Abolish negative gearing to save Budget billions

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By Leith van Onselen

While the Grattan Institute’s new report, Balancing budgets: tough choices we need, was centred around winding back entitlements to older, wealthier Australians, it also included a section on abolishing negative gearing, which it claims would save the Budget around $4 billion per year initially, falling to a saving of around $2 billion per year over the longer term:

Negative gearing allows taxpayers to deduct any losses they make on investments (including mortgage interest) from their overall income when they calculate their tax liability.

Under the proposed reform, investors would no longer be able to deduct these losses against wage income. However, they would be able to carry forward any losses and deduct them against any capital gain they make when the investment is sold.

The proposal would contribute about $4 billion a year to the budget in the short term, falling to approximately $2 billion a year in the long term as losses accumulate, reducing capital gains tax.

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If the proposal induced property investors to invest in other assets, tax revenue would be even higher. Alternative investments will not usually produce a tax deduction against income – indeed any switch to investments that generated a positive return would increase the tax collected.

Grattan highlights a number of non-budget (social) benefits from reforming negative gearing, namely:

  1. increasing home ownership rates by reducing returns at the margin for landlords relative to first homebuyers; and
  2. increasing investment in other more productive assets.

The report also debunks claims that reforming negative gearing would raise rents, since “for every landlord that sells, there would be a renter that buys and becomes a home-owner. The supply of rental properties would fall at the same rate as the number of renters”. It also does not believe that the construction of dwellings would be materially affected, since “almost all of investment property loans are now for existing dwellings”.

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105 Responses to “ “Abolish negative gearing to save Budget billions”

  1. Gripper says:

    Why bother stating the obvious again.

    The debate is over, nothing will be done.

    Perhaps if a parliament had a five year term, someone would have the balls, but I doubt it.

    • krazy.galah says:

      That’s why I’d like to see tax reform as one of those policy areas that Government hand over independently with a goal to simply drive where it is needed to drive inherently productive outcomes.

      Can’t take the blame then.

    • That’s what everyone told me about macroprudential two years ago. Now everyone is recommending it.

      Defeatism perpetuates itself.

    • General Disarray says:

      Well if people just rollover that guarantees nothing will be done.

      NG is getting far more attention than it was a year ago. MB has played a significant part in that.

    • The Claw says:

      The debate is over, nothing will be done.

      There are three questions for any suggested policy change:
      1) What would be the effects of it?
      2) Would you like these effects?
      3) What is the likelihood of the change taking place.

      Gripper, you have given us an excellent answer to the 3rd question. Perhaps you could also honour us with your thoughts on the first two.

      • Gripper says:

        Personally I think the effects of removing NG would be a good thing in the long run, it causes distortions in the market and the rest of the world manages without it.

        However, once you are in an established mess like this, extrication could prove bumpy, perhaps with current low interest rates aiding overall rental yields, now would be a time to act theoretically.

        But lets face it, I foresee no change soon.

      • rich42 says:

        It seems the only reason change is not occurring is FHB’s not broadly having an understanding of what’s causing high prices. A ridiculous situation. Start boycotting the media promoting higher and higher prices.

    • md says:

      Yes Leith, you’re preaching to the converted, though I wouldn’t suggest to stop, even for a second. The problem is – how do we preach to the decision-makers?

      There really has to be a full-on campaign, otherwise it’s just too easy for the government to ignore any suggestion of tampering with something that props up the bubble.

  2. The Patrician says:

    “It also does not believe that the construction of dwellings would be materially affected, since “almost all of investment property loans are now for existing dwellings”.”

    Dear Grattan Institute,
    Why not keep NG for new-builds only?
    Win. Win.

    • Jason says:

      Because everyone knows what our taxation system needs is greater complexity.

    • Tandem says:

      Patrician, NG perfectly works on the age of property. It is all about depreciation. Property can be cash positive, but due to deprectiation – will be tax deductible loss. Depreciation amount depends on the age of the property (value of the property at the moment of the completion) – so for the new property – will be high amount of depreciation, for older – less. And with time almost any property will become positively geared. So NG currently works well enought to attract to the newer property. Why people still buy existing – less risk, but NG still encourages to buy as new as possible.

      • Hixtar says:

        What??

      • flyingfox says:

        Depreciation and NG, two different concepts mate. You can have depreciation and carry forward your loses without having NG.

      • Tandem says:

        as an individual?

      • flyingfox says:

        http://www.ato.gov.au/General/Losses/

        Please read section under individuals.

      • Tandem says:

        read, the individual must utilise lost at the first opportunity. But it doesnt really contradict to my message: the newer the property, the more you can claim wihtout being cash negative.

      • flyingfox says:

        Duh! that is what carry forward means! Same goes for businesses.

        You can claim depreciation yes. It is not a magic deduction, it is there for purpose. While you are claiming “magic” money, people are utlising your property and causing wear and tear.

      • Tandem says:

        You also include depreciation in the costs, which are tax deductible. It may make your investment cash positive, but negative on paper. This was the point about new vs existing properties. The age of the property incentifies investors to buy rather newer than older to claim higher depreciation in costs.

      • The Patrician says:

        So why praytell are 95% of investors buying second hand dwellings?

      • Tandem says:

        Do you have investment property?

      • [email protected] says:

        New dwellings at the bobfnowhere dont offer capital gains?

  3. 3d1k says:

    Is abolishing negative gearing consistent with previous recommendations from Grattan or is this a new position coinciding with a new government.

    Do they suggest a gradual removal of NG or kill it in one fell swoop – surely the method of removal would have some impact ?

  4. Powermonger says:

    One of their other recommendations was to also scrap the CGT discount which would also be good for stablising house prices and lesson the speculation.

    Time we stopped treating the housing market like the share market.

    • myne says:

      That might be a bit regressive and prevent relocations. It would probably be better to reverse-depreciate the gain over a period.

      Ie, the same way you depreciate an asset over X years, the income is carried forward in chunks against your income over x years.

      Say a 100k windfall becomes 5 years of 20k income at the marginal rate.

      • Peachy says:

        Myne – relocations would not be impacted. Gain on sale of residence would still be exempt from capital gains tax.

        Gong back to indexation or abolishing preferential tax treatment of capital gains would get rid of A LOT of the games people play with taxes. I’m for it.

    • gonderb says:

      That’s all well and good, but if the CGT discount were scrapped, then we would need to return to the prevous system of indexing the cost base by CPI, and marginal rate impact apportioning (like what myne just described – myne did you know that’s how it used to work?).

      PS: If this change is supposed to lesson housing speculation, how come we didn’t have as a big a problem with this prior to 1984 when there was no capital gains tax at all?

      • myne says:

        Nope! I had no idea that’s how it was. It just seemed like a common sense way of dealing with the issue.

      • gonderb says:

        @myne – it wasn’t exactly what you described, but was very similar, and essentially followed the same idea.

        When the asset was sold, the nominal capital gain was calculated by subtracting the indexed cost base from the net sale proceeds. Then 20% of that amount was applied to your taxable income, to determine the “average” marginal rate to apply to the capital gain. This rate was then applied to the entire net gain and that’s how much tax you paid. So it sort of “hard-wired” a 5 year averaging into the equation.

      • chrism says:

        At least part of the answer is the exemption of owner-occupied housing from CGT, which has encouraged those with money to spare to throw it at their own housing.

        And where money is being thrown about, speculator landlords will follow (even though they pay CGT).

  5. bigturtle says:

    Not much help on budget but add lots cost to many. Accountants may benefit a lot.

    If negative gear is abolished, how can you make your lost in investment property tax deductible?

    Set up a company and use the company to invest. In this way:

    1. Company’s interest payment is part of business cost, of course deductible against company income

    2. Annual company total loss can be used to deduct from your other income

    3. To make this structure work, many need accountants

    4. People would rather pay accountants than government

    I really don’t like to invest on direct owning a house or unit. To me, the biggest issue is liquidity in a downward market. US San Francisco Bay Area (include Silicon Valley) told us a lesson that Sydney housing market can and will bust. Every investments have up and down but owning an illiquid stuff in a downward market is not good. Unlike USA, Australia lacks REIT for us to invest. This leaves me with only home building companies.

    Even though I don’t own investment property, I really doubt how much government can collect from abolish negative gearing.

    Please, please, we have way too many accountants. Don’t let this to give us even more accountants.

    • The Patrician says:

      “I really doubt how much government can collect from abolish negative gearing”

      With a possible $4bn p.a. revenue return for no outlay, (plus the housing supply/construction/employment benefits) it’s a punt worth taking.

    • Andrew Lees says:

      I would have thought that tagging the losses so that they remain non-deductible through the company structure would resolve that problem. Very much as franking credits are tagged funds on the profit side. I expect that the loss side would have a similar implementation.

    • Peachy says:

      “2. Annual company total loss can be used to deduct from your other income”

      No, it can’t be.

    • Dogbert says:

      Your argument is based on one point:

      “2. Annual company total loss can be used to deduct from your other income”

      However as Peachy says, I didn’t think company loss could be deducted from income from other sources? I’ve never really looked into it, but I always thought it could only be carried forward to offset future profits of the same company?

      • Peachy says:

        Yep. Losses sit in company and can only be used against income of the company.

      • bigturtle says:

        You cannot deduct capital loss from your salary. However, you can deduct your company’s trading loss against other incomes.

        If you run a small business and combine several companies as related entities, you can then deduct. If you are contract employee, you can also do a structure. There are also many other ways.

        That’s why I think this only create more accountants in Australia for non productive reason.

  6. Kovaccm says:

    Adopting the proposals will lead to 2nd- and 3rd-round effects. The likely scenario in the middle to longer term is for a decline in property investment by individuals (they simply won’t have the up-front capital to get into the game). Instead, they will be replaced by corporations. Corporations will be driven by returns so rents will not fall through the floor. Corporations will continue to (legally) deduct expenses of running their business (effectively just another form of “negative gearing”).

    The end result being corporatisation of the private rental market, rents stay high to maximise profits, house prices stay high (house price to average wage ratio becomes meaningless) and govt forced to dig into it’s budget to pay for housing in areas the corporations don’t want to go (so impact on budget will be unchanged – and more likely to increase due to less efficient practices by govt agencies).

    The idea that renters will suddenly be able to purchase houses because individual investors drop out is a highly UNlikely scenario. The likely outcome is that govt will provide for a transition period whereby if you’re already in the game then you continue under existing rules (or close enough that you’re not damaged too much). But new rules apply to those wanting to get into the game. End result is there will be minimal impact on house prices and so renters will not be streaming into home ownership in any large number.

    It would be wonderful if thinktanks like the Grattan Institute bothered to do more than simplistic first-round impact analysis. Such analysis sounds nice but is nearly always misleading.

    • The Claw says:

      The end result being corporatisation of the private rental market, rents stay high to maximise profits, house prices stay high (house price to average wage ratio becomes meaningless) and govt forced to dig into it’s budget to pay for housing

      Of course this would happen. This has happened in every country that does not have negative gearing on housing.

    • Neville Gearless says:

      ^ This stinks of a negative gearer attempting to justify his existence.

      There is nothing to stop corporations taking over rental housing now, or any time in the past before NG gained epidemic status.
      Maybe you should look at scenarios that actually exist in the real world.

      • Tandem says:

        You forgot about supply and demand. Currently individuals and corporations are in the market. If NG will be abolished – all competition from individuals will be gone. Plus there will be event less competition, as corporations will not own 1 property – they will have a portfolio. To summarize – nothing restricts them to go into the market now – but if NG will be abolished – there will be big incentive for them to step in.

      • flyingfox says:

        Corporations are not stupid. They don’t buy assess that loose them money now for potential future capital gains. There is no yield on Oz property, you might as well buy bonds.

        I can see no incentive for corporations to step in.

      • Hixtar says:

        Tandem, your posts in this thread have made absolutely no sense.

      • Tandem says:

        yours definitely are :-) Why do you need to teach me what me to say?

      • Neville Gearless says:

        Who told you corporations would buy? Can you give an example of this happening elsewhere in the world, ie. corporations controlling ~20% housing stock as individual speculators currently do in Aus, otherwise I think this corporation tosh is just that.

        If NG was abolished, competition would be restricted to FHB and upgraders, whom have less leverage than subsidised speculators. This would be the chance for FHBs (currently renting) to step in and realise home ownership.

    • rob101 says:

      If the corporation is only a real estate holding investment company then it will not be getting any deduction at all if it is making a loss until it sells the assets (though the roll over is limited to 3 or 5 years from memory) this is not negative gearing because you cannot then offset this yearly loss against someone else’s salary.

      I think some of the point will be that there will be no benefit to the investor until a property is sold, so the difference is psychological as well.

      Its a bit of a weird argument to say just because everywhere in the accounting system that expenses can be deducted from profits in a corporation therefore no point removing negative gearing. Thats missing the point which is not that expenses shouldn’t be deducted from income, but that income losses should not be attributable to completely unrelated income (e.g. company A loss deducts from company B’s profit).

      • JohnsonM says:

        +100 Rob.

        If mortgage payments could only be deducted against rental income the cost of holding an investment property (with the highly inflated asset prices we have) goes up by a large factor – whether it is being held by a corporation or an individual investor. You can’t expect that significantly increasing the cost of holding an entire investment class is not going to have any supply/demand shocks..

        I’d expect a sudden change to this would see a rush for the doors and a collapse of prices – and a subsequent entry of a *lot* of renters. Home buyers would still buy the dropping market for emotional reasons (stability etc.,), but investors (en masse) would stay clear for some time until they see a floor in prices and a turning point.

        Some sort of grandfather clause which eliminates the negative gearing over a period of time would have less shock but still make an important change over time (and probably be a much smarter way to make the change).

      • Tandem says:

        Plus if it will be abolished suddenly, and massive sales will start, furst thing, the whole army of renters will start looking for new place to live, which will cause the increase in rent for the short period of time, isnt it?

      • Neville Gearless says:

        “whole army of renters will start looking for new place to live, which will cause the increase in rent for the short period of time, isnt it?”

        What a load of tosh. You forgot this part:

        “for every landlord that sells, there would be a renter that buys and becomes a home-owner. The supply of rental properties would fall at the same rate as the number of renters”

        Speculators have no effect except inflate prices. They go, its all upside for everyone else.

      • Tandem says:

        who told you that the renter will buy???? what is the guarantee of the buy by the renters?

      • drsmithy says:

        who told you that the renter will buy???? what is the guarantee of the buy by the renters?
        Do you think armies of investors will be buying those houses and leaving them empty ?

      • flyingfox says:

        JM and Tandem you both dicount the fact that it will become affordable for many of those renters to buy!

      • Tandem says:

        what reduction in price do you expect from abolishing NG? approximately? so if one did not have savings to pay 50K as a deposit, will that person have 40K? What would be their decision making points?

      • flyingfox says:

        There are atleast 5 people in another thread last week, myself included who have indicated they have over 200K in deposits but will not buy until prices became more sane.

        I don’t expect a reduction in price, not a big one anyway, but I expect a much more muted increase in prices in the future. This is the concerning aspect for me. The stability of the whole economy.

      • Tandem says:

        I like your way of thinking. So you are concerned about property bubble, which brings instability to the economy. I believe Australian situation is very different from US (as they compromised lending standards, while Australian banks do not). Even in Spain – the premiere location property did not drop in price. Italy – propery is still over over priced, taking into account their economic prospects and unemployment rate. Why is that from your point of view?

      • flyingfox says:

        Oh please we are different? We were different during the last decade and mining investment. Not any more.

        Have you looked at our economic prospects?

        Australian banks are some of the most levered financial institutions in the world.

        The only difference between a US NINJA loan and one here was that some bogan was working in a mine getting a great wage for a few years. Lets see what happens when the music stops.

      • Tandem says:

        Company can offset losses from this year with profit from the future years. This is one way. Second way – corporations can bundle their businesses all together and tax the group, therefore loss from investment can be offset from the income from other assets. Way no. 3 – to mix portfolio of positive geared and negative geared property into the one company. You can’t imagine how creative you can be in your business model.

      • flyingfox says:

        But why would you do this? Why does anyone have any interest in holding a loss making asset.

      • drsmithy says:

        But why would you do this? Why does anyone have any interest in holding a loss making asset.
        If you believe the long-term return from the asset will exceed its short-term loss ?

      • flyingfox says:

        Yes but good luck trying to justify that to your share holders and board members.

      • Tandem says:

        A) make a right mix of NG and PG properties. NG offsets profit and tax of PG. And slowling NG becomes PG and property portfolio growth, corporation becomes more capitalised
        B) when property offsets tax from other incorporated business activities. It diversifies business activity and can be yielded when asset becomes PG or sold.
        If company is public – then would be difficult to sell to the board. If company is private – there should not be a big issue.

      • flyingfox says:

        @Tandem This is the problem with all pro NG views. You are essentially losing money on a asset that may increase in value. It has done so for a decade but you can’t assume this will continue forever?

        You are essentially buying risk.

        One more thing before you continue on with this slowly NG becomes PG bullshit. It only happens when prices are rising!

        Australia property net returns are for the most part still below term deposit rates. That is a awful investment unless prices keep rising. They have been like this for quite some time and until the recent sydney price rocket, most people buying in the past five years were losing money overall as well.

        when property offsets tax from other incorporated business activities. It diversifies business activity and can be yielded when asset becomes PG or sold.

        Bullshit! If I have cash to invest, I will invest it what is going to give me returns and weigh that against risk. A PG and NG portfoilio only works if the CG on NG outweighs the holding costs.

        Moreover in a corporation you will only be paying tax at 30%. You are usually better off paying that.

    • nqdave says:

      If I understand correctly, companies don’t have access to the same gearing levels that individuals with another income source do.

      If price levels are now being set by marginal buyers that are:

      a) obtaining a tax advantage not readily available to corporations (i.e. offsetting another income another against rental losses);

      b) are taxed at the company tax rate of 30% instead of the high-income earners being taxed at 45-50%; and

      c) have access to high LVRs secured against other residential property; and

      d) have access to the super-low interest rates available to wage earners.

      then I suggest that it’s not likely that there will be a flood of corporate interest at these price levels. If there was they’d already be there.

      Instead, by taking out a pile of demand from marginal buyers, prices will revert to a level better representing the utility value derived by owner-occupiers or the cashflow returns from the rental market.

    • Gral says:

      I think the Grattan analysis is good.

      1. Rents cannot be kept high simply to “support profits”. It’s a market, you know, with supply and demand. If rents were high, it would be for other reasons that you haven’t explained e.g. lack of supply.

      2. Marginal investors set the price. So removing benefits for new investors does have an effect on price, even if you maintain the benefits for existing investors. But if you bought an investment property at a decent yield, then you would be happy to hold on and continue to reap the benefits of negative gearing. If you bought for capital growth, well, you win some you lose some.

      3. Removing negative gearing would have a huge social advantage for the whole community. Even for those who own a property, negative gearing incentivises them not to live in it. A lot of people I know do that because they can’t afford to do otherwise. It’s a ridiculous incentive and the whole nation would be better off if more people lived in the house that they own.

      • m8 says:

        “3. Removing negative gearing would have a huge social advantage for the whole community. Even for those who own a property, negative gearing incentivises them not to live in it. A lot of people I know do that because they can’t afford to do otherwise. It’s a ridiculous incentive and the whole nation would be better off if more people lived in the house that they own.”

        YES!!!!

        Several people I know who own apartments lived in it for a year to get their FHOG and now they moved and and rent elsewhere, or moved back in with parents, and converted it to a negatively geared investment property.

        Even a mortgage broker I know owns several properties but he rents the house he lives in.

  7. Turnitup says:

    I apologise if this has been covered and I missed it, but wouldn’t the abolition of SD encourage people to flip houses willy nilly?

    • The Claw says:

      Removing stamp duty would make more flipping viable. Buying and selling would still entail substantial costs however.

      I don’t see that flipping causes a great deal of harm. Choking supply and excessive immigration do much more harm than a bit of flipping.

    • Powermonger says:

      That is what I would think and when would a LBT be payable? Annually or quarterly? If you’re selling your property, do you need to pay any outstanding LBT upon sale?

      • Turnitup says:

        When you buy a place, you take over all the outstandings such as body corporate (that’s what it’s called here in Vic) from the day of settlement. I guess a land tax would be the same.

        Even I, who is eternally more optimistic than most on MB, wouldn’t like to see houses being flipped willy nilly. This would really only advantage the rich, as they’re the ones with the cash flow to buy quickly. You’d soon see people quitting their day jobs to become full-time, ‘professional’ house-flippers. Yuck.

      • JohnsonM says:

        I don’t think so tbh. Removing stamp duty increases liquidity. It would mean more short-term speculation sure, just like day traders in the share market. I’d expect we would see property still follow the same general price trend but have greater volatility from month to month. I think it’s a bit of a stretch to say that day-trading only advantages the rich though, it advantages the successful speculator at the cost of the unsuccessful. It is a zero sum game.

        But! Increased liquidity for property also helps all of us through making the entire process of buying a new home and selling the old much cheaper and easier. It means people will get a new job and just sell their old home to move closer to the new job. It reduces traffic congestion, increases labour mobility, generally increases the efficiency of our economy.

        Sounds like a winner to me.

      • flyingfox says:

        +1. Remove SD bring on Land tax. Removes incentives to hold onto property and reduces disincentives to sell up and buy elsewhere.

      • Pfh007 says:

        Turnitup,

        Why does flipping concern you? Particularly having regard to your sunny disposition.

        Advantage the rich because they have cash flow? Que?

        You sound like you are confusing flipping with gazumping.

        People quitting day jobs to flip? Que?

        You dont need to quit a day job to buy and sell property in a rising market.

        Nothing wrong with flipping.

        It is a useful indicator of sickness/mania in the property supply or credit markets or both.

      • Powermonger says:

        I would hate to see rampant flipping like it was just another stock on the share market, houses aren’t investment instruments designed for pure speculation.

        Wouldn’t this just be emulating the Chinese problem of people just buying houses, keeping them empty so they can flip them quickly later?

        Add too much flipping and you’ll add too much volatility, you’ll have even more people who have even less emotional attachment to housing just trying to turn them into short term profit.

      • Turnitup says:

        I didn’t say it concerned me, but nice try putting words in someone’s mouth.

        I didn’t say that people would need to quit their day job, just that some would. And who could blame them? But do we really need even more people sitting on their fat arses collecting money without contributing to society?

    • The Patrician says:

      Removing impediments to dwelling transactions is part of the solution to the fixing the current housing supply blockages. (as long as the SD is replaced by an LVT)

      • glissom says:

        Yes. Also benefits people by making it easier to move closer to work or other changes. Taking some pressure of transport etc.
        eg. My wife and I now work in same suburb and commute about an hour, not even considering moving closer. Even to a closer but same price suburb as the cost of move / stamp duty etc is far too high.

  8. Hill Billy 55 says:

    A couple of points.

    1. Companies can carry forward losses forever – change made by LNP (I think) in early 2000′s.
    2. No Capital Gain Discount available through company structure, so full tax payable.
    3. Trusts more viable entity to operate under – see comments by High Rise Harry – as they allow flow through of CGT discounting to beneficiaries.
    4. Small business quarantining of losses (Labor initiative) should at least apply to Rental Property losses, if not outright deferral of NG losses against future profits or Capital Gain.
    5. As an accountant, I agree there are too many of us, same applies to Bankers, Real Estate agents, lawyers.

    Cheers

    • rob101 says:

      HB 55 nice summary, I think as i said above the cashflow situation as well as the profit and loss should be understood. this means that the entity would no longer get the benefit of the loss progressively but only when the house is sold. that is a factor. the losses need to be funded with money that in the majority of cases is fully taxed (a loan from the individual to the company for example) until you sell the asset.

  9. Al says:

    To me the highlight of the NG discussion is John Symond admitting it is a bad policy and not working as intended. Most should know this by now as I can’t remember reading any pro NG arguments recently. Probably because there aren’t any. Hoping discussion turns to WHEN something is going to be done about it.

  10. Jumping jack flash says:

    We can only hope, but realistically, to raise a quick few billion, there is a better chance of them placing a GST on all food, and any other things that aren’t already taxed by it.

  11. swizzy says:

    Here’s my take on it – limit Negative Gearing to a “Business Model” of specified time limit, say 4 years.

    That is, if you can’t get a property or “business” positively geared in 4 years, you are a hopeless business person, and you should need to prove to the ATO that you are changing your business model to try to make it profitable, this includes selling of assets.

    This is a soft approach, and there will be obvious loop-holes, e.g. positively gear for one year, then negatively gear afterward.

    The thing is, We are a nation of “over-leveragers”.

    In the coming decade, the Australian view on over-leveraging may change remarkably.

    But right now, we admire it and discuss it at BBQ’s. This has to change.

  12. joeflood says:

    Just uploaded an old 1986 paper of mine in which I state that negative gearing does NOT RESULT IN ANY LOSS to the government – they actually make money out of it because of the clawback from the tax on the interest received by the financial institutions. Depends on relative marginal tax rates etc but may still hold. See page 10 in

    https://www.academia.edu/5200386/Housing_Subsidies_Study_PR3_Effective_incidence_of_subsidies

    What critics forget is that you actually have to LOSE MONEY to neg gear – extremely risky.

    There are therefore plenty of negatives, the most important being the moral hazard assumed with the government paying 48% of any recurrent loss. And then being forced to prop up the rest of the house of cards.

    I dont think of neg gearing as a subsidy, its actually a free partial insurance policy. Quarantining it I would actually regard as an extra tax on landlords – unless it is done across all asset classes.

    • Tandem says:

      Eventually I hear some healthy thoughts. People forget few things:
      A) the investor’s losses are higher than government’s ones in any case (as long as max income tax does not exceed something like 55% level).
      B) principal repayment is not included in the tax deductibility, so investors still have to pay for their property.
      C) the investor can only offset against other income – it means they have to add value in the other sector of economy. And the more value they add, the more rights for NG they get.
      D) nobody wants to have losses
      I would not say it is free insurance – this is mutual re-insurance between government and landlords.

      • The Patrician says:

        “..mutual re-insurance..”? That is gold. The rentseeking gold medal goes to Tandem.

        I’m surprised we aren’t all paying Tandem for his/her valuable service insuring the government….Oh, that’s right, we are!

      • Neville Gearless says:

        More rent seekers grasping at straws. I saw one argument somewhere (maybe it was Joefloods?) that basically used the Mafia defence. As in they eventually become rich, start legitimate business’s and pay loads of tax. Therefore organised crime is justified..

      • Tandem says:

        Thanks for appreciating my thoughts. If you want to pay me, its acceptet anytime, I prefer PayPal.

    • flyingfox says:

      Quarantining it I would actually regard as an extra tax on landlords – unless it is done across all asset classes.

      As it should be.

      • Tandem says:

        why should it be?

      • flyingfox says:

        Because by most consensus, and this is from people much smarter than you and I, negtiave gearing as it is implemented in Oz (and only in Oz, Canada, Japan and NZ I think) causes gross distortion of asset pricing in particular property.

      • Tandem says:

        What would be ideal system then? Shall residential housing be pulled out from the investment game?

      • flyingfox says:

        Housing and property can be great investments. They just need to not be a CG centric one.

        Get rid of NG (against other income), SD, bring on land taxes.

        Make investment about investment, current income plus future CG.

        Property should be returning above TD rates by a few percent.

        This also means cleaning up the lenders as well.

    • runalltheway says:

      Joe,
      I will admit I haven’t read your paper yet, but thanks for uploading it.

      My immediate thought on reading your post is that you’re missing the fact that our banks borrow offshore.

      Yes, they pay Aust. tax on their interest income, but also claim a tax deduction for the interest they pay offshore.

      For a single dollar of interest paid in excess of net rents by the borrower, the Gov’t could only recoup a fraction (profit margin on the interest x 30% tax) from the banks.

      However, the Gov’t has forgone personal income tax (15% to 45%) on the full dollar of interest.

    • swizzy says:

      Absolutely negative gearing is a partial insurance policy.

      Sydney prices are so high, a person on a single income cannot get a home loan that would cover the debt.

      UNLESS..they purchase it as a property investor, then the banks will loan practically an unlimited amount, interest only, so long as LMI is covered.

      This is an unintended consequence of negative gearing and is great cause for alarm.

  13. swizzy says:

    Absolutely negative gearing is a partial insurance policy.

    Sydney prices are so high, a person on a single income cannot get a home loan that would cover the debt.

    UNLESS..they purchase it as a property investor, then the banks will loan practically an unlimited amount, interest only, so long as LMI is covered.

    This is an unintended consequence of negative gearing and is great cause for alarm.

  14. aj. says:

    Negative gearing will end when the benefit to boomers is outweighed by the detriment – i.e. when they need more tax bucks for their healthcare and retirement.

    There will however most definitely be something that comes along to prop up the speculator housing market in its place.

    http://www.bloomberg.com/news/2013-11-24/norway-poised-to-relax-bank-rules-to-fight-house-price-deflation.html

    Generation debt should be very aware there are no lifelines coming here…just a generation of boomers that want to hand the rent seeker mantle to their kids.