Why are we calling negative gearing a "benefit"?

{Note from mods - posts in this thread moved from here: Today’s big announcement is getting missed}


Hi team,

Why are we calling negative gearing a "benefit"?

Negative gearing is the process of adding up all gains and losses and paying tax on your net taxable income.

By not deducting losses from investments, you are paying on the gross taxable income and therefore paying tax above the marginal rates, which is completely unfair. The only reason they are suggesting quarantining gains and losses is because it over-taxes us in the present (ie we will literally pay above our marginal tax rates).

Paying tax at the marginal tax rates on your net taxable income is not a benefit.

Negative gearing also keeps rents low. So if we want to call housing a "basic right", then pulling negative gearing will make housing less affordable for renters, who are generally speaking entry level.

The housing affordability question is complicated. The reason we have inflated asset prices is because we have very low interest rates and high population growth/immigration levels. We have a weak housing market and we have negative gearing. Perth has had a poor housing market for 5 years, and they have negative gearing. Ditto Darwin. Citing negative gearing as a reason for high property prices is afactual, and buys into the misguided "politics of envy" that characterises the conversation in Canberra.

 

Its good you post this.

Firstly purchasing an investment property isn't always a "business" in the traditional sense to enjoy making "cost deductions".

In a business you generally take a combination of goods/services/knowledge and rejig that in a way that is profitable for you and of perceived benefit to someone else.

In general, business is very productive at improving an economy/society.

An example of a "business" property investment would be Mr & Mrs Smith purchasing a property, fixing it up and then selling it. The argument would be if the Jane Doe citizen purchased a house and spent money on improving it, this should be a valid tax deduction. It currently is, as you can deduct costs of improving a property from the selling price when a property is sold. It is reasonable to use valid "costs of business" as deductions against tax.

However what is happening is the John Citizen person is purchasing a property in the hope that the capital value will rise, and his rents do not cover the mortgage interest repayments. The government is currently subsidising John Citizen by essentially recognising his "asset purchase" as a "business", however this practice is not productive, though the taxpayer continues to subsidise it.

Simply purchasing something in the hope of capital gains / or to store value is analogous to people collecting watches, holding gold, purchasing bitcoin etc. Imagine banks would let you take out a loan to collect items of value and then the Government lets you make deductions against your income of the interest repayments.

Negative gearing in and of itself is not a thing that will "keep rents low" as there is no direct cause/effect relationship. What "keeps rents low" is a stronger supply than demand. The best way to keep rents low is to encourage the production of new housing stock that is larger than the number of working adults looking to live in a particular area.

I don't think negative gearing tax concessions (the interest of a mortgage) is particularly a bad thing, but for sure it does not incentivise a healthy stable/profitable long term economy as much as removing it would.

 

Re "negative gearing", I would like to chuck in a totally impartial opinion. I am not an estate agent/buyers agent , and have no dog in the fight, but I have owned and rented out properties in various countries over the last thirty odd years.

The idea that NG keeps rents low is in my humble opinion rubbish. The market sets the rates, landlords are not in the charity business, and will generally charge what the market will bear.

If NG was ring fenced to only property income, as it is in most countries, that would be fair enough, lose on one prop, make it up on another.

Because in Australia one is able to include all income, it skews the market. High earning individuals with a large income tax bill to ameliorate can out bid first first home owners or general battlers, to build loss making portfolios with a eye to capital gains. I know this because they tell me, they are not too bothered if they overpay, and have actually said this to me.
(Ask yourself why Hertz doesn't rent out cars for a loss, another consumer durable)

A market predicated on capital gains will always hit a wall at some point, as most studies have shown that established housing prices over the long term follow incomes, and generally limp a little ahead of inflation when holding costs are factored in.

Add to this the various instances I have observed of wives and husbands renting out each others properties, or having expensive refurbs on their private property written down to a crappy rental in Paramatta, and it is largely NG and associated tax breaks that have encouraged a mania amongst the Aussies re property, and the subsequent bubble which is imploding before us.

Bearing in mind that US wages are lower, and everything generally cheaper due to their scales of economy, take a little time to study what you can buy a building plot for in a perfectly decent suburb of Houston, or Dallas, or even a house in Boston.

NG, like so many other political bribes, is in my view disastrous, and has put the Australian market in a uniquely dangerous position, and seems to have blinkered those who feel they are benefitting from it to seeing the bigger picture. A level playing field is always better.

The term 'Rent seeking', is general a term used by Economists in a negative way to suggest a non productive exploitative outlook. See what the great man Winston Churchill had to say about landlords, (and yes I have been a landlord several times) and pause to think for a moment where this mania has led us, and what the consequences will be going forward. (I fear an ongoing downward spiral in property prices, possibly accelerating into panic, and a concomitant and dire recession, but hope not)

I bought my first house in Europe in the 1980s, after university, it was no big deal, many of my friends who had left school early bought houses or apartments in their teens. Now look at it, married couples struggling to 'get on the ladder' in a country where land is in absolute abundance.......madness..... and everyone in debt, and working all hours to put a roof over their heads.

As an aside, when opening a new bank account the other day, the young girl nearly fell over when we mentioned we had no debt, "What none?"...."nope!"......"not even credit card debt?"...."er nope"..................."Really??"

 

Thanks Chabs,

Great reply, thank you.

The role that Negative gearing plays in keeping rents down is that it is a free-market (ie non coercive) mechanism for keeping investors in the market, and therefore maintaining the supply of dwellings. This is key.

Alternatives to negative gearing that work far less well are: public housing (UK), and rent controls (United States).

Overall, I should also mention that I am not making a judgement on the quality of assets purchased that utilise negative gearing. They may be high quality properties, or they may be terrible. In many ways, whether you are negatively geared doesn't depend on the asset, it depends on the size of your deposit.

Negative gearing allows people with smaller deposits to get in to the market without being punished. So negative gearing can level the playing field a bit.

In any event, my point was more a point of fact - that it is unfair to tax property investors above the marginal tax rates - which is essentially what removing negative gearing will achieve.

Cheers,
John

 

My ultimate point is that an issue like negative gearing, one way or another, would be far less impactful or polarizing if Australia generally focused on long term with economic policies with a 21st century mindset. Rather than the short-term, reactionary approach to problems we have had in recent decades.

Every society throughout history has had portions of their population that thought they were entitled. Australia is not unique there. The most dynamic economies today deal with this issue. It is not the reason economies don’t grow in long term. That is far more to do with investments in education, infrastructure and R&D which have longer term pay offs.

The Netherlands yes has energy giants like Shell but also has giants like Philips which are the world’s leader in high tech medical devices. Health is the largest and growing expense of most developed countries economies and Philips already benefits heavily from that and will continue in the future.

Their tech startup scene along with Israel and the Nordic countries (see Spotify, Rovio, etc.) letone the fact they have world top 5-10 leaders like Electrolux, IKEA and even Volvo in their respective global sectors.

And of course Holland also have manufacturing giants in consumer goods like Unilever and Heineken that continue to expand their footprint beyond staples in their income.

These are all smaller population countries punching well above their population weights with companies well positioned for next 30yrs in their sectors. Even Shell has lots of renewable revenue investments.

Australia should have a framework that is not short term in its thinking and positions society as a whole for where the world is heading not where it was.

 

I like this post a lot, thank you for putting your thoughts down. As soon as I moved to Australia and learned about NG, I felt it was primarily a way for the wealthy to benefit. I'd love to see any statistic that says that this helps the middle and lower class even close to as much as it does the higher income earners. I also haven't seen a persuasive argument that rents will go up if NG goes away. How exactly does that work? Do all the landlords in an area collude to increase prices since NG is gone? Of course not, and especially not if the economy is poor.

Ring fencing NG to only properties seems like a reasonable compromise.

 

You could go a step further and legitimately question why property needs to be an investment at all. Shelter is a basic human necessity, when did it become an investment and should it be an investment at all?

 

An interesting question. Food is also a basic human necessity and the vast majority of what is eaten is caught up in a chain of for profit business at least in the West (equating to "in investment"). Is medicine a basic human necessity? Big pharma makes $ from it everyday. Is this wrong? If you are going to suggest that all major necessities should not be part of a market based system you are really suggesting a radically different economy/government and system altogether - is that what you are saying?

 

Need to encourage VC
Need to encourage Success and not punish failure
Need to loose sense of entitlement
Need the government not be a nanny state.
Need to provide cheap land land Zoned for industrial and commercial use.

Need to incentivise business not create Red tape.

This is from 20 years of being in management and running my own operation for over 10 years.

This is simply my observation and not necessarily congruent with others believes.

 

I'm Russian government housing was standard during my tenure until my migration non the 90s.

You didn't want government housing . You don't.

Some people want to rent a palace some people want to rent a studio.

 

Thanks for taking the time to reply. The complexity of this equation is beyond me, but it also seems to be beyond most of the politicians.

 

How can you not see it as a benefit?

You take deliberate action to purchase something that is going to cost you money. You do this in the hope (but really it is expectation), that the value will increase more than the sum of the losses. And people with a large portfolio are able to use other income producing assets to offset the associated costs.

You get the benefit that, some of the expense is consumed within your regular taxable income.

^ That is only an option to a certain subset or people. Not FHB, not PPOR people - just investors.

When dealing with housing affordability, people see it as a core right, and it is something that is very different to something like the share market.

The investor will always be able to 'afford' more, than the FHB/PPOR, yet they are also likely to me the ones with more money.

Now if neg gearing was abolished, investors would then look at the purchase of the property like any other investment, and if it was going to cost money, they would let it go.

Therefore the FHB/PPOR gets first bite of the cherry, and due to a reduction of competition, they likely get it at a cheaper price (a double win for them).

In your rationale as to why house prices are higher, you seemed to have omitted the most obvious reason for recent skyrocketing house prices. The ease of available credit. Ironically, negative gearing assists people in gaining credit, so the impact compounded on those who get to use the benefit.

Now what would happen if neg gearing was abolished? I would suggest that there would be less investors in the market, which would put downward pressure on purchase price.

This would result in renters being able to now purchase property, which would put a downward pressure on rents (due to less demand for rentals), and upward pressure on house prices, but only to a limit that investors would usually be able to push past.

There may be some investors who then decide to pull out of the market, which could put upward pressure on rents, however we have already started to see that landlords are being forced to drop rents/especially look after tenants, due to churn and already downward pressure on rents.

In all of these circumstances tho, it becomes a equilibrium to where there is value. Prices can only drop so far, and rents up so much, before the investment becomes attractive.

You spoke about how negative gearing is paying tax on the totality of the investment portfolio - How about this for an alternative? Each investment is treated as its own entity and you pay the tax on the benefit of that investment vehicle. If there is a investment vehicle which loses money, then those losses are only able to be apportioned to profit which comes from that particular investment vehicle.

It would prevent people using the clout of a investment portfolio to bash out newcomers.

To be honest, I'm surprised that you don't know how NG is a benefit? unless of course it was a rhetorical question to generate some conversation

 

The government should be bending over backwards to help people invest for their future to be less reliant on government and more financially self sufficient come retirement time.

If NG is a 'benefit' then I say too little too slow! Investors/mums and dads etc should be given a hell of alot more incentives to take action to secure their futures so more ppl wont be reliant on social security schemes when they retire .

Labor just wants everyone to be equally reliant and poor.

 

So up to $1.6m tax free super balance on retirement is not enough?

 

No, that's just getting started

 

Can I assume the 50% CGT is a cost then?

 

Yes it s the key, and at this moment over 90% of property investments are existing dwellings, and therefore add sfa supply, hence why labor will try to incentivise supply of new buildings with NG

 

over 90% of property investments are existing dwellings, and therefore add sfa supply