More drivel on negative gearing

Can you believe all the drivel being written about negative gearing, although I think we should not use the term and instead call it for what it is: the deductability of costs associating with investing in an income-producing asset?

Why doesn’t everyone get outraged about the other deductions that people claim (and massage) associated with earning an income?  And let’s face it, there are some pretty dodgy allowable items and a lot of fudging that goes on.

Here are some of the duh points that have been revealed recently in relation to negative gearing on residential real estate:

  • People on higher incomes claim higher losses;
  • There is a bunching of net taxable income just under $80,000;
  • More people are using negative gearing;
  • Negative gearing doesn’t increase the supply of affordable housing;
  • Net investment losses are included in most means-testing cut-off points established by government (including other things such as superannuation contributions);

So people can afford to cover larger losses have higher incomes.  Well, that’s a revelation.

People organise their financial affairs to minimize their tax liabilities.  Well, that’s a revelation.

The combination of low interest rates, available credit, bracket creep and the absence (and or risk) of alternative investment strategies (eg. superannuation) has seen more people pile into real estate investment.

And buying an existing house fairly close to the city centre is a much safer bet than investing in a newly constructed house in an outer suburb.  If the authorities were ever to do something about supply constraints, the biggest price impact would be on those newer houses in outer suburbs.

But here’s the main point: this provision in the tax code has nothing to do about increasing the supply of affordable housing.  You cannot impute an objective to a law that was never there.

And as for that stupid idea that negative gearing should only be allowed for new housing, will we restrict the deductability of costs for investment in shares to IPOs?  Or investment in new commercial property?

It is all nonsense stuff – the provision is just about investment in an income-producing asset.

And the final point, a trivial wrinkle about the calculation of means-tested cut-off points, even though Fauxfacts really thought is was on to something.

As for the estimates of the budget savings that can be made from restricting or eliminating negative gearing, none of them take into account the other side of the ledger and the fact that the profit associated with the lending is taxed in the hands of the lender.

To restrict negative gearing would be to impose double taxation.

Two further points:

  1. What a hoot that public servants in Canberra are among the the most prodigious users of negative gearing.  It suggests they are overpaid and that any advice they might be give on changing negative gearing could be tarred by a conflict of interest (no bad thing in this case).
  2. Using overseas comparisons is fraught with dangers.  It is sometimes claimed that Reagan clamped down on negative gearing.  But there is tax deductability of mortgage costs of owner occupied dwellings as well as scope to use different legal entities such as incorporation or unit trusts to provide full cost deductability on investments in real estate.  (And yes, Bruce, you are right about different ways to skin a cat although the middle class might feel more reluctant than the well-heeled.)
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91 Responses to More drivel on negative gearing

  1. Rabz

    To restrict negative gearing would be to impose double taxation.

    What about the inevitable effects on rental rates?

    Put another way, if NG is abolished, my tenants will see their rents significantly increase.

  2. Token

    Who will have the capital to buy the huge stock of real estate which will hit the market when this redistribution plan by the elites has been enacted?

    If the Coalition had a political bone in their body they would be pushing back hard. This is a BBQ stopper.

    Any move to limit negative gearing will result in a redistribution of property from the middle class to the rich with ALP connection class.

  3. Token

    What about the inevitable effects on rental rates?

    ALP cronies will be raking in the premium and paying it back in donations to the party while the Liars demogogue about “equity”.

    It is the perfect storm for them.

  4. eb

    To restrict negative gearing would be to impose double taxation

    Lefties would consider that a feature not a bug.

  5. Bruce of Newcastle

    If Canberra restricts negative gearing then the immediate effect is about a million investors will corporatize. Accountants would fall over themselves to help this happen. The anticipated revenue would remain anticipated, like Swannie’s budget surpluses.

    That is because if the investment property is in the company the deduction will continue. Canberra could not remove it without amending corporations law. Which would be an epic can of worms.

  6. Old School Conservative

    Great headline in the Australian: “Battler’s engage negative gearing”. (Their apostrophe, not mine).
    Good stats about the potential backlash against lollies of both persuasions if NG is abolished. My favourite stat – But the single biggest group of people using the property concessions live in the Labor heartland of Canberra.

  7. Old School Conservative

    lollies pollies. To use Judith’s words, duh.

  8. struth

    Again I state, having these stupid ignorant socialist conversations while a conservative government is in power means we don’t have a conservative government in power.
    We had a chance to fix this.
    The spill that never happened due to a liberal base that saw Malcom as the only alternative.
    The spill was brought on because the government was heading too far left.
    Even Malcom knew that.
    He never even challenged because he knew that.
    He would not have been the new leader anyway.
    We may have got someone in with less political experience but really, isn’t it about political conviction?

    Do you ever think that although Steve Kates types (he was very tribal when this happened) may be nice people , the political timidness was akin to the political timidness now shown by the very politicians they support and we woefully have in power?

  9. OldOzzie

    Rabz – re your comment

    “Put another way, if NG is abolished, my tenants will see their rents significantly increase.”

    Why does not the Real Estate Institute introduce Domestic Rental Leases where the Tenant is responsible for all out goings including Land Tax, Council Rates and Water Rates including usage.

    The Tenant would soon be upset with where his rent is going to the Governement

    If you have a Commercial lease, you are responsible for your percentage of all outgoings, including Land Tax, Council Rates and Water Rates for the building.

  10. Judith Sloan

    Agree – Joe, man up and explain why negative gearing is good. We need to encourage investment.

  11. Snoopy

    The Australia Institute proposals for limiting negative gearing to new housing and the first 10 years of an housing investment seems to be a common strategy already employed by investors in the outer suburbs. A lot of ex-rentals enter the property market 8-10 years after construction.

  12. Charles

    You are right on the money here Judith, it appears the Lefterati and even respected economists (I’m thinking Saul Eslake as one example) seem to believe the following:

    a) Capital is not mobile and will stay where it is double taxed

    b) Rents won’t go up despite facing unsustainable repayments for the asset

    c) Expensive house maintenance and repairs will still be undertaken despite the fact they will be taxed,

    d) All investors will just give away their hard earned savings to the government in a show of solidarity with their ambition to waste as much tax-payers money as possible, and,

    e) So on;

    Funnily enough, some of this original thinking has polluted conservative ranks to the point where they are even contemplating it. There should be an immediate and strict quarantine of all LNP politicians from the public service organisations who advise them, lest they do something really stupid in the immediate future and remove normal tax deductibility options from housing investment.

  13. H B Bear

    No surprise to Richard Dennnissss and the Ponds Institute at the centre of the wrongheadedness.

    Dumping a negatively geared new build after 5 to 8 years makes sense. Depreciation of fixtures and fittings would be tailing off. Give it a coat of paint and flog it. Rinse and repeat.

  14. Yohan

    Residential housing are not capital goods, they are consumption goods, i.e they are goods directly used by the consumer/end user. They are not capital goods whose accumulation raises productivity and real wages in the economy.

    So why have a tax system that deliberately diverts scarce resources and savings into bidding up the price of consumption goods?

    You can make the argument to allow negative gearing for commercial property and buying shares, because in these cases the tax savings will be invested by business in expanding production.

    But this is not the case with residential housing. To see why, note the wealth effect caused by rising prices of residential housing has been offset by record increases in household debt ratios. If that same money had been invested in Australian business our real wages and wealth would be a lot higher than it currently is.

  15. strange

    “Put another way, if NG is abolished, my tenants will see their rents significantly increase.”

    Why should they just because your costs have increased? Have rents fallen because costs, such as interest rates which are now at record low levels, have also fallen? What you get is what the market is prepared to bear.

  16. rich

    Double taxation is another means to soak the rich. All par for the course.

    they are consumption goods, i.e they are goods directly used by the consumer/end user.

    I’d disagree because the end result of building a house is an accumulation of capital in our society; wealth is created to build a house so long as it stands. “Consumption” to me is the expending of a commodity as an overhead in wealth creation.

  17. Econocrat

    Judit, Foreign Affairs types get 7 years where they can rent their property out while on a posting, and not have it included in the capital gains tax. Basically, everyone buys a house a couple of months before they get posted to Rome or where ever, then rent it out without CGC for the whole posting (while having their rent paid OS by mug taxpayers). Now there’s a rort that should be done away with!

  18. Yohan

    I’d disagree because the end result of building a house is an accumulation of capital in our society; wealth is created to build a house so long as it stands. “Consumption” to me is the expending of a commodity as an overhead in wealth creation.

    We must be clear about what ‘capital’ is.

    Capital is something used to increase the productive output of our labour. For example, Robinson Crusoe used a fishing rod to catch fish. His fishing rod is a capital good. The fish is the consumption good, the end goal. By using his scarce resources and savings he can build a net, which is an improved capital good. Fish output per hour has now been increased 5x by the use of a new capital good (the net).

    Expand this analogy to the modern economy. Factories, office buildings, inventions, powerlines e.t.c are capital goods which increase the output per hour of labour, hence raising our real wages (standard of living).

    Residential housing can not ever be considered ‘capital’ in this sense. Sure there is a restricted supply and income rent yield, but this part of the economy does nothing to raise output of goods per hour of work (the real driver of increased wealth).

  19. mundi

    Well they are at least partly a capital good. How could you perform labor if you lived to far from a factory? My productivity can increase easily by being closer in to a bigger CBD, especially if self employed.

    Who would doubt that land use restrictions being lifted would lead to higher density living and more efficient productivity?

  20. alexis

    So why have a tax system that deliberately diverts scarce resources and savings into bidding up the price of consumption goods?

    Good question but if you are criticising “negative gearing” you are completely missing the point. The diversion is due to 50% marginal rates, 25-50% CGT, up to 50% taxes on fixed interest investments, 50% on personal exertion income (gee it would be better to just manage a property portfolio…), up to 30% +15% + maybe 30% tax on super which is already so inflexible people are terrified to start an SMSF. We have created an economy where the best option is to lose money as opposed to say Singapore where it is thought good to make it.

  21. rich

    Residential housing can not ever be considered ‘capital’ in this sense.

    You need to house workers, ergo housing is a capital good that has a form of persistence. Housing is an important component of a society’s productivity.
    Unless you propose housing them in the factory.

    You can even convert housing to a doctor’s surgery if required.

  22. Yohan

    Well they are at least partly a capital good. How could you perform labor if you lived to far from a factory? My productivity can increase easily by being closer in to a bigger CBD, especially if self employed.

    Who would doubt that land use restrictions being lifted would lead to higher density living and more efficient productivity?

    Yes that’s all true mundi very good points. But my general argument is a pushback against this idea housing is a capital investment on the same level as a factory or something like that.

  23. Yohan

    You need to house workers, ergo housing is a capital good that has a form of persistence. Housing is an important component of a society’s productivity.
    Unless you propose housing them in the factory.

    The idea is not that we don’t need houses, its that bidding up the limited stock of housing does not raise productivity or real wages, it reduces real wages.

    Having a tax system that encourages us to pull money and savings out of business investment is not the path to an increased standard of living. We could add the proposed ‘super’ taxes as another example of this.

  24. Rob MW

    ““Consumption” to me is the expending of a commodity as an overhead in wealth creation.”

    Au contraire…… “Consumption” in Oz is a tax-concession standing in the express lane every Thursday at the Government’s ‘Redistribution Banks’.

  25. ar

    AFR reports negative gearing “costs” to taxpayers down 31% citing high rents and low interest rates.

    http://www.afr.com/news/policy/tax/negative-gearing-cost-to-taxpayers-falls-31pc-20150429-1mvpfn

    A non-problem fixes itself.

  26. motherhubbard'sdog

    The other point that’s been missed in the whole debate about negative gearing is that, with current low interest rates, it is rather hard to generate significant losses on investment property. You have to be geared up to the hilt, which of course brings with it an element of risk.

  27. Margaret

    I have a genuine question, not a rhetorical one.
    If you buy a house as an income producing asset, then shouldn’t it be expected to actually produce a profit as a going concern after a reasonable period of time? You might have renovation and borrowing costs at first, but if it keeps produding losses in the long run, then its not much of a business is it? Is the answer to this question, that speculation on future asset price movements is in itself considered a business model? How do you distinguish this from encouraging asset price bubbles, or is that not a concern of government? How do you deal with this sort of issue when the government, via fiscal and monetary policy is very much a player in what is an economic proposition and what isn’t?

  28. Luke

    Seriously you sound like a bunch of smokers defending smoking.

    Any similar policy and you would be all about the perverse consequences of such policies distorting prices.

    The best display of cognitive dissonance right here on this blog defending negative gearing.

  29. struth

    The best display of cognitive dissonance right here on this blog defending negative gearing

    Luke, no good reading a dictionary if you haven’t got a brain.

  30. Gilas

    Luke, 150% correct!

    Self-interest has a way in these things..

  31. Rob MW

    “The best display of cognitive dissonance right here on this blog defending negative gearing.”

    You sound like an overeducated sort of guy, however, I would suggest that you take the time to find the definition of ‘cognitive dissonance’ then actually read, not only the post but the comments, and actually find any ‘cognitive dissonance’.

    When you have achieved that little feat tell me; apart from shit, what have you actually produced in your life ?

  32. struth

    Luke, do you understand the term” institutionalised education”.
    It’s when wankers with no life or business experience get brainwashed by left wing educators also with no real life or business experience, believe in their own intellectual superiority, and make fools of themselves when interacting with people who do have that experience.
    Toddle back to the safety of like minded backslappers.

  33. Tim Neilson

    Luke.
    Wrong.
    When did anyone on this blog criticise tax deductibility of costs of buying shares, or units in a trust, or business assets or any other income producing assets?
    That’s right, we didn’t. There’s a reason for that. It makes sense to allow deductions for costs of income producing assets, as long as they are intended to make more income than deductions. It is already illegal to deduct interest to the extent that you intend to sell (and to claim that that profit is capital) when your deductions still exceed your income. No need for any law to stop that – just for the existing laws to be enforced.

  34. Yohan

    If any political party is going to make changes to NG, Lab or Lib, it should be grandfathered for current users, and only apply for those going forward.
    Many people are highly geared on their property portfolio, so any large changes could make some go broke.

  35. rich

    Seriously you sound like a bunch of smokers defending smoking.

    Meme alert!
    Apparently negative gearing is as evil as smoking!

    IS it so much to ask that, whatever investment vehicle we choose, we do not suffer double taxation on it? The real villain is the politician who needs to scoop more money out of wallets to fund his boondoggles. Some double taxation ought to do it.
    If you really want house prices to go down, reduce the town planning regulatory burden. Release more land. Allow more high-density housing.
    The market will correct itself.

    @Yohan. I get the gist of your argument, that enablers that aren’t directly involved in wealth generation (houses, roads, infrastructure) should not be considered part of society’s capital. Yet I am not wholly convinced, but will need time to think it through further.

  36. mundi

    Removing NG is stupid. We want less tax, not more. Government shouldn’t be using tax policy to decide on asset investment.

    It’s envy politics. Our issue with housing costs is land use restrictions and zoning laws pure and simple. This is evidenced easily by the price change in land compared to the cost of services. Example farm land worth $800 is being sold for $200,000 in most capital cities after costs of just $60,000 for road, water, sewerage and power. There is no reason for this expect land use restrictions.

  37. notafan

    That bit about negative gearing being included in means tested cut off points, I though losses from passive investments were added back to taxable income for the calculation of family allowance and child care benefits?
    Has that changed?

  38. Rabz

    All investors will just give away their hard earned savings to the government in a show of solidarity with their ambition to waste as much tax-payers money as possible

    Known as “Reverse Kerry Packer Syndrome”.

  39. struth

    Profit equals income MINUS expense.
    They didn’t want to know or understand that at the recent senate inquiry either.
    There’s not enough “ee” in greed to describe these parasites.

  40. Hydra

    Profit equals income MINUS expense.

    I think this is the point being missed. Rent is income. Expenses that have to be made for the purpose of making income are tax deductible, and this principle should be consistently extended to every type of income made in this country without exception.

    Without this, business would go broke. Business simply wouldn’t exist.

    Providing rental housing is a service and thus payments expensed in the course of creating rental income must be deductible.

  41. rickw

    the Ponds Institute

    The Ponds Institute is real, these guys aren’t !! 🙂

  42. Gavin R Putland

    I preface my remarks by acknowledging that the whole issue of negative gearing assumes the existence of a general income tax, which I do not support. However, given that we have a general income tax…

    Judith Sloan wrote:

    But here’s the main point: this provision in the tax code has nothing to do about increasing the supply of affordable housing. You cannot impute an objective to a law that was never there.

    But that objective is routinely imputed by the defenders of negative gearing, including commenters Rabz and Token.

    And as for that stupid idea that negative gearing should only be allowed for new housing, will we restrict the deductability of costs for investment in shares to IPOs?

    And new capital raisings? Good idea! On a macroeconomic scale, only the creation of a new asset is investment. The mere acquisition of an existing asset is not, unless the fallacy of composition is elevated to dogma.

    Or investment in new commercial property?

    Ditto.

    To restrict negative gearing would be to impose double taxation.

    Well, if you impose double taxation on the acquisition of an existing asset, but only single taxation on the creation of a new asset, that’s an incentive for investment!

    Token wrote:

    Who will have the capital to buy the huge stock of real estate which will hit the market when this redistribution plan by the elites has been enacted?

    There will be no mass sell-off, because political calculations will ensure that existing arrangements are grandfathered.

    Bruce of Newcastle wrote:

    …about a million investors will corporatize.

    Not if they’re grandfathered.

    Mundi and rich, respectively, wrote:

    Well they [houses] are at least partly a capital good. How could you perform labor if you lived to far from a factory?

    You need to house workers, ergo housing is a capital good that has a form of persistence. Housing is an important component of a society’s productivity.

    Glad to see that two readers understand the connection between housing affordability and economic efficiency. Wouldn’t it be funny if the Left started selling that point before the Right did?

    notafan wrote:

    That bit about negative gearing being included in means tested cut off points, I though losses from passive investments were added back to taxable income for the calculation of family allowance and child care benefits?
    Has that changed?

    No. That’s the inconvenient point that Judith dismisses as “trivial”.

  43. struth

    And new capital raisings? Good idea! On a macroeconomic scale, only the creation of a new asset is investment. The mere acquisition of an existing asset is not, unless the fallacy of composition is elevated to dogma.

    So just bare with me here.
    If I bought a second hand truck for my transport business, I am not investing in my business, until it is a new truck and one I have to place an order for and wait for it to be built and that would not have been built if I hadn’t placed the order?
    On a Macroeconomic scale, if I’m growing my business and the second hand truck is not still sitting in the sales yard, you reckon it’s not investment?

  44. Andrew

    Luke, 150% correct!

    Self-interest has a way in these things..

    Not only am I not negatively geared, I have never in my life reported a negative investment income in a tax year. Nor am I a renter. In fact, I don’t even know how I would manage to achieve negative investment income even if I made this the primary objective of my life – at these interest rates.

    So for me it would be fantastic if they uniquely double tax residential property investors and destroy the lives of renters by causing rents to spike 50%. It would be a great outcome for all my positively geared rental properties.

    Similarly, it would be fantastic for me if they slapped a whopping big tax on riding bicycles within 15km of the CBD and doubled it for having a water bottle that mentions the Greens.

    Nevertheless, that doesn’t make it great policy, or fair.

  45. struth

    A rental is a business.
    A business must be able to deduct it’s expenses before taxation or the business won’t exist.
    I have owned a rental property, (though never again) and I guarantee that if you can’t deduct your expenses you would either not go in to it, or the rent you charge would have to go through the roof to make it worth while.
    So with the lack of private ownership of rental properties due to not being able to claim your expenses like any other business, you better start building accommodation communist government style.
    So again left wing dip shits………………where does the money come from?

  46. notafan

    They could quarantine passive investment losses in the same way capital losses are.
    Carry them forward until the investment return goes positive.
    Are there possibly similarities in the treatment of ‘non commercial ‘ business losses that also have to be carried forward til either the tests are met or the net profit can absorb the losses?

  47. struth

    The system needs to be simple so that hard working people that are not investment specialists , want to put their money into housing.
    It helps everyone in keeping rents down and really is an investment in this country.
    They can always put their money elsewhere.
    It is a business.
    It is private sector business.
    In many cases, very small business.
    It supplies an accomodation service just like a hotel.
    Accomodation business from Motels to caravan Parks and everywhere inbetween can claim their expenses.
    Is it not that simple?

  48. Tim Neilson

    Gavin R Putland
    #1668614, posted on April 29, 2015 at 4:07 pm

    People invest in IPO’s in part because they hope to get dividends, but they also hope that when they ultimately sell they’ll make a profit.
    If the secondary market purchaser isn’t allowed a tax deduction for interest on the purchase price, the price will be lower, ergo the initial investor will expect a higher dividend yield before the initial investment makes sense, that higher expectation has nothing to do with the underlying merits of the investment but just the tax distortion between initial and secondary markets, ergo the policy will kill IPO’s that economically make sense.

  49. Barry

    Always a laugh to read the Public Servants/Schoolteachers and various middle-class welfare moochers on here defend neg gearing on I/Ps.
    New home builds should get Neg gear – existing properties? No. It’s non-productive and it’s a rort, and you all know it.

  50. Rabz

    Where’s that tax policy guru, Bunty Twatfield?

  51. Rob MW

    “But that objective is routinely imputed by the defenders of negative gearing, including commenters Rabz and Token.” – Bullshit. Cause, effect and consequences including unintended consequences are imputed into tax law on a daily basis – class rulings.

    “And new capital raisings? Good idea! On a macroeconomic scale, only the creation of a new asset is investment. The mere acquisition of an existing asset is not, unless the fallacy of composition is elevated to dogma.” – Bullshit. Investment consolidation and/or composition demergers are microeconomic considerations, notwithstanding; why would any person or business buy something that they already own, and has been accounted for ?

  52. Tel

    Is the answer to this question, that speculation on future asset price movements is in itself considered a business model?

    Is there something evil about factoring in price inflation when doing economic calculation? If you don’t factor it in you get Grubered.

    How do you distinguish this from encouraging asset price bubbles, or is that not a concern of government?

    There is no way to distinguish, but if government doesn’t print money, and doesn’t allow banks to form a cartel to protect themselves from competition, and if government doesn’t use tax money as a backstop to protect the financial industry from it’s own speculation… then asset bubbles would be a lot less of a worry.

    How do you deal with this sort of issue when the government, via fiscal and monetary policy is very much a player in what is an economic proposition and what isn’t?

    Start by wiping all laws off the books that treat banks as different to any other businesses, then find a way to greatly restrict the Reserve Bank money printing, and gradually phase out any government backed deposit protection. That would probably do it.

    If you want to go the rest of the way and get the job done properly, phase out the entire government boon of limited liability and offer that to nobody… make shareholders liable for company debts. They will start being real careful real quick. Individuals have to be highly conservative with their personal leverage unless they enjoy bankruptcy, financial corporations are merely organized groups of individuals as far as I’m concerned.

  53. David Brewer

    Sorry Judith but I don’t buy these latest arguments in favour of allowing negative gearing for property investment either.

    1. I think we should not use the term and instead call it for what it is: the deductability of costs associating with investing in an income-producing asset?”

    No – negative gearing is a better term. What it means is allowing deductability of losses in excess of the income produced. In practice it allows one to reduce one’s taxable income by the claimed loss. This might be fair enough for the early stages of productive investment, but it is a rort when applied to housing, because housing is not a productive asset and the gain from investing in it is usually and mainly in the form of a capital appreciation that is not reportable as income. If the annual change in capital value of negatively geared properties were counted as income, practically all the current “investors” would find they had a net amount to add to their taxable income, which would be taxed at their marginal rate, instead of being able to make deductions from their income as they do now.

    2. Why doesn’t everyone get outraged about the other deductions that people claim (and massage) associated with earning an income? And let’s face it, there are some pretty dodgy allowable items and a lot of fudging that goes on.

    They should be outraged at other dodgy allowable items and at all the fudging that goes on, of course they should, but negative gearing on property investment involves a very large slice of the total of all the dodging and fudging.

    3. To restrict negative gearing would be to impose double taxation.

    Why so? What tax are “investors” already paying on their phantom losses? Anyway, for a start, why not just stop allowing punters to deduct more than they earn from the rent? I wouldn’t even bother with grandfathering – just give a few months’ notice. You’ll find negative gearing drops to near zero so fast that the double taxation question won’t even arise.

    4. What a hoot that public servants in Canberra are among the most prodigious users of negative gearing. It suggests they are overpaid

    Well, true, but are you listening to what you yourself are saying? Doesn’t the fact that this loophole is being rorted by thousands of overpaid Canberra public servants tell you all you need to know about the fact that it is a futile unproductive rent-seeking financial trick rather than a true investment?

  54. Rob MW

    “Always a laugh to read the Public Servants/Schoolteachers and various middle-class welfare moochers on here defend neg gearing on I/Ps.”

    Ahh Barry……….I see the problem. It’s important to be regular you know…….try Metamucil 3 time a day.

  55. Hydra

    You’ll find negative gearing drops to near zero so fast that the double taxation question won’t even arise.

    Yeah, because rent prices will increase to cover the losses.

  56. David Brewer

    Proponents of negative gearing here seem to have differing views about whether negative gearing promotes cheap rents; compare

    But here’s the main point: this provision in the tax code has nothing to do about increasing the supply of affordable housing. You cannot impute an objective to a law that was never there.

    (Judith)

    with

    ‘You’ll find negative gearing drops to near zero so fast that the double taxation question won’t even arise.’ – Yeah, because rent prices will increase to cover the losses.

    (Hydra)

    However, would there really be noticeable increases in rents, or falls in the supply of “affordable” housing by abolishing negative gearing? To be sure, it would be less attractive for people with high incomes to buy property to rent out, but this in turn would reduce competition in the bidding for new houses, and so reduce the prices of those houses.

    All in all I can’t see much change in rents from abolishing negative gearing. But say there was – wouldn’t that just prove that the government had been subsidising the housing market through the tax system and thus distorting the allocation of resources?

  57. Percy

    would there really be noticeable increases in rents

    The rent for every negatively geared house would increase to the amount required to cover the mortgage. Sure, there’d be the option to move, but demand for housing that isn’t currently negatively geared would then also increase. When demand exceeds supply, prices don’t go down.

  58. Andrew

    No – negative gearing is a better term.

    Why? Gearing is the application of leverage to an investment. Negative gearing means a negative level of leverage through retention of net cash, or through some form of structuring (such as credit support). How is it a better term for such high gearing that the investment becomes loss-making?

  59. Rabz

    The rent for every negatively geared house would increase to the amount required to cover the mortgage. Sure, there’d be the option to move, but demand for housing that isn’t currently negatively geared would then also increase. When demand exceeds supply, prices don’t go down.

    QED.

    If I was a tenant, I would be very nervous about all this clamour to abolish NG.

  60. Gavin R Putland

    struth @ #1668627: Your acquisition of a 2nd-hand truck is an investment from your (micro) viewpoint, but not from the national (macro) viewpoint. Of course the re-allocation of an existing asset may cause it to be used more efficiently and thereby increase national output. Nevertheless, investment is one thing and allocation is another.

    As property investors overwhelming buy existing properties, the main allocative effect of negative gearing is to turn potential owner-occupied properties into rented properties, and potential home owners into renters. And you all know it.

    struth wrote:

    A rental is a business.

    Not quite. In Australia, a business is subject to non-commercial loss rules, from which property investors are exempt because they are deemed not to be conducting a business. If they were not exempt, a negatively geared property worth less than $500k and generating less than $20k/yr in rent would run afoul of the rules.

    Tim Neilson @ #1668687:

    In the first place, if tax deductions for acquisitions in the secondary market are abolished or quarantined, the general tax rates can be reduced. That has its own benefits.

    In the second place, whatever the tax laws may be, people will feel the need to save. Now where do those savings go? If primary investments (e.g. new homes, IPOs) are taxed less than acquisitions in the secondary market, more savings will initially be converted into primary investments. If the tax differential is to be removed without ultimately reducing primary investment, all the savings initially diverted from the primary market to the secondary market must find their way back to the primary market. But will they? It seems to me that some of the proceeds of sales in the secondary market will pass through the hands of people who will blow them on (e.g.) imported consumables rather than invest them.

    Percy wrote:

    The rent for every negatively geared house would increase to the amount required to cover the mortgage.

    No, because (i) the politics of the situation ensure that all currently negatively geared properties would be grandfathered, and (ii) even in the absence of grandfathering, market rents are limited by capacity to pay: landlords who think they can raise the rent to cover their costs will suddenly discover the demand curve.

  61. Rob MW

    “……………..but this in turn would reduce competition in the bidding for new houses, and so reduce the prices of those houses.”

    Good one, just reduce the risked equity…………enter the abundance of mortgagee in possession property sales. Yep……that ort to work, perhaps the Government could do a ‘hands-up who wants to participate’ type survey eh.

  62. Rob MW

    “No, because (i) the politics of the situation ensure that all currently negatively geared properties would be grandfathered,……..”

    Stop with the ‘grandfathering’ bullshit. Government schemes and intervention can be grandfathered but the ‘Market’ including risk, value and equity of all property in land and housing cannot be grandfathered by any Government scheme or device. The effect of NG property runs right through the whole fucking lot, including the vast majority of land and housing that is owner occupier.

  63. Docket62

    Not quite. In Australia, a business is subject to non-commercial loss rules, from which property investors are exempt because they are deemed not to be conducting a business. If they were not exempt, a negatively geared property worth less than $500k and generating less than $20k/yr in rent would run afoul of the rules.

    True, but that would mean the $20,000 is not taxable under those same rules. Given that most investments properties today are pushed negative by depreciation, it would make little to no difference to anyone with a rental property. I have a number geared at 105% – all cash flow positive but the dep schedules are worth $12k a year, pushing them heavily into negative. I’d welcome the above changes LOL

  64. Docket62

    No, because (i) the politics of the situation ensure that all currently negatively geared properties would be grandfathered

    Bold assumption. Labour would simply dump it because they lack the intelligence to understand grandfathering, and the libs won’t bring it in…

  65. struth

    Gavin, you come up with all sorts of tosh and your links don’t work.
    Some cockhead bureaucrat economist may try to muddy the waters with the same crap you are dribbling but in the real world , guess what ,it’s just that …….crap.
    You don’t own viewpoints and are not an authority on what the nation’s viewpoint is regards investment.
    Thank god for Australia that there are doers that get stuck into business in the real world and those that are successful are usually the ones that understand the world and see through the over institutionalised brain farts you are peddling.
    Some people aren’t put off by that.
    You say , for example, that buying an investment property is not a business.
    Really?
    Is it a game of cards?
    Is it a music festival?
    Maybe it’s a music festival in disguise.
    An expense outlaid to gain a profit is what in your eyes?
    Your analysis is ignorant in the extreme, making the assumption (and left wing) that those nasty property investors are keeping people from buying homes.
    The governments charges , stamp duty , land release policy and industrial relations laws keep people from buying homes.
    Thank god they can rent until they can afford the down payment and stamp duty orchestrated entirely by government policy.
    If they ever can.
    Government policy made home ownership unaffordable to many.
    Even for investors.
    It’s one of the greatest crimes government has visited on the Australian people.

  66. entropy

    Rob, you have to understand where Gavin is coming from. It’s basically ‘allayer stuff belong to us’. So what the market may or may not do in response isn’t relevant. It is all along with the prattle about ‘non-commercial loss rules’ because the reason a person would invest in rental properties is capital gain, to make a commercial profit in the long run. Otherwise why on earth bother? it ain’t for the rental income.

    It’s like they ignore what happened when Keating temporarily removed negative gearing, realised his mistake and reversed course. When you think of it, it’s like the dicks promoting communism, who when it is pointed out that it never worked anywhere it was tried, retort that it hasn’t been properly tried yet.

  67. alexis

    I have a number geared at 105% – all cash flow positive but the dep schedules are worth $12k a year, pushing them heavily into negative. I’d welcome the above changes LOL

    I wouldn’t be so smug.
    Five years down the track:
    We owe another 200bil in national debt and are told we are a low-taxing nation. Moochers claiming phantom losses for depreciation are responsible, and most people claiming these tax losses are relatively wealthy. So depreciation is limited to $2000 per year on an investment property. Then it turns out that the wealthiest people make more money out of the PPR exemption, so that’s capped at $1m.

    Basically it may or may not be a good idea to stop this tax deduction, but the merits are irrelevant. Because currently the money claimed is in the hands of the private sector, and if changed it would be in the hands of the government who quite literally could burn banknotes and achieve the same outcomes they achieve from much of their spending.

    There is no limit to the greed of the tax takers vis a vis the tax payers and they won’t stop until we have marginal rates like 1970s England with no deductions. Those of you clamouring for the tax payers to pay more are completely naive.

  68. Percy

    (ii) even in the absence of grandfathering, market rents are limited by capacity to pay: landlords who think they can raise the rent to cover their costs will suddenly discover the demand curve.

    There’s enough vacant, non-negatively geared rental properties around that they could absorb all the tenants of houses that are currently negatively geared without raising their rental prices? Well there you go, let’s get on with it then. Wait, why aren’t people living in these cheap rentals already?

    The only time you could even think about unwinding NG without putting poor people onto the streets is when there is a massive over supply of housing. What chance of that happening soon?

    Grandfathering

    Safe as Super.

  69. Rob MW

    Entropy, I know. They think, whilst taking a well-earned break from living/hiding under some else’s bed, that removing negatively geared property from the equation that this will, in effect, provide more Government revenue to put into even more public housing estates where the waiting lists are as long as a ACOSS membership award ceremony.

  70. Docket62

    I wouldn’t be so smug.

    Clearly your knowledge of tax minimisation, or anything to do with property, business or gearing is…….. Fuck all. There’s nothing smug about buying property and renting it. It’s an investment strategy and nothing more ….

    Moochers claiming phantom losses for depreciation are responsible,
    Phantom losses for depreciation is an oxy moron, substantially like yourself. The property does decline in value as it is used, parts wear out and need replacing, hence depreciation. No phantoms there, and certainly no moochers here.

    governments spending squillions on overpaid, semi retarded government employees, or roads that don’t get built, or fucking desal plants that no one needs, or pink batts, or school fucking halls is the cause of the extra 200b in debt, not a few properties being geared by the percentage of the population that pays 96% of the taxes in the country.

  71. alexis

    Clearly your knowledge of tax minimisation, or anything to do with property, business or gearing is…….. Fuck all.

    Obviously the lack of a subjunctive mood in our language has sent you way up the garden path, maybe if I clarify:

    We owe another 200bil in national debt and are told by lefties
    “We are a low-taxing nation. Moochers claiming phantom losses for depreciation are responsible, and most people claiming these tax losses are relatively wealthy”. So depreciation is limited to $2000 per year on an investment property. Then it turns out according to lefties that “the wealthiest people make more money out of the PPR exemption”, so that’s capped at $1m.

    By smug I mean you seem happy to lose the negative gearing deduction because you think you will continue to make use of the depreciation deduction. I am merely pointing out that once this one goes, your depreciation will be in someone else’s sights, then the PPR exemption, then family trusts, then whatever deductions are still available from super. Our LDP friend has the only appropriate response, which is, “I will never vote for an increase in taxes”.

  72. Gavin R Putland

    struth wrote:

    Gavin, you come up with all sorts of tosh and your links don’t work.

    I gave only one link above. It works in Firefox and Opera, times out in Konqueror, and is extremely slow in Epiphany. Bizarre.

    Thank god for Australia that there are doers…

    Amen. Especially those who build new dwellings.

    You say, for example, that buying an investment property is not a business.

    It’s not me who says that. It’s the law on non-commercial losses.

    entropy wrote:

    Rob, you have to understand where Gavin is coming from. It’s basically ‘allayer stuff belong to us’.

    Which is an admission that if you want to defeat me, you have to misrepresent me. The economic philosophy to which I subscribe holds that the proper source of public revenue is economic rent, and that all other forms of taxation are violations of private property rights. Hence I oppose a general income tax. But if you’re going to reduce income tax for some people and not others, you ought to have a better excuse than that the former have outbid prospective owner-occupants for existing homes.

    It’s like they ignore what happened when Keating temporarily removed negative gearing, realised his mistake and reversed course.

    Keating reversed course because he couldn’t match the property industry’s campaign budget, not because his policies drove up rents; see the third graph here. His mistake (which he never realized, as far as I know) was that he didn’t leave negative gearing in place for new builds. If he had, he would have split the property lobby between producers and rent-seekers and made it harder for the latter to peddle their lies.

    Percy wrote:

    There’s enough vacant, non-negatively geared rental properties around that they could absorb all the tenants of houses that are currently negatively geared without raising their rental prices?

    There won’t need to be, because the currently negatively geared properties won’t cease to exist. Moreover, the situation won’t arise because, as surely as politicians will play politics, any changes to negative gearing will grandfather existing arrangements.

  73. Docket62

    Alexis…. Thanks for clarifying which side of the coin you view, didn’t come across like that in first post hence my garden path meandering. I agree withe the description of the left view however, most wouldn’t realize what depreciation is, let alone it’s effect on gearing.

  74. struth

    Yes it’s the law that says it’s not a business, Gavin, and hey you don’t have to have an ABN to do it.
    I know that.
    But it is a business.
    Maybe you should have to have an ABN( as in commercial property) to do it so people like yourselves don’t get confused with the realities of life and if the law stated it as a business your brain may be able to compute this better.
    Try to think of it as more of a business than an investment because it has day to day running costs and expenses. Although of course it is both.
    It is really private business investment in accommodation.
    It should be taxed the same as any other business.
    After expenses.
    No matter what the government tells you or any public servant has taught you at uni.
    (I am only assuming that and admit I don’t know that for sure, it just seems your thinking has been muddled by left leaning confusologists at some stage), the market rules this business activity.
    Negative gearing is no more than the term applied to taxation of an “unofficial” business in basically the same way as “official” business.
    It is vital for renters to have the supply available to them of this privately supplied accommodation while they try to save up for what they increasingly will never afford due to government interference in the property market and in the regulation of everything else which is keeping this country down .

  75. Rob MW

    “Which is an admission that if you want to defeat me, you have to misrepresent me. The economic philosophy to which I subscribe holds that the proper source of public revenue is economic rent, and that all other forms of taxation are violations of private property rights.”

    Mate you are defeating yourself simply by subscribing to your own crap dictum. So exactly how do you get your ‘economic rent’ from public housing tenants and welfare recipients of rental assistance including emergency assistance ?

    Quid-pro-quo sunshine !!

  76. Gavin R Putland

    struth wrote:

    It should be taxed the same as any other business.
    After expenses.

    As I have explained, this implies some curtailment of negative gearing! But, in order to increase what struth rightly calls the “vital” supply of accommodation, I would curtail it differently – as I have also explained.

  77. struth

    Negative gearing is just that.
    Claiming your expenses against your income.
    It basically is that simple.
    Also I believe in some strange way, the left believe this gets you out of paying tax due to the politics of envy and entitlement meaning the investor is well, you know, RICH.
    Your way won’t work Gavin.
    It hasn’t in the past and won’t work in the future.
    The situation is basic.
    Simple.
    It’s not that complicated.
    I’ll even give you a scenario.
    One house is for sale which is way overpriced due to government interference in the real estate market, excessive taxes (stamp duty and the like) and the general corruption from lack of land release blah blah, you get the picture. That’s about every house in Australia at the moment.
    In some states the stamp duty and costs are higher on that one house for investors and definitely higher for them than a buyer with a taxpayer funded first home buyers grant.
    Yet nobody buys it as you got rid of the negative gearing that made it workable for investor and it is still too high for home buyers, who can’t even get a deposit together and never will due to the price of housing in this dumb country being absolutely out of reach to those on the average wage. Which also keeps rental returns low as people can’t afford to pay rents which cover the costs for the investor making it even more of an unviable proposition for them.
    So everybody loses.
    And the would be renter gets wet when it rains.
    So where is the money going to come from to build your communist units to replace them?
    Your alternative will never work these days because the excessive cost of housing is actually caused by excessive parasitic taxation and market restrictions.
    Lefties always look for scapegoats when their theories fail.
    As they always do.
    Another thing, this going after scapegoats just before this country will have it’s housing bubble burst is even going to cause more pain.
    I left the “business” of investing in rentals because I found the returns aren’t there for the effort.
    Especially with the type of renters around these days, people should be glad anyone wants to do it at all in this country.

  78. Gavin R Putland

    struth wrote:

    Your way won’t work Gavin. It hasn’t in the past and won’t work in the future.

    What past? To my knowledge, the policy of limiting negative gearing to new builds (with or without grandfathering) has never been tried.

    Yet nobody buys it as you got rid of the negative gearing…

    Not if it’s a new build.

    that made it workable for investor and it is still too high for home buyers…

    Ummm… If nobody buys it, the market price is lower than the asking price. Is the seller somehow “entitled” to get the asking price?

    So where is the money going to come from to build your communist units to replace them?

    From private investors encouraged by negative gearing for new builds. Apparently this is communism.

  79. David Brewer

    Negative gearing is just that.
    Claiming your expenses against your income.
    It basically is that simple.
    Also I believe in some strange way, the left believe this gets you out of paying tax due to the politics of envy and entitlement meaning the investor is well, you know, RICH.

    Sorry, but wrong, wrong, wrong.

    Negative gearing is not just claiming your expenses against your income. Negative gearing on property is claiming your net loss on the property against your other, non-property income, thus reducing your tax bill. It only works as an investment strategy because your countervailing gain is being hidden and not added to your income as it accrues. This is the gain in the capital value of the house being rented, and it is only going to be taxed later, at a time of your choosing, and with a 50% discount on the amount to be declared, which in most cases will reduce tax payable by more than 50% of what would have been paid had each year’s capital gain been counted as income at the time.

    Saying this is not the politics of envy and entitlement. Nor does it doesn’t matter much how wealthy the investor is. Negative gearing works fine as a tax avoidance lurk for anyone on more than $80K a year (marginal tax avoided 39%, eventual tax on the capital gain likely less than 20% and cannot possibly reach 24.5%).

  80. struth

    What past? To my knowledge, the policy of limiting negative gearing to new builds (with or without grandfathering) has never been tried.

    Getting rid of negative gearing on existing properties has been tried.

    Not if it’s a new build.

    That one house is what I’m talking about and it’s still sitting there.
    Vacant.

    Ummm… If nobody buys it, the market price is lower than the asking price. Is the seller somehow “entitled” to get the asking price?

    No, of course not but the you forget government costs.
    This is the very point.
    People don’t sell (as many are not doing now due to not being able to get the price for what they owe)
    So the owner of the property lowers the the rent……market forces at work……and those that cannot afford the initial purchase (due to taxes and costs caused by government) get a place to stay.
    Bugger me !
    But now that loss of income incurred by the owner is not a tax deduction in your eyes?

    From private investors encouraged by negative gearing for new builds. Apparently this is communism.

    Good luck with that.
    See above.

    Negative gearing is not just claiming your expenses against your income. Negative gearing on property is claiming your net loss on the property against your other, non-property income, thus reducing your tax bill.

    So I have an overall income from a number of different activities and business activities over the year , all with income and expenses.
    My overall taxable amount is calculated on what I have after expenses.
    Is this hard for you to work out?
    You assume there will be a capital gain at the end.
    You forget about cash flow and incentive to go into it in the first place.
    You’ve got to be able to get to the end.
    Using this theory of Gavins will shoot property investment dead and have a detrimental effect on renters.
    It will only be better for the uber rich developers at the expense of mum and dad property investors.
    The problem with our property market is entirely the creation of government on many levels.

  81. Gavin R Putland

    struth @ #1670045:

    Getting rid of negative gearing on existing properties has been tried.

    Do you mean that negative gearing for new builds was still allowed, or were you hoping that readers would forget that bit?

    That one house is what I’m talking about and it’s still sitting there.
    Vacant.

    You mean your “scenario” at #1669279 wasn’t hypothetical? You mean the house actually exists and is a new build? Well in that case, if negative gearing were limited to new homes, some investors (including “mums and dads”) who would otherwise buy established homes would redirect their attention to new homes, and the house would be more likely to sell!

    And for this I am accused of wanting to “shoot property investment dead”.

  82. struth

    What is the point to your argument?
    Do you see an accommodation crisis or a housing price crisis?
    If housing prices were not so artificially high due to government interference, land release corruption and tax, the affordabliity problem and therefore supply would be solved immediately
    Or do you see a ” I want investors to pay tax on their gross instead of net income because they’re bastards” crisis?
    If you limit investment to new builds in this country you are not taking into account all scenarios and therefore you seem to be saying that if you got investors out of pre existing houses, all renters would immediately buy that stock because it would be cheaper.
    Not even contemplating that not everyone wants to buy a house or will ever be able to whatever the price is, young people that don’t want to live with their parents until theyr’e 45, and so on it goes.
    There is more issues than that, but that is why I made comments about real life.
    It would not work and is unnecessary.
    We need investors to buy pre existing homes and they would not if you double tax them.

  83. Gavin R Putland

    struth @ #1670351:

    Do you see an accommodation crisis or a housing price crisis?

    Too many rents and prices are out of reach for too many people.

    If housing prices were not so artificially high due to government interference, land release corruption and tax…

    And NIMBYism in established suburbs, and land developers drip-feeding markets, and banks incurring foreign debt in order to lend against domestic real estate, partly through negative gearers who can bid up prices of existing homes instead of building new ones…

    …you seem to be saying that if you got investors out of pre existing houses…

    Not all, but some…

    …all renters would immediately buy that stock…

    Not all, but some…

    …because it would be cheaper.

    Which is what you’re really afraid of, innit? Whereas you wouldn’t see a problem if, e.g., taxi plate holders had their asset values wiped out by deregulation. “Sauce for the goose…”

    We need investors to buy pre existing homes…

    We need investors to build new homes. We don’t need “investors” buying so many established homes that would-be home owners are forced either to rent, or to become “investors” themselves in order to compete.

  84. David Brewer

    Negative gearing on property investment is a rort.

    Maybe a simple example will help people understand this.

    Say you bought a $500K property and held it for 10 years, selling at $1 million, net of buying and selling costs. You put none of your own money in, but borrowed the whole $500K, so that the interest bill and other costs meant you ran at annual loss after rental income of $10K. So your total reported losses on your 10 tax returns were $100K. If your marginal rate was 39c in the dollar, you reduced your tax by $39K and had a net loss after tax of $61K.

    Now after 10 years you sell at a $500K net capital gain. Only half of this is taxable. So you add $250K to your taxable income, which gets taxed partly at 39c but mostly at 49c, say an average of 46c, resulting in a tax bill this year attributable to your investment $115K. You thus pocket a net capital gain of $385K. After deducting your net income loss of $61K over the 10 years, you come out $324K ahead in nominal terms.

    And this was on an “investment” of zero! OK you took a risk – if the property had fallen in nominal value, or risen by less than $100K or so, you would have lost money. But this was hardly likely. Far more likely is a large net after-tax profit, generated by a combination of general inflation, rising real house prices, and a phantom and fictitious annual loss for tax purposes.

    What was really going on over those 10 years? In fact, the property was gaining in nominal value by an average of $50K a year, net of buying and selling costs. Your average real position each year was not a loss of $10K but a gain of $40K. If you had been taxed on this, you would have had paid at least 39c in the dollar. Total tax bill in 10 years – what you should have paid – at least $156K (i.e. 39% of $400K). Instead, the negative gearing rort meant you only pay $76K ($115K on the capital gain, minus the $39K you got back on your fictitious annual “losses”).

    Like I said, it’s a rort. It should be abolished. But apparently 70% of federal politicians are doing it, so don’t hold your breath.

  85. Gab

    I can see you are quite het about this, David. You call it a rort and yet it is legal. It’s also a risk – bad tenants, no tenants and the property is lying idle, re-zoning, increases in rates, insurances etc. People seem to think that renting out properties is easy and risk-free, it’s not. And why would anyone rent their investment property to not gain something it by it? Should rental properties be run not-for-profit?

  86. David Brewer

    Gab I agree with all of your points. Negative gearing is legal. One can lose money investing in rental property. There are risks, including no tenants, bad tenants, rate hikes, rezoning etc. No one would invest in anything if they didn’t think they’d make a profit. Maybe I’m even het up about this…

    But the fact remains, negative gearing is a rort. It creates artificial losses that do not reflect your real financial position from year to year. Most years, most houses go up in value, and by more than any net income loss from renting it out. Yet the value increase is ignored. A phoney loss is allowed, and you get part of your tax back based on this phoney loss. When your true financial position is realised by selling the place, you are not taxed on that full gain, but only on half of it.

    So all your points are right, but it’s still a rort. It creates an artificial loss each year, which is socialised. And this results in an artificially high profit at the end, half of which is privatised (i.e. the investor gets to keep half the capital gain, tax free).

    I haven’t seen any arguments here that tackle this point. Admittedly, even positively geared property investment is advantaged by the 50% CGT concession, and a part of the problem is the arbitrary nature of that concession. So negative gearing can be seen as only an extreme exploitation of this concession, but the very extremity is what exposes it as a rort.

  87. Gab

    Do you pay taxes, David? Do you claim expenses against your taxes? Because if you do, by your definition, you are engaging in rort.

  88. JC

    Gab I agree with all of your points. Negative gearing is legal. One can lose money investing in rental property. There are risks, including no tenants, bad tenants, rate hikes, rezoning etc. No one would invest in anything if they didn’t think they’d make a profit. Maybe I’m even het up about this…

    But the fact remains, negative gearing is a rort. It creates artificial losses that do not reflect your real financial position from year to year.

    Interesting. So businesses that borrow, claim a deduction and see the enterprise value go up are also rorting, right?

  89. JC

    Want to virtually eliminate so-called rorting through negative gearing?

    Lower tax rates to the point where the deduction is basically immaterial.

    One more point. The level of deduction for negative gearing shows up the biggest rort of all. It’s that taxes are so fucking high creating that deduction. The punishing tax rates is where the rort actually exists.

  90. David Brewer

    JC – your analogy with businesses is hard to answer because it brings in other issues. In some ways a business may be more productive than a house, in as much as it creates something new with the borrowing. Also, the increasing value of the business may be taxed in different ways depending on how that value is realised – sale, share price gain, franked or unfranked dividends etc.

    But I still don’t see any compelling argument directly addressing the point that I and others have made, that negatively geared property investment creates false, tax-cushioned losses, and then excessive, partly tax-exempt profits. Do you have any comments directly contradicting the example I gave above of how this works as a rort in practice?

    Also, let me just try one more angle to see if I can get anyone on the other side of this argument to see my point. In a typical property investment of any kind, depreciation is allowed for wear and tear on carpets, curtains etc. This allowance for depreciation will be part of the losses claimed on a negatively geared property. Now, leaving aside any argument about the percentages applied, the deduction is fair enough in principle isn’t it? Those carpets really aren’t worth as much now as they were a year ago, so it’s only common sense to deduct the loss in their value from the investor’s rental income.

    But the carpets and curtains are only a drop in the bucket in the value of the house. How can you allow the investor to claim a deduction for their trivial loss in value while ignoring the normally far greater increase in the value of the house as a whole? How come when that increase is finally brought to book on sale, it is arbitrarily reduced by 50% before tax is applied?

    BTW I agree that taxes are far too high to start with, and that high marginal tax rates are one of the reasons negative gearing is so attractive. I also don’t blame anyone for getting into negative gearing – it’s a great deal, the risk/return profile is terrific. Of course it is – because it’s a rort!

  91. David Brewer

    Do you pay taxes, David? Do you claim expenses against your taxes? Because if you do, by your definition, you are engaging in rort.

    Gab – Yes, yes and no – see my last post above. Making deductions is not a rort. Claiming losses that don’t really exist is a rort. Negatively geared property investment is claiming losses that don’t really exist.

    And another difference with borrowing to build up a business. The prime purpose of such borrowing is to increase the income from the business, and thus to generate (increased) profits. In property investment, the purpose is to make a loss for tax purposes. Not a real loss of course, since you are hoping the capital value of the property goes up more each year than your net income loss. However, even it fails to do that, and thus fails as an investment before tax comes into play, the tax treatment might still put you ahead, since the eventual capital gain will only be taxed at around 20% whereas the annual income loss was trimmed by a 39% or 49% tax reduction.

    To put more specific numbers on that, say in my previous example of a house bought for $500K, and rented out at a claimed income loss of $10K a year for 10 years, the final sale price was not $1 million but only $590K net of costs. What a turkey of an investment! $100K lost over 10 years, for only $90K capital gain at the end. You surely can’t expect to come out of that in front can you? But you will after tax. Your accumulated income losses of $100K gross were only $61K net. Your capital gain was $90K, but only $45K of that is taxable, which at 39% means you owe Joe just $17.55K in CGT, leaving you with a net capital gain of $72.45K. This net capital gain exceeds the net income loss: overall you come out in front by $11.45K, courtesy of the taxman and of course, other taxpayers, who have paid you a net $21.45K over the life of your “investment”. What a rort!

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