Potential AXE to negative gearing?!

Discussion in 'Property Market Economics' started by Property Twins, 2nd Oct, 2015.

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  1. Perthguy

    Perthguy Well-Known Member

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    To be clear, I wasn't saying that claiming negative gearing is illegal, but if a person purchases an investment property for the dominant purpose of avoiding tax through negative gearing, it could be seen to breach the general anti-avoidance provision Part IVA of the Income Tax Assessment Act. I have never bought an investment property "to pay less tax" because I think that is a very poor reason to invest and, in addition, may be illegal. If people invest to make money and there are tax benefits (such as negative gearing) that can be used, I don't see a problem. But if an investor "buys negative geared properties mainly to reduce tax", that might breach the general anti-avoidance provisions.

    https://www.ato.gov.au/General/New-...e-tax-general-anti-avoidance-rule-(Part-IVA)/
     
  2. Aaronjod

    Aaronjod Well-Known Member

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    Haven't you guys read Jan Somers book? She covered what happens when it happened before.
     
  3. Rich2011

    Rich2011 Well-Known Member

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    Haven't got a copy can you give us a summary ... ? ;)
     
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  4. ZachAnsel

    ZachAnsel Well-Known Member

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    If they plan to remove NG from property, what happens with another investment instrument?

    Oh politics..
     
  5. Rugrat

    Rugrat Well-Known Member

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    I'll believe it when / if it happens. Not convinced anymore then all the other times this topic has tried to gain traction in the past 20 years.

    And when / if it does happen, it will impact our choices about whether we invest in property or invest in other avenues. Whilst we don't invest in property for the negative gearing, it is beneficiary enough for us that we do factor it into our calculations.

    I am not convinced abolishing negative gearing will be beneficial for the economy. But then I don't believe that negative gearing is the reason behind everything people claim it to be.
     
  6. Perthguy

    Perthguy Well-Known Member

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    I think some things that are forgotten in the whole NG debate is that NG is allowed on all forms of investments in Australia, not just residential property. In another pointless thread, it was claimed that shares don't cost anything to hold. In reality, shares can be Negatively Geared as easily as residential property. The other side it that NG works with Capital Gains Tax (CGT). So any changes to NG would also have to look at changes to CGT. Finally, las time NG was rolled back, investors would still carry forward losses to offset agaist future profits, so it wasn't as straightforward as dissallowing it all together. There is a great research paper into Negative Gearing published in the eJournal of Tax Research. Well worth a read for anyone that is interested.

    http://www.austlii.edu.au/au/journals/eJTR/2005/4.html
     
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  7. Perthguy

    Perthguy Well-Known Member

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    I agree. When it comes to capital gains tax (for example), owner-occupiers have the competitive advantage over property investors. That is why (until recently in NSW), owner-occupiers have been the majority purchasers of residential property. OOs have a bigger market share, more purchasing power and better tax breaks than property investors, particular when renting out their main residence for less than 6 years. I reckon OOs have a far bigger influence on rising prices than property investors. The exception to this being Sydney this year.
     
  8. propernewb

    propernewb Well-Known Member

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    Echoing some of the other comments in this thread:
    1. I'll believe it when I see it! This was proposed in the Henry Tax review back in 2007/2008 and it was shelved back then. Last time it was removed, it was soon reinstated.
    2. If they were to remove it, I think there would be some sort of grandfathering arrangement, or a grace period of X years, or restriction to new builds only.
    My personal view is that NG is just welfare for a poor investment decision. Removal would definitely shake up the market with a view to lower prices.
     
  9. See Change

    See Change Well-Known Member

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    My observation is that whenever they make changes , there's always some way to benefit from them , and often something that the powers that be didn't think of .

    Just a matter of being open minded and nimble on your feet .

    Cliff
     
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  10. Cinch

    Cinch Well-Known Member

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  11. Perthguy

    Perthguy Well-Known Member

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    Yes and no. The time I benefit most from NG is like this year when both my rentals were vacant for 12 weeks each. Apart from that they would have been positive to neutral. So it is nice, but not necessary, to be able to NG them. If they just flat out abolished it from next year, I certainly would not be "devastated". Even though many investors are claiming a tax loss to NG a property, it may only be going into the red because of depreciation, which is non financial loss. If NG were abolished, people would not be "losing" as much money as is claimed. It's a lot more complex than the commentators make it out to be.
     
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  12. Phantom

    Phantom Well-Known Member

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    Perhaps. But the problem for the tax office will be to prove that someone intentionally bought the property to not pay tax. (Tax Evasion).
    The only way someone could be charged with this is if they admitted the purpose of the act was to avoid paying tax. Now, if there are investors buying in just for the purpose of paying less tax, well that's not very intelligent. But even so, I doubt they would officially admit it to the ATO.
    Has there ever been a case in Australian Tax Law where a person was charged with tax evasion directly linked to NG and that alone?
     
  13. Perthguy

    Perthguy Well-Known Member

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    Don't know. I agree I agree it is not very intelligent behaviour and even worse to admit it to ATO. It would take a special kind to stupid to do that! :p

    Maybe it is more about stopping property spruikers enouraging investors buying NG property to "save tax".

    Keep in mind I was responding directly to this comment:
    Unwitting investors may not know that is a criminal offense. In any case, it is serious enough for the Australian Institute of Criminology to mention it in their Thinking about Tax Avoidance paper. This is what they said:
    http://aic.gov.au/media_library/publications/tandi_pdf/tandi043.pdf

    So next time an investor metioned they bought x to "save tax", perhaps casually mention that they shouldn't tell the ATO that. ;)

    You could do the same thing with the CGT exemption for a Main Residence. Say, buy a house and move in, nominating as my Main Residence, then move back home, rent it out and sell it CGT free 6 years later. If my primary purpose for doing this is to avoid paying tax, it is a breach of the Tax Act.

    Bottom line is, if you invest to make a capital gain, you are not breaching the law, if you invest with the primary purpose of avoiding paying tax, you are breaching the law.
     
  14. wategos

    wategos Well-Known Member

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    Yes hockey is a known liar on the topic, the argument that rents rose when NG was withdrawn doesn't stack up or make sense, since over 90% of investors buy existing property.

    From the article:
    The verdict
    During the period that negative gearing was abolished real rents notably increased only in Sydney and Perth - where rental vacancies were at extremely low levels.

    This is inconsistent with arguments that negative gearing was a significant factor, with negative gearing likely to have a uniform impact on rents in all capital cities.

    At the same time, high interest rates and the share market boom of the mid 1980s increased consumer demand for rental properties, encouraged existing investors to pass on high mortgage costs to renting consumers, and discouraged additional investors from investing in the rental property market.

    While the rent increases in two cities did coincide with the temporary removal of negative gearing tax deductions, it is unlikely that change had a substantial impact on rents in any major capital city in Australia.

    Mr Hockey's claim doesn't stack up.
     
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  15. Phantom

    Phantom Well-Known Member

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    Yep...nicely said. Agree with that. :)
     
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  16. Ed Barton

    Ed Barton Well-Known Member

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    No I haven't. Most commentary of the Keating removal of negative gearing is wildly, totally wrong.
     
  17. Aaronjod

    Aaronjod Well-Known Member

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    Can't remember the exact specifics, but rents rose + there was uproar and it was back within a year. If the rents didn't rise, more of the Aussie pop saw benefit in it coming back otherwise we'd still be without it. I agree with Seech, there is always an opportunity if open-minded.
     
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  18. Perthguy

    Perthguy Well-Known Member

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    We should really be prepared for either scenario: NG retained, NG removed. Either way, a good property investor will benefit. A PI who has built up a negative portfolio relying on NG to make it worthwile will probably suffer the most. But was that a good strategy in the first place? Say a PI has a highly geared, highly negative portfolio. What steps can be taken to profit if NG is removed? I think this is the right answer to the question, oh, no! rents will rise.
     
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  19. THX

    THX Well-Known Member

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    Rents spiked sharply in Sydney and Perth.
     
  20. See Change

    See Change Well-Known Member

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    My observation is most people don't build up a big portfolio of negatively geared properties .

    We have two in my name , but have many more that are cash flow positive , neutral or minimally negative .

    Cliff
     
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