Shorten Short On Negative Gearing Figures

Discussion in 'Property Market Economics' started by House, 18th Mar, 2016.

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  1. Graeme

    Graeme Well-Known Member

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    Actually abolishing it now wouldn't be a bad move. Interest rates are low, and so investors wouldn't be as badly burnt as they would be at (say) 7%.
     
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  2. Skilled_Migrant

    Skilled_Migrant Well-Known Member

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    Most of the countries function without (or with limited) NG, and they do have deductions for capital expenses, just not against personal Income Tax.

    On a separate note looks like the PM agrees with you and NG will stay unless we have prime minister Shorten. Turnbull's own words turned against him on ABC 7.30

    "That is so wrong, Leigh," Mr Turnbull said. "Negative gearing is income tax 101," and a normal tax deduction, not a government incentive.
     
  3. sanj

    sanj Well-Known Member Premium Member

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    Umm that is precisely what is being proposed by some, that it be abolished.

    no one is saying remove the ability to claim losses, they should just be claimed within asset classes instead of subsidizing personal income. it isnt like the losses disappear either, you'll be able to claim them in the future when you make income in the same asset class.

    there are valid reasons for and against allowing people to claim losses in resi IPs to reduce their overall taxable income. personally I'm mixed but probably leaning towards getting rid of NG.

    I don't get why some have to get so emotional and try to find any possible way to be overly dramatic about it.

    call it a subsidy or welfare or an upfront payment/loan (since effectively it is bringing forward losses you'd probably claim at some stage assuming being positively geared in the future). the label doesn't matter, it is still a significant cost to the government and every resident in it to assist a small group of people.

    there is also then no incentive for some people to ever be positively geared, how many times have we seen people on PC/SS discuss selling property when they get older and using the gains to buy higher yielding investments? in this case the investor has has the advantage of claiming a pretty large amount of losses along the way and not paying any income tax at all, just CGT at the end.

    in the past it was easier to justify but at a time where the govt badly needs to improve the budget and there is arguably evidence that property is viewed as the automatic investment asset class by the majority of the population I think the time has come to make a change.

    keeping it for new properties only has its flaws too but at least it would be supporting something productive. there is very little thats productive for the economy at whole for someone to buy a house, rent it out at a loss for years and get a tax deduction for those losses
     
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  4. Skilled_Migrant

    Skilled_Migrant Well-Known Member

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  5. Guest

    Guest Guest

    I wrote a post about Labor's negative gearing policy on my blog, here is an excerpt (the issues I have with Labor's negative gearing policy)...

    Lastly (but not least), what Labor got wrong...

    It will help to repair the budget

    Labor's policy document states that:

    "Two specific tax deductions – negative gearing and capital gains subsidies – are both significant calls on the budget and are growing at a rapid rate."

    However, negative gearing shouldn't be seen as a budget boon for reasons I have highlighted in the past:

    "The reality is that an end to negative gearing for property wouldn't be a huge budgetary boon (as these commentators have suggested). Most advocating for it's removal suggest a 'grandfathered' approach, which means properties already owned by investors aren't affected (until the asset is sold). Even when investors make a purchase (following negative gearing's removal), any losses which would have previously been deducted in the same financial year against other income could be carried forward to claim against future income or profit from the same asset class (property). While it might delay when deductions are made (and some investors may not make a future profit in property meaning it never is), improving the government budget in the short term, it's long term impact would be negligible.

    Furthermore, it's likely that over time investors would adjust their expectations and reasons for investing in property. Currently a large number of investors buy for the tax advantages that negative gearing (and other tax breaks) offers.


    It's removal would result in a lower number of investors prepared to speculatively purchase at higher prices knowing that (as it stands now) low yields (& resulting losses) are partially offset by a tax deduction against other income at the end of the financial year (or as they go for those investors using an Income Tax Withholding Variation). Over time this would likely result in a normalisation of rent to price ratios so that fewer investment property purchases would be loss making from the outset."


    Other than the carried forward losses and behaviour changes, we also have to consider that Labor's policy doesn't necessarily stop an investor from negatively gearing an established property if they have other income (that doesn't fall under salary / wages) against which they can claim their property related losses (covered in more detail below).

    ☒ Only stops losses claimed against salary/wages

    Some have tried to claim that negative gearing (as it relates to property) is only those net losses which are claimed against salary / wages, but that is not the case. The ATO makes it quite clear:

    "A rental property is negatively geared if it is purchased with the assistance of borrowed funds and the net rental income, after deducting other expenses, is less than the interest on the borrowings.

    The overall taxation result of a negatively geared property is that a net rental loss arises. In this case, you may be able to claim a deduction for the full amount of rental expenses against your rental and other income (such as salary, wages or business income) when you complete your tax return for the relevant income year. Where the other income is not sufficient to absorb the loss it is carried forward to the next tax year."

    Labor's definition and policy appears to only affect those offsetting losses against salary / wage income:

    "The investor can deduct any losses associated with the investment from their salary and wage income."

    &

    "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."

    This suggests investors will be able to continue buying established homes and negatively gearing those losses against income other than wages. Granted salary and wages are the largest income item, but there is plenty of other income that property losses could be offset against. Look at this table from the ATO (showing 2013-2014), rental losses are minuscule compared to the other income they could be offset against:

    [​IMG]

    Based on the information we have available I am not convinced we can conclude (with certainty) that negative gearing of established houses will reduce with Labor's policy.

    ☒ It could increase rents in desirable (established) suburbs

    Some have made the point that negative gearing won't increase rents because even if the pool of rental housing reduces due to fewer investors (in the established market), these houses have to be sold to someone, i.e. one less investor is one new home owner. They also highlight that increased investor participation in new builds will expand the rental supply.

    I agree with those comments and would think it unlikely rents in aggregate increase as a result of Labor's policy, however... while median rents may see downward pressure or a lack of growth, the ability for investors to negatively gear new properties could create a distortion where most of that downward pressure on rents is in the outer suburbs (where the number of rental properties will increase), while inner/sought after suburbs with mostly established housing stock see rents rise as natural attrition of existing established investors reduces the pool of available rental properties. Yes that means an increase in owner occupiers in those suburbs, but those who can’t afford to buy in those suburbs may be left to pay higher rents or be forced to move to less desirable suburbs.

    --------------------------

    As you can see, while well intentioned Labor's policy is far from ideal, in fact we can't even be sure it will achieve what it sets out to. Sadly many of those who want negative gearing to go are defending Labor's policy without giving it the careful consideration it needs. Here's hoping that changes as we near the election or if Labor does get into office, then I hope they review their policy and make the changes required to meet an objective of improved housing affordability and a higher home ownership rate.
     
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  6. Aaron Sice

    Aaron Sice Well-Known Member

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    Has anyone mentioned commercial? With most of Perth's sheds empty, do they classify as existing property?