Jamie Alcock on Negative Gearing

That's not true. Since it is open to all taxpayers to make use of NG, it is by definition equitable. No one has to pay for negative gearing through higher taxes. Capital Gains Tax paid for it.

None of this is true. Negative Gearing continues to exist because of Capital Gain Tax. Remove Capital Gains Tax and the need for Negative Gearing falls away. I would support abolishing Capital Gains Tax.

 

I think I have made an error referring to the current NG policy as regressive. NG and the 50% CGT concession work necessarily in concert.

Starting with NG, take a property that loses $10k per annum. This would reduce the taxable income of a person on $50k by a larger percentage compared to someone on $150k. Say they both sell and make a Capital Gain of $100k. The lower income earner pays proportionately less tax than the higher income earner, who will pay proportionately more tax. This is, by definition then, a progressive taxation policy?

However, the Labor proposal to remove Negative Gearing will still allow investors to offset an investment loss against other investment income. Low and middle income investors are not likely to have significant other investment income to offset a loss against. Only higher income investors are likely to have significant other investment income to offset an investment loss against. Lower and middle income earners will pay proportionately more tax and higher income earners will pay proportionately less tax. This is, by definition, a regressive taxation policy.

Effectively then, the Labor proposal is replacing a progressive taxation policy with a regressive taxation policy. Are you cool with that @wategos?

 

I know it seems like there are about 50 million threads on negative gearing but I have found them very useful and educational. At the start I didn't really understand them. To me, negative gearing was something that happened because I told the truth on my tax return. It was not something I set out to do. I didn't know that negative gearing (investment losses against personal income) only exists because of Capital Gains Tax. Now that I understand that, it makes more sense.

Really if we are talking about reform of negative gearing we must talk about a reform of capital gains tax. Since they are intrinsically linked, both must be reformed at the same time. Capital Gains Tax and Negative Gearing both distort the market. Any changes to these policies will distort the market. The reason they need to be reformed at the same time is to make sure the market distortion arising from the reforms isn't worse than the market distortion prior to the reforms. If you change one without changing the other, the market distortions could go in the wrong direction.

I have not run an in depth analysis, but the Labor policy removes Negative Gearing from new acquisitions of existing residential property and reduces the Capital Gains Tax concession from 50% to 25%. However, investment losses can still be used to offset other investment income. Taken in concert, what will be the proportionate impact on a low income investor, middle income investor and high income investor? Without running any analysis, my gut feel is that the low income investor will be worst off, the middle income earner worse off and the high income earner least effected. I find it rather curious that a supposedly progressive party is proposing to introduce regressive taxation of investments.

 

No.. The income tax system is already progressive, Negative Gearing just makes it less progressive since higher income earners get the biggest tax breaks. The system is still progressive, but less. Removing Negative Gearing restores the original progressiveness (progressively is good to a degree.. but not too much, I dont believe in top rates over 50% like some countries have).

You´re distorting the argument with Capital Gains.. whats that got to do with it ? I don´t understand you´re linking of the two. The only thing in that respect I would support is being able to carry forward investment losses to future years and use them against future investment income, or against the Capital Gain if it is made.

Anyway this issue has changed my vote, I´ll be voting Labor for the first time in my life (in a marginal seat).

 

I am not distorting the argument with Capital Gains Tax. Negative Gearing only exists because of Capital Gains Tax. Negative Gearing (against personal income) was only introduced when Capital Gains was introduced. Both Capital Gains Tax and Negative Gearing were introduced at the same time because the two polices are intrinsically linked.

Did you notice that the Labor proposal to reform Negative Gearing also makes changes to Capital Gains Tax? It wasn't me that linked Capital Gains Tax and Negative Gearing. If you think that then it sounds like you have not read the policy that you are voting for

Here is a quote from the Labor web site:

Labor will reform negative gearing and the capital gains tax discount to ensure that our tax system is fair, sustainable and targets jobs and growth.
​

Positive plan to help housing affordability

Negative Gearing does not work in isolation. It works because of the 50% Capital Gains Tax concession and it is the 50% Capital Gains Tax concession that makes Negative Gearing attractive. There is an acoss paper that explains how this works.

Negative gearing and the Capital Gains Tax discount are not the only drivers of inflation in house prices and rents, but they have become a much more important factor as investors have purchased a growing share of dwellings.
...
In its analysis of the causes of the last housing boom in the early 2000s, the Reserve Bank concluded that it was the combination of these long standing tax arrangements and easier access to credit that drove higher demand for properties among investors
...
Negative gearing arrangements, together with the Capital Gains Tax concession, skew investment towards properties most likely to yield higher capital gains, which are located in more expensive areas.​

http://www.acoss.org.au/images/uploads/Fuel_on_the_fire.pdf

You probably won't be interested to know that prior to 1999, capital gains were taxed at a real rate – the nominal return less the inflation rate over the period an investment was owned. Negative Gearing existed in its current form prior to 1999, but because of the way Capital Gains were taxed, it wasn't very attractive. It was the introduction of the 50% CGT discount that turned NG from a niche activity to a popular strategy.

The reason is the combination of the CGT discount and negative gearing made for a very attractive tax minimisation scheme.
​

How negative gearing replaced the great Australian dream and distorted the economy | Greg Jericho

And there you go, that is where my "linking of the two" has come from.

If you are serious about understanding this and voting for it, I suggest you do some reading and don't just assume these reforms are progressive. I really think that low and middle income earners are going to be strongly disadvantaged by Labor's policy but it won't affect high income earners much at all. On that basis, I certainly won't be voting for it.

 

@wategos I didn't understand the link between CGT and NG either until I read the Greg Jerico article "How negative gearing replaced the great Australian dream and distorted the economy".

How negative gearing replaced the great Australian dream and distorted the economy | Greg Jericho

In retrospect, that change to the way CGT is calculated and introducing the 50% concession was a huge mistake. It works (for the Government) when inflation is high, but when inflation is low (like now), it's not good for the Government. Besides that, it is the interaction between the 50% CGT discount and NG that is the problem. As a standalone policy, NG isn't actually that bad.

Think about it. If we changed Capital Gains Tax back to taxing gains at at a real rate, would Negative Gearing be so attractive?

 

There was a time when there was no CGT, this has been grandfathered but imaging buying something 3 properties in Sydney for $20,000 each and today it is worth 1M each... The best part would be this 3M would be TAX FREE!!!

I wish I was born earlier in those days to take advantage of that but then I wouldn't be on a internet forum getting all this information for free or being able to view (some buy) properties from the comfort of my own lounge room.

 

Negative gearing has been legislated since the 1936 tax act @Perthguy and I dare say around in common law principles before that and capital gains only started in 1985, there is no link between their existence other than that they're both very favourable taxpayer funded "subsidies" that are most readily exploited by property investors.

The reason negative gearing is "inequitable" is because whilst it is technically available to all citizens it is realistically only available to higher wealth individuals. It's not something like the tax free threshold that every citizen automatically gets, it requires access to substantial capital resources to be able to access and it provides disproportionate benefits the wealthier that you are and the more wealth that you have access to.

The problem with that inequity is that not only do the wealthier (anyone above 60k as a household is already in the wealthier 50%) get much more access to the subsidy but it it is the poorer folks that are struggling to get into the property market who end up paying the cost of having house prices be inflated by government policy because they're the ones being priced out of the growth in house prices as they grow exponentially in relation to wages.

There isn't any good reason to have government policies that meddle with the housing market, it's one of the better functioning markets without heavy handed government influence but it's also far too important that it is accessible to the majority to have so many government policies that are designed primarily to ensure that housing prices continue to grow.

Realistically you could argue that if the government were to be interfering with housing prices their goal should be to make housing more accessible and not less accessible as they currently are through their policy. Ultimately it should just be left to its own devices and let the demand and supply (another heavily government influenced aspect) set the price. If that still results in people making money out of the market, then so be it, but we shouldn't have government policies designed to push the prices as high as possible. CGT concessions, NG, main residence exemptions, land tax exemptions, means testing exemptions and the like should all be canned. We will get none of this because there are too many vested interests in politics to enact real change these days.

 

They really are two different things... for most people in most years capital gains tax is not paid so it makes little difference to the attractiveness. When a CG is made a person is likely kicked into a higher bracket so NG saves them a bit more tax that year, but other than that there is not much linking the two. Personally I think a flat rate of CG would be better, since a large CG is badly affected by being pushed into higher rates that a person usually doesn't suffer. yes I had an IP pre-1999 but I was never affected by CG tax since I didn't sell it.

 

Negative Gearing in its current form was introduced in 1985. Prior to that, you could not claim an investment loss against personal income (wages). The difference between allowing investment losses to be claimed against personal income vs only against other investment income is really quite significant. This is why I specifically stated that Negative Gearing (against personal income) was only introduced when Capital Gains Tax was introduced. This links the two. Negative Gearing in its current form did not exist prior to 1985. Have a read of the Greg Jerico article and then explain to me how both policies - in their current form - are not intrinsically linked. Why was Negative Gearing before 1999 a niche activity and after 1999 a mainstream activity?

It seems like you are missing a huge chunk of the full picture. What most people do is buy a rent a property, negative gear for some time, then sell the property. In isolation, NG might at first appear inequitable but what if you consider it for the full ownership lifecycle? An investor might be able to claim a loss against their income for the years they own the property, but what happens at sale? Capital Gains Tax. So someone in the highest tax bracket is going to pay a lot more tax on the capital gain that someone in a lower tax bracket. When you consider the whole life cycle, including the tax paid at sale, then the policies in concert are not as inequitable as NG in isolation first appears.

Try telling that to my low income earner investment partner. He is currently negatively gearing a property and gets a tax benefit from doing so. He isn't complaining about negative gearing at all.

The issue with considering NG in isolation and abolishing NG in its current form is that wealthier individuals will still be able to claim residential investment losses against other investment income. My investment partner does not have any other investment income to offset a rental loss against.

Abolishing Negative Gearing against personal income creates greater inequity. It does not reduce inequity as claimed.

What is needed is reforms to Negative Gearing and Capital Gains Tax together that make the system more equitable, not less equitable as planned.

 

I am happy to remove all taxes if you are happy with that?

I would agree to remove NG if you remove land tax and CGT as these are additional costs an investor needs to have.

Also remember an investor (if they are a true investor) are not the ones paying above FMV, if anything they want below. However a PPOR buyer is buying on emotions which means they will say they want it below MV but it is more likely they will pay more for it with the emotional factor.

For example an investor would rather pay 450k rather than 500k for a house but they will not pay more than 500k for the house as there is another property coming up that will make more sense dollar wise.

However if this house was also being looked at by a PPOR and ticked all their boxes they may offer 450k at the start and also go to 500k however I know for a fact (used to be a REA) that they home owner will pay more than the 500k because they don't want to miss out. Even if they got it for $510k, they are still happy and if they were not going to move for 10 years people justify paying 10% more (550k) as in 10 years it could be worth 1M. I picked double as typically the NG properties we are refereeing to will be in Syd, Melb, Bris which are most likely going to do something close to double in 10 years (not guaranteed!).

Back the investor, that extra $50,000 first the investor needs to put upfront $10,000 (to exclude LMI from calc so 80LVR) plus another $46.15 per week they have to find at 6% IO (even at 4.5% it is $34.62). Can they get another $46 a week (or $35) to cover their additional $40,000... Hell no. However if he can get it $50,000 less than FMV that is another $46.15 per week in his pocket which would and he would have $10,000 sitting in an account somewhere so it is a less risky investment. This would allow them to buy more properties as one they can have more security to use AND better servicing as they are not paying an additional $1,800 a year (which btw NG assists with so lets just say he is still worse by $1,000.

Again the investor isn't causing the prices to go up yes they are reducing the supply but it is for supply no one wants.

 

I agree that NG and CGT are really two different things. Of course they are. One applies during asset ownership and one applies at asset sale. This does not mean that they are unrelated and does not mean they don't interact. The way CGT is calculated makes a huge difference to the attractiveness or otherwise of NG. Claiming otherwise is demonstrably wrong. They way CGT is calculated (50% discount) was introduced in 1999. The claim is that this made Negative Gearing much more attractive. Let's test the claim. Here are the stats:-
- in 1999, rental properties in Australia made a $1.076 bn profit.
- in 2001, rental properties in Australia made a $1.151 bn loss.
How negative gearing replaced the great Australian dream and distorted the economy | Greg Jericho

Looks like it really did become more attractive to Negatively Gear property after 1999.

The reason is the combination of the CGT discount and negative gearing made for a very attractive tax minimisation scheme.

The tax system thus in effect encourages you to engage in “debt-financed and speculative investments” because negative gearing enables you to minimize your current income and the CGT discount enables you to minimize the tax on your profit – because you get to choose when you sell your property.

It’s a combination that has produced an odd state of affairs where the Reserve Bank notes that “in most countries the earning of rental income is seen as the most important reason for investing in rental properties ... This seems to stand in contrast to the situation in Australia.”

Ain’t that the truth – and it is one that really can’t be denied.

There was no reason in the early 2000s for why suddenly landlords would start losing money on their rents – it was a purely driven by the changes to the capital gains tax – and the level of impact clearly demonstrates that the discount is too great.​

How negative gearing replaced the great Australian dream and distorted the economy | Greg Jericho

Given that, its really hard to argue that these issues are not linked.

 

Further the rich will likely own or run a business as a major part of their cashflow. What the owner... sorry the company will review pays and decide that the owner isn't worth much anymore and reduce his pay form 200k (picking a figure) to 50k but instead pay them $150k in dividends... No longer a PAYG... Smart play labour!

 

I'm happy with that

And since housing was cheaper before Capital Gains Tax it seems obvious that abolishing Capital Gains Tax will make houses cheaper. We should definitely do it!

 

Then pick up some Negatively Geared investment properties and claim the loss against the "dividend" income. If Labor got voted in and implemented this poorly thought through policy, there are some who would really benefit. Pity none of those would be low or middle income earners.

I wonder how regressive the Labor policy is? I would love the run the numbers but I really can't be bothered. We would compare 3 individuals.

First person earns $50k pa
Second person earns $150k pa
Third person earns $150k pa + 30k in other investment income

Each buys a house for $500k and makes a loss of $10k pa.
At the end of 5 years they sell and make a $150k capital gain.

Under the current tax regime, what tax is paid each year (including the final year when the capital gain is made)? Under the Labor policy, who paid proportionately more tax? I am guessing the First person will pay proportionately more tax over the lifetime of the investment. The Third person will definitely be better off than the First person as the result of the Labor policy. It is flat out an inequitable policy and I am very surprised that anyone is supporting it.

 

@wategos @wogitalia @Big Will. I have to admit I can't quite get my head around this claim by Greg Jerico:-

"The reason is the combination of the CGT discount and negative gearing made for a very attractive tax minimisation scheme."​

My question is this, does it really make that much difference if (at sale) the seller has to pay tax on the real capital gain (minus inflation) or pay tax on 50% of the capital gain?

The theory is that it is not acceptable to lose money on an investment year after year (negative gear) if at sale, the investor has to pay tax on the real capital gain (minus inflation, the pre 1999 method). However, it is fine to lose money year on year if an investor only has to pay tax on 50% of the capital gain (post 1999 method). Does it really make that much difference?

If only we had an accountant to explain it to us!

 

Very attractive tax minimisation scheme is another way of saying a favorable tax regime for investment. This plus favorable demand and supply economics for properties in Australia and paucity of viable options make for a doable path towards financial independence!

 

It's a huge difference. I'll use an example of a property that one of my friends parents bought in South Perth for ~110k in ~1990 and sold it in 2010 for ~2.4m.

Under the old indexation method they'd have a cost base of ~185k for a capital gain of $2,215,000 and assuming no other income a tax bill of $971,600.

Under the discount method they'd have a net capital gain of $1,145,000 for a total tax bill of 490,100.

A saving of $481,500 in tax due to the regime change.

The negative gearing aspect is just a very minor aspect of it all. They work together in that the negative gearing offset is essentially a tax subsidy to encourage the speculation on investments that are highly tax preferred because of the discount on the actual gain. Essentially you have tax payers paying a sometimes very significant chunk (~50% at the highest rate) of the costs to hold a property and then we give a 50% discount when it comes time to actually realise the profits.

My issue remains there is no good reason that property (or shares though we've covered that negative gearing them is far more difficult) should be subsidised by taxpayer money. There is also no good reason why you should only pay tax on 50% of your gains on them, it's pure government market manipulation that's completely unnecessary and has genuine social costs on top of the financial losses.

You can be damn sure that I'll be exploiting both as long as they exist because you'd be stupid not to but they're awful policy, imo. They're worse because the benefits are greatest to those who are most well off as well. One alternative is maybe only make negative gearing available to those on below the median household income in Australia, would shut down the taxpayer funded benefit to the vast majority of those using it while still letting our "Aussie Battlers" get ahead with an investment property!

 

This could be the ALP's modus operandi:

A government which robs Peter to pay Paul can always depend on the support of Paul.
George Bernard Shaw


They need to remember this:

A nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.
Winston Churchill

 

And the LNP's.