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:
- 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).
- 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.)