having tax free status here and people being against it, but the argument is similar. The churches money is from donations from its congregation from their AFTER tax income. These donations ARE NOT tax deductible. If the government then taxed these donations they would be having two bites of the pie.

  30. OK, suppose the same business rents the factory, also after tax? Or now it goes before tax?

    Is that an interest cost? No, goes before tax.

  31. politichix

    Driftforge
    #1209962, posted on March 2, 2014 at 2:50 pm

    Suppose a company borrows money to build a new factory. Where would you put those interest payments in the company ledger?

    Costs of borrowing. But it doesn’t come off profits until after tax.

    You are confusing a company’s financial statements with tax deductibility. EBIT etc are financial reporting conventions not an indication of tax deductibility. Borrowing in this instance is a tax deductible expense as would rent as Tel has pointed out.

  32. Judith Sloan

    I don’t understand this capital gains tax discount business. The capital gains tax is the one set by the government. We used to have 60 per cent plus marginal tax rates. Is the current rate a discount?

  33. Grumbles

    Judith, the discount is designed to reflect longer term investments, vs someone who makes a living out of investments and turns them over faster.

  34. dan

    Negative gearing should go.
    So should every other tax deduction.
    With a 10% rate of income tax on every dollar earnt from $2500o to $2.5 million and more.

    By the way the idea about fraudulently renting each others’ houses ignores the costs of stamp duty, which would be incurred twice under this scheme (and again after “two years” when you buy the ‘real’ house). In my neighbourhood that totals $200,000 for the first two times.

    You would have to be paying one hell of an interest bill to end up ahead, and stamp duty scales with the interest bill anyway.

  35. dan

    Judith, the discount is designed to reflect longer term investments, vs someone who makes a living out of investments and turns them over faster.

    The point is that the current rate is not a ‘discount’, it just is what it is, namely 25% after 12 months. You might as well call the current 44(?)% a ‘discount’ from UK 1970s rates of >90%.

  36. Grumbles

    dan, its 50% and then that’s on your marginal tax rate, at most you would pay 22.5% of the capital gain as tax and that’s only if you earned $180,000 else where.

  37. Famer Gez

    Just extend capital gains tax to the primary residence. Am I being too naughty?

  38. Ed

    As a side point, I often see the issue of Churches having tax free status here and people being against it, but the argument is similar. The churches money is from donations from its congregation from their AFTER tax income. These donations ARE NOT tax deductible. If the government then taxed these donations they would be having two bites of the pie.

    That idea usually comes from anti-religious activists.
    Churches are essentially run the same as non-profit organisations. There are no shareholders, and no owners. The leaders – equivalents of CEO’s – make pretty modest amounts.

  39. old bloke

    hammy said –

    Negative gearing and dividend imputation are just two very destructive forms of tax evasion favouring the rich at the expense of the poor.

    Is hammy therefore opposed to RETs and solar panel subsidisation schemes as the “poor” (renters, apartment dwellers, etc.) pay a loading on their electricity bills to benefit the “rich” (home owners)?

  40. Grumbles

    Ed, non-profits are usually different, as donations are often tax deductible.

  41. Ant

    There’s a bad state of reporting generally, I would have thought.

    Political reporting in Australia may as well be outsourced to the Labor/Greens party machine while environmental reporting may as well come straight out of mouth of one of those dingbats in a koala suit.

  42. dismissive

    One of the differences in the personal investment/negative gearing model is the property vs share dichotomy.

    If I wish to buy an investment property, I can easily get a lone for 90% of the property (assuming no other asset involvement – I have personally received 105% based on other asset collateral)
    If I wish to buy investment in shares, I can get a maximum of 50% – the so-called Margin Loan.

    Both these items receive exactly the same tax treatment.

    If however the $1m house drops in value to $900k, I just keep going.
    If my $1m share portfolio drops in value to $900k the bank makes a margin call for $50k and I must pay -NOW!

    So which will I do if I have $100k? If you take away negative gearing, watch the All ords drop by 1/3 overnight.

  43. Grumbles

    dismissive, low deposit loans attract mortgage insurance, this offsets the need for any margin calls

  44. dismissive

    In my experience (limited I suppose) I have never been required or even requested to take mortgage insurance on a property investment even when the loan was at 105%.

    I’ve had it pushed on me for owner occupied – I went to a different lender,

  45. Rabz

    The number of economically illiterate idiots posting on this blog is a disgrace.

    They should be mercilessly culled.

  46. Craig Mc

    No negative gearing means no capital gains tax. But the morons arguing for abolishing NG are too dumb to realise that.

  47. Tel

    Just extend capital gains tax to the primary residence. Am I being too naughty?

    I don’t like CGT but that would at least be consistent, and then also allow negative gearing on the family home to be completely consistent. A lot of people don’t mind CGT hitting “the rich” but once it hits the median voter there will be trouble brewing. That’s why a magic exception to the rule exists.

    The thing is, most people who take out a mortgage and buy a house will buy based on access to work… they have no choice, otherwise the mortgage does not get paid. Thus, the mortgage payments are indeed a requirement to earn a living, so is transport to and from work for that matter.

  48. Craig Mc

    But I am particularly staggered by the quality of business reporting.

    But, but, but we have Ticky Fullerton covering business for the ABC!

  49. Tel

    I might point out that if Fred Foobar lends me a million bucks to buy a small unit in Sydney so I can get a job and pay interest on the loan; then when Fred gets his interest payments those are treated as income and taxed accordingly. So the government gets their slice (and stamp duty as well, that’s two slices).

    By forcing me to pay Fred out of my already taxed income, the government gets to tax both me and Fred on the same transaction.

  50. Disillusioned

    The churches money is from donations from its congregation from their AFTER tax income. These donations ARE NOT tax deductible. If the government then taxed these donations they would be having two bites of the pie.

    On that basis should anything I purchase with my post tax wages also be tax free? Is that also not two bites of the pie?

  51. dismissive

    Going back to the point of this post – business reporting. The Business Spectator site was one I discovered when chasing budget details on one of the early Rudd/Swan budgets, possibly the first …

    I was really impressed at the time. They highlighted issues that no-one else saw, Robert Gottliebsen & Stephen Bartholomeusz where particularly strong and I specifically recall an article on the effect on pension changes that meant pensioners would be less likely to work part-time which no-one else covered at all. Alan Kohler was an apologist but he was a still against the budget in good technical terms.

    I don’t go and look at their budget stuff any more and in fact I rarely go there at all. It’s sad.

  52. Andrew

    Seriously? Disallowing interest on investment / business borrowing?? Has the WBCT or the WBMT taught us nothing about the economic devastation caused by idiosyncratic tax structures?

  53. dan

    If however the $1m house drops in value to $900k, I just keep going.
    If my $1m share portfolio drops in value to $900k the bank makes a margin call for $50k and I must pay -NOW!

    So which will I do if I have $100k? If you take away negative gearing, watch the All ords drop by 1/3 overnight.

    I don’t follow your logic. Surely people would move into shares rather than property if margin loans were still tax deductible.
    But this is the whole point, you can’t stop “negative gearing” on residential housing investment – if that’s what you want to call deductibility of interest payments for business purposes – while keeping it for everything else. If nothing else, what happens if you invest in a listed residential property trust via a margin loan? Would a listed commercial trust be treated differently? What if a company builds a skyscraper and leases it out, they wouldn’t be able to deduct holding costs before tax??

    Even better, what happens if you spend $50k on interest and receive $50k of income? The cost of the interest wouldn’t be tax deductible. So you get $50k, pay $23.5k in tax, and can’t deduct the $50k you have spent.

    To the economic illiterates writing letters to the editor, “negative gearing” is some special arrangement for residential small-time landlords, but it’s just a normal business deduction.

    low deposit loans attract mortgage insurance, this offsets the need for any margin calls

    …if you don’t have enough assets or income to justify a waiver.

  54. wreckage

    Business Spectator basically just turned into a giant pile of suck. No analysis, no business acumen, just pointless fluff.

  55. dismissive

    Sorry, I am assuming if you take away negative gearing for houses, you take it for all personal investment. Thereby all Margin loans are closed at the desperate fire sale mode.

  56. dan

    Having read this whole article at Business Spectator:
    let-poor-pay-my-fast-car
    I am so glad I have basically stopped reading newspapers.
    The author presents a sob story about some poor immigrant working for minimum wage and subsidizing rich peoples’ cars. The fact that the poor immigrant would undoubtedly be receiving far more from the tax system than she is paying, and that the person with the fast car is paying net tax seems to elude him. Seriously, how can people publish stuff like this. Just embarrassing. And wait until you read the comments.

  57. dan

    Sorry, I am assuming if you take away negative gearing for houses, you take it for all personal investment. Thereby all Margin loans are closed at the desperate fire sale mode.

    OK I understand. But this is a can full of other cans full of worms. Because this may be personal investment, but I have a trust…and a company…I assume they wouldn’t be personal investors??

    Is negative gearing so amazing anyway? Five years on my investment property is almost breaking even. If negative gearing went and prices fell, and LVRs dropped you could hold the same property without losing money, which is of course an unavoidable aspect of getting the tax deduction (depending what happened to rents).

  58. dismissive

    Investing through a discretionary trust (often called a family trust) or even a unit trust (purpose is the question) would be personal investment.

    If the company is used as either the trustee or a corporate beneficiary but the purpose is for investment then it is likely to be seen under personal investment if they were changing laws to stop negative gearing. Reality ask a lawyer, an accountant, the ATO and whoever drafted the law. You would probably get 9 opinions from the 4 people.

    I am not qualified to answer these questions.

  59. dismissive

    In response to your second bit – is negative gearing so good …

    Like everything it depends. To my mind it opens an investment door which you may otherwise not be able to afford until later in your lifetime. This means you are more likely to build personal wealth in such a way as to take you out of the welfare stream. I like that bit.

  60. sdfc

    To disallow negative gearing would be to discriminate against an asset class.

  61. Monkey's Uncle

    If you need to borrow money in order to purchase an investment,

    Then you can’t afford it, and you can pay the costs of doing so.

    It is irrelevant, insofar as tax treatment goes, whether or not you or the tax office or anyone else thinks an individual can afford it. The tax system is supposed to be somewhat progressive and based on the ability to pay (unless you are arguing against this principle). What one cannot afford is to be hit with a big tax bill that does not take into account a legitimate cost of undertaking said economic activity.

    It would be like saying that a business that loses money should still have to pay a similar tax bill to a business that makes a lot of money, and if they cannot afford to pay then ‘oh well, you obviously cannot afford to have a business’.

  62. Blogstrop

    In today’s SMH Ross “Che” Gittins the revolutionary appears to be advocating the collapse of the regime and all the lobby groups that surround it. Unless we wipe the slate clean and rebuild from the ashes like Japan and Germany after WW2, we will not relive the glory days of the super- reformist Hawke-Keating demigod duopoly.

  63. Andrew

    Perhaps we are a little off topic. AFAIK, the proposals are not to disallow deduction of interest (positively geared) but to quarantine and carry forward losses from investing activity. It’s a question of disallowance of grouping, effectively – not a bizarre rewrite of tax codes entirely.

    Personally, I think it’s great. I make an outrageous amount of money from investment. The amount of negative gearing I would need to put in place to zero it is well beyond my ability to fund or my assessed borrowing capacity from any institution. So it suits me just fine.

    Does it hurt the ASX? Unlikely. Any industrial portfolio returns 4% grossed up, so on LVR 50% you’re positive.

    Resi? Not sure. I believe the marginal low end buyer and price setter is the first home owner, followed by elderly wogs positively geared. Top end crash, certainly. But I doubt at 5% rent / 4.6% mortgage that it’s a big deal – unlike 1980s.

    So what’s the argument proponents of NG are using specific to the grouping of losses question? (Precedent is the non-commercial test of farming, Amway etc.)

  64. entropy

    Gittins has been getting very shrill lately. Madness lies in working at fauxfax.

  65. Blogstrop

    Does anyone recall Gittins pinging the unions as “lobby groups”?
    Miranda Devine quite correctly describes the Gillard minority government as being set on a course of entrenching union power. Is that what JG meant by “changing what it means to be Australian”?
    Labor remains the plaything of the union movement, and I await Ross’s dissertation on that unholy alliance. For now he’s content to run the same old references to business links with the coalition.

  66. Chris

    Is negative gearing so amazing anyway? Five years on my investment property is almost breaking even. If negative gearing went and prices fell, and LVRs dropped you could hold the same property without losing money, which is of course an unavoidable aspect of getting the tax deduction (depending what happened to rents).

    Negative gearing can work really well. It works well in conjunction with having a home loan for the place you live in. The trick is to never pay off capital. With line of credit accounts you don’t even need to pay off the interest and just let the loan size increase. Instead you take the rental income to pay off your home loan for which the interest is not tax deductible. And whilst the loan for the rental place increases, the interest for that one is tax deductible. Over time you end up paying off your home loan, effectively having converted non tax deductible loan costs into ones which are tax deductible.

    Of course this technique is not limited to investing in housing. You can do the same thing with borrowing to buy shares too and using the dividend income to pay off the non tax deductible debt rather then using to pay the loan for the shares.

    I think removing the CGT exemption on the house you live in is the best way to go to reduce speculation in housing. Also remove the 50% discount in CGT after 1 year. Instead for both cases just have a cost basis that increases with inflation. That way there is more reward for holding for the long term compared to chasing short term gains through churn. It also closes the loophole where people buy houses to live in, rennovate and then resell. Which is one a way to get tax free income.

  67. Blogstrop

    People who buy a house to “live in, renovate, then resell” will have a fairly messy and often uninhabitable house. Not an easy road to follow, truth be known. Too many people seem to be keen to rip off money from homeowners, many of whom have no other way to get on a ladder to a better financial situation for their older age, or simply trade up during their working lives.
    We aren’t all on ABC style salaries, you know.

  68. .

    Negative gearing can work really well. It works well in conjunction with having a home loan for the place you live in. The trick is to never pay off capital.

    Whatever, champ. There is a reason why people like you end up asking for more regulation.

    I think removing the CGT exemption on the house you live in is the best way to go to reduce speculation in housing. Also remove the 50% discount in CGT after 1 year.

    No doubt you don’t think income tax should be subject to compensatory cuts across the board if we treat all income, capital gains, salaries, wages, dividends etc the same.

  69. Grumbles

    dismissive; the mortgage insurance is if you have no other assets, otherwise you are using them as collateral, the bank is always covered for recovering the money. If you own a property and buy another investment, equity in the first counts towards total asset deposit.

    Disillusioned; the church is also taxed when they spend this money, so no its not the same. It’s still 2 bites of the pie tho, income tax is and will always be immoral.

  70. dismissive

    Grumbles

    That only works if it is the same bank who hold my home mortgage. It wasn’t.
    OR, if I sign a second mortgage – I didn’t.
    Possible another comment on the complete idiocy of bankers and banking.

    Sorry again as this really isn’t on topic for the post.

  71. Grumbles

    Not so, they are judging your propensity to pay. If you have equity, they are covered. If you have no equity they are not covered, hence mortgage insurance. There are holes in the system, plus some complete idiocy on the side, but calculating whether you need MI or not is set in stone.

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