Greens to curb negative gearing

I have been retired for nearly 7 years and, last year, we bought our latest IP.

It is the most expensive property we have ever bought, it is negatively geared and it does consume around $20,000 of our self-funded pension.

The opportunity was there, we did the analysis, we took the risk, we bought it and, hopefully, we will achieve our outcome in time of increasing our Net Worth (things are looking good at the moment).

If there wasn't NG, we may not have bought it. If we didn't buy it, the risk for Australia is that we might need to rely on the Aged Pension later in life. If this IP does what we believe it will, we should be self-funded for the rest of our lives.

We could have taken the $20,000 from our self-funded pension and invested it on Lotto, on the horses, on the dogs, on the pokies, on red at the casino, ...

I would rather we gamble it on this property and it is good that the Government encourages and rewards us for doing so.

Small pain today for a big gain tomorrow, for both us and the Government.

 

Supposedly the Labor negative gearing policy (positive plan to help housing affordability) will stop speculation, reduce negative gearing, lower the cost of housing and make the tax system fairer. Will it? Take a look at the wording of the policy. Read each part carefully and think about the outcomes.

Labor will limit negative gearing to new housing from 1 July 2017. All investments made before this date will not be affected by this change and will be fully grandfathered.

This will mean that taxpayers will continue to be able to deduct net rental losses against their wage income, providing the losses come from newly constructed housing.

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

Investors will still be able to negatively gear new housing. This means that speculation in new housing will continue. Is this a good outcome?

Investors who are currently negatively geared will not be affected by the policy as the changes will be fully grandfathered. We now have 2 classes of investors: those who can continue to negatively gear and those who are locked out of the opportunity (unless they buy a new property). The policy created inequality. Is this a good outcome?

Losses from new investments in shares and existing properties can still be used to offset investment income tax liabilities. This means that people with other investment income that is more than a loss from a rental property or shares will continue to be able to effectively negatively gear. Again this creates inequality because it means that not every person will have access to negative gearing. Only people with positive investment income (higher income earners) will have access to negative gearing. This policy created inequality and allows higher income earners to continue to effectively negatively gear and speculate on property. In fact, I would argue that the policy encourages anyone with a positive investment income to speculate on a loss making property and negatively gear the loss. It's basically telling lower income earners they can't negatively gear but higher income earners will be financially rewarded if they do. This is a policy that financially rewards high income earners with a positive investment income to speculate on a loss making rental property. Is this a good outcome?

Finally, losses can also continue to be carried forward to offset the final capital gain on the investment. This means that people who can afford to carry a loss making property will be able to do so and deduct the losses from the profit when they sell. This change will only benefit investors with a high enough income that they can carry forward a loss year after year. Who do you think will benefit from this policy, higher income earners or lower income earners? Lower income earners won't be able to carry a loss making policy but higher income earners can. Is this a fair outcome?

The other side is Capital gains tax

Labor will halve the capital gains discount for all assets purchased after 1 July 2017. This will reduce the capital gains tax discount for assets that are held longer than 12 months from the current 50 per cent to 25 per cent.
​

What happens to the first home buyers who are using shares to invest while they are saving for a deposit? With deposit requirements becoming much higher, this is becoming more common. Currently when those first home buyers sell, they get a 50% discount on any capital gain, which means they pay less tax, which means they can afford to buy a house sooner. Under Labor's plan to help housing affordability, they will only get a 25% discount on any capital gain, which means they pay more tax, which means they have to save longer to get that deposit. How is this fair?

Will all of this help with housing affordability? According to the Grattan Institute Report into Negative gearing and capital gains tax reform,

If higher taxes are fully passed through into house prices, they are unlikely to fall by more than about 2 per cent.
​

Is a 2% drop going to make housing more affordable? It seems not. And don't forget anyone who is investing to help save a deposit to but a house is going to pay more tax on any capital gains.

Who will the policy harm? According to the Grattan Institute Report into Negative gearing and capital gains tax reform,

One concern with quarantining is that it will favour investors with more diversified portfolios. This is because investors with other positive investment income can make use of the loss write offs immediately, whereas those with only one loss making investment will have to wait until the income from that investment is positive. There may arguably be an equity concern if wealthier investors tend to be the ones with more diversified portfolios.

But this will do little to offset the improvement in equality from our proposed change. The impact will be small because most negatively geared investments start to generate positive income – and therefore losses can start to be written off – within five years.129 And those receiving sizeable tax benefits from immediate loss write offs against wage and salary are
disproportionately those on high incomes (Section 3.4). And in any case, even if those on somewhat lower incomes are disadvantaged slightly more, policy change should still be pursued. Not every principled policy change will be progressive in every respect.​

(emphasis mine)

https://grattan.edu.au/wp-content/uploads/2016/04/872-Hot-Property.pdf

TL;DR Winners from Labor's policy: higher income earners, investors with diversified portfolios, current negative gearers. Losers from Labor's policy: anyone investing to save for a deposit, lower income earners, investors with limited investments.

 

That is BS's definition of equality .

 

Some people are more equal than others, right?

 

Oh gawd, the old NG thorn.....it just won't go away will it, amazing as it would fix everything if they just got rid of this one problem

 

Apart from the fact negative gearing is a tax result at a point in time and not a hand out as you claim, as investors portfolios mature over time properties will become tax flow positive and tax paying as rents rise. On sale of these assets CGT will also be paid.

So if you run your numbers 13 Biln or so in tax breaks @ an average marginal rate of say 40% means that there is actually 13 / 40% = 32.5 Biln in investor subsidised housing before tax. So after tax investors are contributing 19.5 Biln in subsidised housing saving us all more taxes!

Housing investors provide housing (given yes most are as a form of investment strategy & not for ideological reasons) to renters who either choose to or can not afford to own their own property.
If individuals are compared to the government trying to provide direct housing for those renting, I know who are much more efficient and cost us all overall less in taxes.
The last time negative gearing was scrapped (late 80s) this lasted 2 years as rents rose & we then had a rental affordability crisis.

Those investing for their future are also aiming to get ahead & avoid having to rely on government pensions & handouts. Which is then saving others more tax in having to provide for them.

Maybe you need to look at the bigger picture of why the government is only chipping in approx 40% to subsidise housing instead of just complaining?

 

Bring it on bay-be, I could do with some increase in yields

 

This is an incorrect assertion. Analysis of the rents during the time shows:

Three myths on negative gearing the housing industry wants you to believe | Grattan Institute

 

Jokes aside, I have no idea what will happen to rents if NG is axed and tbh I rarely give a second thought to all this NG fanaticism that some ppl seem to think will fix all their problems and make Australia a happy place once it gets axed.

 

Who is the typical investor in the Australian property market?

The typical real estate investor in Australia is........... A very high-income earner ripping off the tax system, or your typical middle-income bloke next door. Written by Maria Yanotti and this article published in Property Observer:

MARIA YANOTTI | 1 AUGUST 2017

"According to the same data, residential investors have an average net monthly income of A$8,600, or A$103,200 a year. But if we exclude the 100 investors with a net monthly income over A$100,000, the average net monthly income becomes A$6,617, or A$79,404 a year.

Residential investors, financing the property with a mortgage, have on average A$934,091 in net wealth (50% of investors have A$581,541 in net wealth). Some of them have diverse portfolios; 6% of investors also own shares with an average value of A$4,884."

 

I don't think NG is the issue. Interest and dep are legit expenses and should be deductible. I'd prefer the CGT discount be dropped/grandfathered.

 

Wow kierank you are truly humble and good on you for reading, I believe that's the first stepping stone to improve oneself. And....thank you for understanding me!
Thank you kierank, as if you read my mind! I actually thought of stopping for a while with the posts thinking I may come across sometimes too emotional. When I mentioned Russia it was an example only, I do not blame the people, people suffer everywhere wouldn't you agree?
I also believe there are good and bad people from any background.
But I grew up elsewhere hence I thought I can express what it was like, but have kept lots out too!
And I think with age I slowly am growing up, as that's exactly what I decided to do, what's the point, as my mentor Jim Rohn said, "you find good people you cannot make good people".
This applies to all of us.
My dad is actually seriously ill in Poland currently in coma on machines, may or may not survive, so I may be silent for a while as I may need to leave the country, and perhaps that's why my emotions are so sensitive?
You are right, we all responsible for our lives to make it better, no matter what, I have always believed that, so remember you are a great example of that!

 

Sorry to hear that, hopefully he'll have a speedy recovery.

 

Thank you, we are positive people, but he is old and now all we can do is wait everyday see if he recovers?

 

Sounds like its in someone else's hands now.

 

Interesting infographic which perhaps would illustrate, not all would be able to buy or afford house, with no matter what rules are changed by government or others (NG, CGT, etc...).
Whatever rules are changed some will do better some will not, since we are all different and react differently...
It's like if we have a pressure cooker (assume a project, a challenge to complete), and we have person A - who is an achiever, person B - who is mediocre, person C - who couldn't care.
So we apply the same pressure, the same problem, the same challenge, yet we have all different results, where person A will do really well, person B may do so-so, and person C may not even complete the challenge. So why is this, same problem yet different outcomes? Because we are all different, hence some housing affordability measures may work for some but not the others hence that's how the world works!...
Let the free markets do its thing, sometimes too much interference can be dangerous for all...

 

If we had a "free" market, then the global economy would be a smoking ruin. The free market gave us the GFC, but it it was governments that stepped in to save the day. These are documented facts.

People love free markets, until things go wrong, then they turn to government and say gimme gimme gimme. How can people be for a free market but not be willing to accept the consequences of a free market? Our free markets are not what Adam Smith imagined.

 

I don’t know whether I am truly humble but I do try to be truly decent .

Sometimes, people get ‘under my skin’ and I say things I later regret. I suppose that is one of the failings of being human.

I have been in your situation and have been hounded by fellow PC members. Initially, I felt like quitting PC. But then I realised that these ‘bad’ people would win. So, I absorbed their negative posts and it made me stronger. So much so, that I will now post what I did with you to encourage people to ignore ‘bad’ people.

I (like you) tend to give personal examples as I feel that it adds creditability to what I am posting. Sometimes, I forget this is a public forum and ‘bad’ people could potentially use this personal information and do ‘bad’ things with it. Something we all need to remember.

BTW, that is a great quote from JR and it is so true. I will file that one away in my memory banks. Thanks for sharing it.

You should post it on the Inspirational Quotes thread.

My mother was diagnosed with a terminal disease in August last year and she passed away a month ago (at 88). So, I have some idea what you may be going through.

Over the last 10 months or so, the time I spent on PC did decrease as I had a lot to consider and process. I found that whenever I was in the ‘valley of despair’, I would log onto PC and just read what people were posting. I use PC as a distraction. I focussed only on the inspirational threads, the positive threads, the educational threads, … I kept away from the negative threads and skipped any negative posts.

What I found incredible was that some PC members picked up on my situation and they PM’d me to check if I was OK, to tell me that they had experienced a similar situation, to advise what really helped them, to support and encourage me, … That was something I never expected from this Forum.

This was from people I do not know and, to this day, I have never met. Yes, there are some ‘bad’ people on PC but I have found that there is also some incredibly great people as well.

 

My opinion differs.
I blame the government for changing/relaxing the laws, banks for inventing these products/derivatives, and the wall street for greed. All 3 are to blame IMO.

 

But do you agree that the government shouldn't have intervened? Live by the sword, die by the sword?