Silly question about Negative Gearing?

come on that's far from all it is. that's certainly the case in some instances but many people view it agnostically. I'm mixed myself but lean towards it being offset against future income gains in that asset class instead of the current arrangement. simply dismissing arguments against it as being sour grapes does no good imo

 

There is some intellectual debate going on but the bulk of it unfortunately is the noise generated by the media stirring the pot

 

The interest part would not be huge issue. The NG people don't like about property is the depreciation schedule over 40 years. Thats money back in your pocket without spending a cent.

Now depreciation is allowed on business assets and instruments because they depreciate. A laptop is worth nothing 5 years from now hence depreciated. But is building really worth nothing after 40 years? That is the debate.

 

The depreciation claimed reduces the cost base so down the track if the asset is sold more CG tax would be payable. Its hardly a free lunch, the 'benefit' is received now but it is clawed back if the asset is sold.
I can't see why it's not perfectly reasonable.

 

We'll have to agree to disagree on this one mate.

For me it's twofold.

1. As an investor i am unapologetic for wanting all 'tools' available to me incase i want to use it for specific instances and

2. Personally i don't believe at the heart of it, NG is the issue at all. If NG is abolished tomorrow i don't think it will make it any easier for ppl who currently find it hard to buy a place. The problem is 'up top' and nothing to do with NG.

Just my opinion of course.

 

It comes down to the identity of an entity.
As I understand it, if an individual has a job and a unprofitable business, the loss can be offset from his job income. If his business is a Pty. Ltd. Company, then that is a separate entity and therefore its loss cannot be offset from the directors income. Same rules apply with property. If you buy property in a company name you cannot offset the loss.

 

Any drop of home ownership rate in Australia is in keeping with the trend already happening in more matured developed countries.

List of countries by home ownership rate - Wikipedia, the free encyclopedia

Very high home ownership rate is found among the least developed countries, but low rates of home ownership are noticeable among the most developed countries. It is telling which point of the spectrum of home ownership is coinciding with a more desirable economy.

This trend has traction. Globalisation continues to progress. Nations are more inter-connected. Work demands get global too. Hence, long term commitments such as home ownership are under pressure.

Apart from the macro trend, why is NG considered such a big deal in Australia? The reasons are many, migration, climate change and:

• Non NG users listening to naysayers about tax payers actually paying for the NG. Naysayers call it subsidy ie revenue money from the budget being allocated to landlords. The PM has put his reputation on the line and call it normal tax deduction, ie money accounted at the taxpayer before they pay tax. The difference is critical and impact on the 'savings' that can be calculated.
• allied with the above viewpoint, 'aggrieved' non beneficiaries in the capitalist economy and socialists are attracted to abolishing NG because it will socialise profits and privatise losses.

• FHBs being aggravated by the leverage and flexibility of investors to invest in the whole range of properties. They pick on NG as the critical driver, whereas the driver is risk adjusted profitability which can be managed. As post APRA and China internal measures to curb external investments have shown, investor activity can slow down independently of any change to NG.

Enough said!

 

Because you've incorrectly identified what is happening.

Depreciation claimed now results in a reduced cost base; however this isn't 'clawed' back at the same rate it is claimed. $1 now or $1 in 20 years? Beyond that, it's still being halved by the CGT discount. So it's more like receiving $1 now and having to pay a real amount of $.05 in 20 years.

This is pretty much the definition of 'free lunch'. There's a non-cash 'cost' to you, which you transfer to a cash benefit, which is received now and paid back at a significantly reduced amount in the future by way of inflation and the very nature of the calculation of capital gains.

Property investment isn't running a business, as you've identified, and as such comparisons to an actual business aren't meaningful. This sums it up perfectly:

It comes down to two things:

The entity
The investment type

Consider the difference in treatment in capital vs. revenue. Further, there is no guarantee that the individual can offset the loss from the carrying on of a business (in fact there's rules that can prevent it).

 

The 'cash cost' is the price you pay for a new property.
No you have missed the point, at some point significant renovations or a rebuild will be required, anyone who owns a 50 year old IP knows that the maintenance costs can be high.
Any rebuild in 40 years time would be infinitely more expensive as material and wage costs would look nothing like they do today.
It's a legitimate cost, I cannot see how you could objectively think otherwise.
The ATO accepts it, why don't you?

 

Property investment in itself is not a business. If you buy a property, leave it vacant and not earn anything from it until you sell, it is an investment.
However, what we are talking about here is renting out a property, which generates an income and requires work to manage it, which is a business.

 

Why do you think positively geared properties have raised home ownership? I cant see the logic in that one. The more properties that are owned by investors and speculators, the less are owned by home owners, and this has what has happened over the last 20 years. People are free to invest as they wish, but there are too many unfair tax breaks given to speculators as the expense of home owners.

The top 10 electorates for claiming negative gearing losses are run by Liberal members, I think this says it all about Turnbulls motivations. He has no interest in helping home ownership or people getting ahead, he just looks silly when he tries to make these arguments. The spectacle with the 1 year old property investor was a joke. Oh look whos at the top of the list !

 

If it is business why not run it in the business structure and pay 30% tax rather than get taxed at much higher marginal tax rates.

 

Strategies using either positive or negative gearing may appeal to investors, so both can contribute to a decrease in the home ownership rate. Your question doesn't make any logical sense.

Negative gearing may encourage an investor to buy more properties, borrow a higher amount or purchase sooner than they would have otherwise.

 

It is a business or not a business depending on the legal jurisdiction and the ownership of the property.

According to the federal government, rental properties do not constitute a business, which is expedient (see below). The private rental accommodation is not a business if it is owned by an individual, but short stays and long stays can be a business when a company makes a business of managing it, whether they own it or not. State legal jurisdictions would be less conflicted in typifying a rental property arrangement as a business.

IMO, the major concern the federal government has in not calling rental property a business is to avoid opening the floodgate to salaried tax payers to claim deductible expenses, such as car and phone. Then there is concern with the expenses of hobby like pursuits being underwritten by tax offsets, such as holiday home. The conditions of various dollar parameters that a business with NG needs to satisfy before being allowed offset against other income seem to reflect this concern.

 

The difference is a taxation difference.

Businesses are unable to offset their losses against an individual's salary/wage income. The exception to this is a sole trader in certain situations (the sole trader likely doesn't HAVE much other income anyway as THEY are the business and wouldn't normally have a wage).

Scrapping negative gearing doesn't mean you're unable to claim interest as a deduction. It means if your rental expenses exceed your rental income, you would be unable to claim this amount as a deduction against your other income.

Many argue (myself included) that you should instead carry these losses forward to offset future investment income. Exactly the same way it works for business and capital losses.

That's really a response to the lowest common denominator in this debate. Plenty of people have dumb arguments for the removal of negative gearing (which you'll regularly see on mainstream television), but there are plenty of people with reasonable arguments who are advocating for it to be scrapped.

Why is it unreasonable to change negative gearing to instead allow carry-forward losses to offset future investment income (this goes for all investments, not just property)? This is how losses are treated in many situations in the Australian taxation system.

So in the meantime, while you're on your way to profitability, why do you need to be allowed to offset these losses against your current salary/wage income?

 

Almost every new business is speculative in your sense then. Every business I've know has been running at a loss for some time in their startup phase. It could be months, but for an awful lot its many years. Investors are in the same boat. You call it "speculative", but that just shows a bias against almost every business and a huge majority of investments - commercial and resi.

 

I could accept this but you can't have it both ways.

By this I mean, if a property is NG, I would be happy to not offset the losses against other income as long as, when the property becomes positively geared (which all properties will if one hold them long enough), you don't add the property net income to my other income.

I have seven positive geared properties and one negatively geared property. I would love the Government to allow me to carry forward the losses on my NG property (not offset the losses against other income) as well as treat each of my PG properties as separate with a $19,000 tax-free threshold for each one .
I think I would be a lot better off.

 

Maybe other businesses are speculative, but when compared to NG:

• Business models do not originate (NG) and culminate (CGT exemption) in tax evasion.
  
• Tax payer does not subsidize the speculation. Business wears the loss or profit.
• The economy itself does not develop an unproductive bias.
• There is no social cost.
• Tax system does not get corrupted, by hybridization of labour and capital income streams.
• .....

 

I agree a loss making businesses is speculative ( and in general I have no problem with speculation). I'm a co-founder in new start-up myself which will be a loss maker in the first year if not second, but I can't claim the loss against my unrelated salary... and more importantly this speculative activity isn't pushing up the value of a basic human need.

 

We already have it 'both ways', as demonstrated perfectly by capital gains tax, being that capital gains are added to your other income in the year they are earned. There's no marginal tax rates exclusive to capital gains as there is in your proposed scenario.

IMO, any change should seek align investment losses with other forms of losses (capital, business, trust etc), not be completely different.