Data Breakdown of Who Uses Negative Gearing

Discussion in 'Investment Strategy' started by House, 12th May, 2016.

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  1. Perthguy

    Perthguy Well-Known Member

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    No. They are only stopping people from offsetting a loss from an investment agaist personal income (like employment) not against other investment income (like from dividends).

    It depends on where the income comes from, a wage or from other investments. High income investors won't be able to offset a residential investment property loss against their personal income (wages) but they will be able to offset it against income from shares (dividends) or income from other listed securities (investment income). Essentially, it will reduce their taxable income, so it has the same effect as negative gearing but it is not negative gearing.
     
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  2. Guest

    Guest Guest

    The same goes for the ability to offset losses from holding property against unrelated income ;)
     
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  3. Skilled_Migrant

    Skilled_Migrant Well-Known Member

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    Some evidence of relation between the NG and CGT exemption and property prices
    • Historical evidence 1: TRA 1986. The post Bill shorten poised to take negative gearing. and the historic record in papers referenced should provide historical relevance. Unless....Australia is different.
    • Historical evidence 2: Look up your favourite boom-bust cycle and the implication on the asset price. Gear it with the knowledge that the asset is the prime driver of the national economy. Not a boom ? Look at the historical correlations between earnings and asset prices, yields, GDP to debt ratios.
    • Cause and Effect: Take away the cause and the effect will diminish. Investor behavior's correlation with the tax lurks ( http://grattan.edu.au/wp-content/uploads/2016/04/872-Hot-Property.pdf section 3.2.3):
      • Since the introduction of CGT exemption (15 years), the no of investors claiming NG loss has doubled as has size of loss in real terms.
      • Half of investors would not have invested in property if NG was not available.
      • All additional investors over last 15 years were NG and number of positively geared investors has almost been stagnant.
      • Net rents have consistently been negative since introduction of NG.
    • Psychological reason: Herd behavior in a bear market. Bulls climb up the stairs, bears jump out the windows. It is hard to believe that only a few investors will exit the property, when tax avoidance on both the sustenance and the disposal of the asset are taken away. Fear is a stronger negative emotion than greed.
    • Political reason: Greens and labor are willing to stake their future in an election and its highly unlikely that they doing it based purely on ideological standpoint. Why this sudden departure from a bi-partisan position, when the policy departure will not justify the reason (housing affordability).
    • Misery loves company: The NG and CGT changes are not occurring in isolation. FIRB, ATO, APRA, Basel, apartment glut, risk rating agencies, deflationary economy, foreign investments, banking inquiries will play their part as well.
    • The above reasons are easy to disregard when only reason that most are willing to consider is the impact on their negatively geared portfolio. BTW congratulations are in order on the latest IP.
    The factors which will mitigate the reduction in property prices:
    • Liberals being voted back in.
    • Historically low interest rates.
    • Grandfathering.
    • Continuation of NG in new properties, (but that is productive for the economy, although personally I would prefer intervention in depreciation as well).
     
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  4. emza

    emza Well-Known Member

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    Do you have a source for this?

    Google literally brings up just your post here and not much else.

    I haven't read that residential losses will be able to be deducted from shares or investment income.
     
  5. Perthguy

    Perthguy Well-Known Member

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    True, but that only applies to lower income investors, not high income investors with diversified portfolios. In some ways, the Labor changes makes it more attractive for high income investors to pick up a negative cashflow residential investment property or two. Particularly since it seems that these individuals will be limited on how much they can invest in super. They will find a new tax haven for their money, which could very well be negative cashflow residential investment properties.

    Cheers. I am happy that my latest IP will be cashflow positive as soon as I find a tenant. I don't want a negative cashflow portfolio. My plan is for all properties to be CF+ within 12 months. I don't actually enjoy losing money every year ;)

    With regards to NG and property prices, I understand what you are saying but I don't buy it. Besides the recent Sydney and Melbourne booms, where for a brief time investor loans eclipsed OO loans, the rough breakdown of residential property ownership is 70% OO vs 30% investor. We know that only a % of investors negatively gear, so in the scheme of things, NG property investors are a minority in the marketplace. I do not believe that combined, they have enough market power to influence property prices to the extent that has been claimed. Owner occupiers have the greatest market power and accordingly, the greatest impact on housing prices. To make housing more affordable for all, we would abolish the 100% CGT exemption for owner occupiers and the 50% CGT exemption for investors and level the playing field ;)

    Almost all the of changes to prices, rents and negative cashflow can be correlated with the 100% CGT exemption for owner occupiers. It is just as easy for me to claim that housing prices are so high because low interest rates are low, allowing owner occupiers to borrow more money and pay higher prices for houses, pushing up the price of housing. And that OOs bought because of the 100% CGT exemption for owner occupiers.

    The truth is probably inbetween.
     
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  6. Joynz

    Joynz Well-Known Member

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    Perhaps as a casual?
     
  7. Perthguy

    Perthguy Well-Known Member

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    Yep. Check the Labor website:

    From 1 July 2017 losses from new investments in shares and existing properties can still be used to offset investment income tax liabilities. These losses can also continue to be carried forward to offset the final capital gain on the investment.

    Positive plan to help housing affordability

    You can see how someone with a postive cashflow listed securities portfolio and a negative cashflow residential property portfolio would benefit from this (i.e. high income investor). However, someone with only a negative cashflow residential property portfolio (i.e. lower income investor) will be disadvantaged.

    Think about this: Billy Bob and his cronies have significant diversified investments. Would they really implement a policy where they would be worse off? ;)
     
  8. Angel

    Angel Well-Known Member

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    If this statement is indeed true, then would it be the case that removing NG will make rents positive?

    Bring it on then. Of course in order for rents to become positive, I would think they would have to increase. Good one for me. Too bad for all the truly poor in the country whose rents are already unaffordable. Their situation will only get worse.

    Now will you folks please stop writing so many interesting posts. I really should be doing my PAYE Tax Variation forms this weekend ;)
     
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  9. Pernoi

    Pernoi Active Member

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    I'd assume the flip was created by the increase in the cost of the property relative to the rent, rather than a fall in rents, based on the average changes in rent and housing over the last 16 years or so. In order for 'rents to become positive' it's simply a matter of the cost of housing to reduce while rents are static. (or rents increasing while housing is static, or some variation where Rent up > housing up)
     
  10. Perthguy

    Perthguy Well-Known Member

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    Property prices have skyrocketed since the introduction of capital gains tax. Perhaps capital gains tax is to blame ;)
     
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  11. wylie

    wylie Moderator Staff Member

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    I don't think she was a casual. She told me once she used to work two or three days week and was asked to work full time. I remember thinking I was doing the wrong job (but I don't think I'd clean a toilet in a shopping centre even if I was paid $35 an hour).
     
  12. Joynz

    Joynz Well-Known Member

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    I just looked up the Cleaning Services Award on the Fair Work Ombudsman site.

    For an adult level 1 Cleaner on this award, the rate is $18.46 per hour. It is $36 on Sundays and $46.15 on public holidays.

    It looked like there were other awards and I haven't checked them, but I would say $18 is pretty standard.

    I did a lot of cleaning - both private and public - in the past. Factory work too. Feel very very glad I don't have to now.
     
  13. wylie

    wylie Moderator Staff Member

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    Maybe we discussed this on a Sunday? :D

    She told me her hourly rate... didn't say that was for Sundays, but maybe it was, and if she was casual her rate is higher than PPT. I was employed as a casual for nearly four years before being pushed to PPT and taking lower pay. I gained sick leave, but never had one day sick.

    I've no reason to think she was making this up. But I recall being impressed with her hourly rate.
     
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  14. Skilled_Migrant

    Skilled_Migrant Well-Known Member

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    To put NG from property in perspective vs other assets (non-incorporated) consider extract from Grattan report pp 22 http://grattan.edu.au/wp-content/uploads/2016/04/872-Hot-Property.pdf, :
    • Total lending for shares 2013-14 was 19 billion against the share holdings of 550 billion. This means that the shares have an average LVR of (19/550) 3.5%
    • Average LVRs for those who borrowed for shares was 27%
    • Borrowings in property were 548 billion by the property investors i.e. a multiple of approx 29 (548/19) when compared to share investors.
    • Total interest costs for unincorporated businesses were $1.5 billion in 2013 - 14. Hence unincorporated businesses can be dropped from the discussion.
    For the losses in property to be offset against the share income (as stipulated in the labor policy) the following conditions/situations should exist simultaneously:
    • Both the property and other income generating portfolio should be unincorporated.
    • Income from shares should be greater than the loss in property.
    For the NG losses claimed by High income investors to be comparable to current NG losses, income from the portfolio should be roughly the same as earned in PAYG. This is the very definition of financial freedom as advanced in the reasons for investments. Will someone who has a passive income equal to active income, still be interested in NG ?

    Even ignoring the (quantum of) parity of purported NG losses for High Income Investors (HII ) following contradictions need to be reconciled:
    • HII is dabbling in capital income (against labor income) which is well above the average income, but still willing to forego the tax, depreciation and deduction advantages offered by a corporate structure. If this is indeed the case, the ATO should be sending thank you cards to the HII for foregoing a tax rate of 30% and pushing him/her (self) to higher marginal tax rates (of labour income) to claim the NG.
    • HII is adequately skilled / capitalized to generate a sustained income in a (relatively) volatile asset class, but still willingly chooses to undergo a regular loss on this income in another asset class. There better be a pot of gold (CGT exemption) in property at the time of sale...just that this pot of gold has been halved as well.
    • HII is willing to forego a conservative borrowing profile (shares) in favor of higher LVR (properties) which generate a loss to claim NG.
    While a theoretical possibility, there are many impractical hurdles for HIIs to offset NG losses. If they still do, the overall amount will be very less due to significantly reduced participation and the losses will be compensated by the change in tax profile (corporate to uncorporated).

    Or maybe the unthinkable ;).....just pay their fair share of tax. Not everyone spends hours plotting tax avoidance. Some do it just on the advice of accountants

    So...currently negative geared.

    • 30% investor usually also OO, hence the unbiased ratio to analyze the market distortion between participants is closer to 40:30=OO:Investor.
    • Housing prices (or for that matter any traded asset) is an agreement between the highest bid and the lowest offer. In case of leveraged asset, highest bid is essentially the borrowing capacity and the ability to capitalize adequate equity. Guess who wins ?
    • Cheap debt will lead to inflation, but does not create the affordability distortion between participants as along as equally accessible. Discussion here is about prioritizing one set of market participants over the other.
    • Look forward to the correlation between 100% CGT exemption with property financials. Do include the churn rates in the study as well:).
     
    Last edited: 13th May, 2016
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  15. Skilled_Migrant

    Skilled_Migrant Well-Known Member

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    Agree...CGT has had a greater impact. A better solution than the labor's proposal would be to keep NG and get rid of CGT exemption altogether. It will be interesting to see how many are brave enough to lose money every year knowing that the profits (if any) will not be tax exempt.
     
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  16. Angel

    Angel Well-Known Member

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    Hang on. If CGT has had a greater impact (on skyrocketing property prices than NG has), then lets just remove CGT. You wont get any opposition to this suggestion on this forum.
     
  17. propernewb

    propernewb Well-Known Member

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    Just remove both and be done with it
     
  18. emza

    emza Well-Known Member

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    Okay, right.

    My understanding is that last year billions in investment loans were issued. A significant percentage are I/O and NG. The Labor change will make it not so profitable to take out a large loan to buy an investment property because it will not be able to be negatively geared and when sold, the CGT discount isn't as large as currently.

    If the very wealthy are still able to deduct, I can see what you mean that they can participate in the market but someone not making $200K a year from share dividends can't utilise NG.

    But there's not going to be a complete substitution is there? When all the lower investors exit the established home market, they're not going to be 100% replaced by wealthy investors. If they could be, why aren't they now?

    The entire point of the policy is to change the tax levers - to take away the ability to deduct losses from wages and stop every accountant in Australia pushing it as a tax minimisation and wealth growth strategy.

    Compared to "do nothing", it's a good plan.
     
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  19. Skilled_Migrant

    Skilled_Migrant Well-Known Member

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    Agree...
    All or nothing is the last fig leaf for the proponents of NG and CGT.
    It is difficult to reconcile the statement coming from the current beneficiaries of NG "I will not support removal of NG and CGT, because the extremely rich will still be able to use it (howsoever improbable) but I will continue to use it."
    It reeks of self interest as it justifies own upward comparison while denouncing others upward comparison on the same subject
     
  20. LibGS

    LibGS Well-Known Member

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    By allowing it on new property, people who still want to NG will now be stimulating the construction sector and provide new housing. Pumping cash the existing housing market, which is fixed, surely must put upward pressure on prices.

    Capital would be then be better directed to alternative investments that make things we can sell to other countries.