One of the most frustrating things about being an observer of the political scene is how easily politicians are let off the hook when they make misleading or specious claims. The most outrageous illogicalities are meekly accepted by a media class that seems to have abandoned any pretence at intellectual rigour.
The usually astute Chris Mitchell has a piece in the Australian in which he opines:
In my view, a cap on the number of negatively geared properties is desirable to prevent high-earning surgeons and lawyers avoiding all tax by owning dozens of negatively geared properties.
As someone who, along with my wife, has based my retirement on property investment, I am always irritated when politicians and commentators routinely conflate property investment with ‘negative gearing’ – as if tax avoidance, rather than wealth accumulation, were the primary motivation.
And I am particularly intrigued by these canny surgeons and lawyers who are able to ‘avoid all tax’ through negative gearing. I know a few surgeons and lawyers but none of them are in this category, so I have to imagine how the others do it.
Let’s say I’m a brilliant surgeon earning $1,000,000pa. I pay a top marginal rate of 45c in the dollar. So before any deductions I may have, I pay $423,097 income tax.
For the purposes of this example, let’s ignore all other deductions. That leaves me with $576,903.
Let’s say I decide to live on half of this and, each year, to put a $300,000 deposit on a rental property worth $800,000. I need to borrow $500,000 and secure an interest only loan over 30 years at 6%. (In reality, I wouldn’t maintain an interest only loan over such a long period but would pay down principal wherever I could but for simplicity’s sake go with me here).
Let’s say I get $600 per week rent – $31,200.
I am paying $30,000 p.a. interest on my loan. That is tax deductible.
Let’s say I pay annual rates of $2,000 and insurance of $1,000.
And I engage a managing agent who charges, say, 10% or $3,120 pa.
My outgoings are $36,120.
So I’ve made a loss of $4,920.
So now my taxable income is $995,080 and tax payable is $420,883. So I’ve ripped off the government to the tune of a measly $2,214.
Let’s say I do this every year for the next 20 years. I now have 20 properties all structured the same way. My annual loss is now $98,400 and my annual tax bill is $378,817, a saving of $44,280. But I’m living on $53,720pa less than I otherwise would have.
In short, I’m a hell of a long way short of ‘avoiding all tax’. Cultivating losses to avoid paying tax as an end in itself does not strike me as a good way to accumulate wealth. Ultimately, short of breaking the law, tax must ultimately be paid. The best you can do is delay paying it.
Does this seem to you a very unlikely scenario? This is a very simplistic example. I have deliberately and artificially structured it as a worst case scenario – one that produces the best outcome from a tax avoidance perspective. Any tweaks to the scenario I have outlined above, to make it more realistic, eg incorporating regular rent rises for the older properties, regular increases in income, paying down principal etc etc, would all have the effect of reducing the tax avoidance potential.
A throwaway opinion in an op-ed in The Australian is not, of course, a world shattering matter and I would normally not have bothered to respond but Mitchell’s comments play into the Labor myth that property investment is just a tax dodge for the wealthy. In fact, this is of a theme with the general subversion of the English language that passes for political debate. The corruption of words such as ‘racist’, ‘sexist’ and ‘homophobic’ are the obvious and worst examples but there are many others.
For example we hear a lot now from Shorten and co, and echoed by many journalists such as Peter Van Onselen, about ‘closing tax loopholes’, by which they mean the discount on CGT, negative gearing, tax deductions for accountancy fees etc. A ‘loophole’ is a device unintentionally created by a deficient drafting of legislation that allows someone to legally circumvent the intention of that legislation. All the tax provisions, relating to discount of capital gains tax, negative gearing etc that Labor do not like, are not loopholes – they have been specifically legislated to achieve a particular outcome. If Labor wants to change that outcome as part of their tax grab that’s their business but they should refrain from smearing those who legitimately use these tax provisions as shysters taking advantage of a ‘loophole’.
As long as we have journalists parroting the Shorten li(n)es, what chance has the normal voter got of getting close to the truth, especially in this social media dominated world?