Silly question about Negative Gearing?

Oh this'll be great. I'm getting popcorn.

 

One has to wonder how much in various taxes and charges the Government raises from the
incessant exchange of the existing stock, but let's conveniently ignore that for now.

 

There's actually nothing stopping someone setting up a company to buy rental properties but funnily enough next to no one does it because you can't offset the early period losses against your other income and you lose the CGT discount and you'd need to a very significant portfolio to actually generate enough income to reduce the overall tax position.

The logical outcome would be to remove negative gearing being applicable against other sources of income. Rental losses would be quarantined to rental income, business losses to business income (largely are to be fair), dividend/interest losses to their respective incomes. The same as capital losses are quarantined against capital gains. This is actually all that any reasonable person should be asking in regards to negative gearing.

Now the capital gains concessions are a far bigger issue and as usual the Australian public is gobbling up the red herring of negative gearing and can't see the forest for the trees. They are very connectable to the explosion in property prices and a far bigger drain on the economy.

 

Peter Martin has argued exactly what @wogitalia is saying Peter Martin: There's more than one way to kill negative gearing

Grattan report also establishes a direct causality of property parameters (especially growth of NG) with the introduction of CGT exemption.

It would be better that CGT exemption is taken away instead of NG. It will not be retrospective hence no need to grandfather it and NG will be effortlessly neutered. How many will be willing to loose money annually when the CGT is at the marginal rates.

 

This doesn't make any sense. Why would/should the rental income be taxed at a lower rate? If they are negatively gearing then they aren't effectively paying any tax on the rental income anyway.

 

If the NG is removed it means the expenses attached to the IP are now not deductable.

But the income is still there and the Gubb will want to tax it for sure.

And; you can bet your life that the Gubb will want to have their cake and eat it to - have it both ways....they will still want to tax the IP income (rent) combined with the other PAYE income....it will elevate folks into higher tax levels - they will pay even more tax, and be hopelessly out of pocket with the IP expenses.

To combine it with the PAYE income is the unfair element to it if you cannot deduct any of the IP expenses.

My suggestion is to offer incentive to folks who would still want to buy IP's (not many will under Billy Bob's plan - given all the grief associated with buying, owning and managing IP's).

The incentive is that the IP income stands alone, and is taxed at a much lower rate than any PAYE income.

Otherwise; no-one will do it.

The argument is "OH; but we will give you tax concessions on new builds!!"

I've already explained how that won't work too well;

The percentage breakdown of investors who are multiple IP owners is very low, the vast majority own only one - which means that yer vast majority are only going to be able to buy at the lower or maybe up to median price properties - hence;

1. The Mum and Dad investors will not be able to buy the new townhouse builds in the middle suburbs and inner suburbs due to the cost - many are $500k+ and up to over $1m), and the rent returns are horrible. The degree of neg cashflow will kill off a lot of would-be new build townhouse purchasers in the established areas in higher demand - unless they have a whopping cash deposit - and again that will be very few Mum and Dad would-be investors.
2. They may be able to buy smaller, cheaper inner-city apartments, but we all know where that is currently heading (massive oversupply), so that will end in tears,
3. They will be left with the cheaper more affordable outer-suburb/new estate elcheapo tract home builds - but again there will be an oversupply from too many investor purchases, and the demographic of FHOB's, young families and less renters generally in those areas.

But we humans a pretty stupid; we've already seen NG removed, and very quickly re-instated 2 years later...it'll be Groundhog Day.

Also; it will change everyone's thinking; many of the folks who would have gone down the IP route will either simply save it in the bank and get neg returns on their capital (after tax, fees, and inflation erode it away)

Or; throw the available funds into the stock market, or get stitched up by the FA's to buy crap investment products (still linked to the stock market but a lazier/easier way to invest).

Or; they will chuck it all into Super (stockmarket), and the Gubb is systematically stealing it by stealth ad goal post moves..

It'll be terrific for the folks already in the stock market as it will create the biggest boom of all time..hopefully it won't crash a la 1929, 1987, 2000, etc.

Or; everyone will go; "You know what; stuff it - I'm just gunna spend it, have a nice lifestyle now, and the Gubb can save me with a pension".

 

You don't understand what is being proposed.

Investors would still be able to offset property expenses against property income (or even against other investment income under Labor's scheme), so they would not be in a higher tax bracket due to rental income. Furthermore any expenses unable to be offset against income in the current year would be carried forward to deduct at a future time.

 

As long as they still allow the IP expenses to be offset against other investment income then that would be sensible.

This is assuming that the investor has other investment income to offset it against.

My suspicion is that a large number of current Mum and Dad investors - and future prospective Mum and Dad investors - have no other investment income (other than maybe Superannuation).

Us folks here in the fishbowl are the more enlightened minority of investing folks; a decent number of who dabble in shares, some of who might earn all their personal income from a sole-trader business which the IP could be offset against....but the number is quite small overall in the investor world.

 

Agree that alternative investment income may be limited @Bayview, but they can still offset costs against the rental income in the first instance and then if they can't afford to carry the losses forward (rather than negatively gearing remainder against salary/wages) then maybe they shouldn't be buying.

Investors may need to stop wasting their money on iPhones, buying lunches or coffees every day and having drinks with friends every weekend, taking holidays, etc, then they would be able to afford an investment property. They all want to buy their dream investment property straight away, but they may need to buy something smaller or further out and then look at trading up over time.

 

Your last sentence will be the reality, but this is not what we want our citizens to be doing - we don't want them to close up shop and not invest; to try and better themselves financially, etc.

The wider % of Mum and Dad investors only have one; maybe two IP's, and no doubt the vast majority of those folks will start off quite neg cashflowed..let's face it; most folks wandering around the planet are living pay-check to pay-check as it is, and live their lives totally upside down financially - our % of retirees on the pension is testament to that.

So; given that - most will not be able to carry the cashflow loss from week to week I reckon if they are only able to carry the losses forward.

The only reason why many of these folks buy IP's at all is because they can minimise the neg cashflow through the tax deductions allowed currently.

The rest of the population don't even do this; many more folks simply whack any extra available income into shares and hope for the best - because it is far easier to do than buying a property.

Hey; we are in total agreement for once!!

 

This is a problem when no monetary buffer has been allocated for the regulatory/political risk. Capital gain is not the only reason/way to invest, there is money to be made (yields, BMV, distressed equity/debt/asset) on the downslide as well. As the cyclic experts will testify it's the bears turn now.

 

It seems so straight forward doesn't it.
I didn't do it straight away myself, but I didn't blame anyone else for my choices.

 

Nicely said.

What makes me laugh (cry, actually) is; I didn't buy my first property until 25 (wasn't able to financially), and then only found out about buying IP's 14 years later, and still managed to get a few.......

The info out there for the young folks today on how to buy their first property (as an IP) is terrific and gives them a much bigger head start than I ever had (due to no knowledge about it)...if they are of the mind and inclination to do it.

My son is almost 15 and already knows what the deal is with IP's, and already has a few Grand in the Online Bank from a savings plan, and is accruing (compound) interest...he hasn't got a part-time job yet either; the dollars will really rack up for him then.

How is his head start? It's awesome.

 

This is essentially what Jon Giaan is saying, just a little less subtly

"If you vote Labor and you're a property investor, you're a bloody idiot"

If you vote Labor and you’re a property investor, you’re a…

 

Lindsay David on negative gearing.

Negative gearing is not preventing a fall in house prices. It's already causing one | Lindsay David

 

Yeah, it's this typical complaining that seems to coincide with the peak of the Sydney market.
As if that's the only market in Australia.

 

Yep; and it's only a CBD market or within 5 km's as well, right?

 

Think it's expanded to about 15-20km this time around though

 

The Universe has expanded...