Busting the negative gearing myth

ScreenHunter_951 Jan. 21 20.02

By Leith van Onselen

The Housing Industry Association’s (HIA) Shane Goodwin yesterday wrote a spirited defence of negative gearing in The AFR. Let’s evaluate Goodwin’s arguments:

Much of the commentary around negative gearing appears based on the presumption that it is the exploitation of a loophole by investors in residential property, when of course, it applies to an entire range of asset classes. Negatively geared investments contains risk and will only provide a benefit to an investor when the accumulated capital gains (after-tax) over the holding period outweigh the cash flow losses incurred during the holding period. If this is not the case then the investor is left with losses.

It’s the after-tax part that’s the issue with negative gearing, whether it be for property or shares. Why should investors be allowed to offset investment losses against their current wage or salary income? Such deductions are not allowed in most other countries and they cost the Budget billions in foregone revenue. They also artificially increase demand, which leads to higher prices and a mis-allocation of capital, not to mention worsening the equity and integrity of the tax system.

Back to Goodwin:

It is also important to recognise that property investment is not the domain of the wealthy. According to the Australian Taxation Office, 77 per cent of taxpayers with property rental income have a taxable income of less than $80,000.

This is partly true. The majority (72%) of negatively geared investors do earn less than $80,000 per year:

ScreenHunter_07 Apr. 30 11.17

However, the proportion of people holding negatively geared property also rises with income:

ScreenHunter_35 Oct. 22 07.52

As do the losses claimed:

ScreenHunter_36 Oct. 22 07.54

Back to Goodwin (my emphasis):

The taxation revenue forgone from negative gearing is around $2 billion annually. Contrast this with $5.2 billion spent by the Commonwealth under the Social Housing Initiative to bring 19,700 homes to the market. A significant addition to the public housing stock, but the equivalent of about 1 per cent of the private rental market. If changes to the taxation treatment of investment in housing did see investors exit the market, will governments have the appetite, or means, to fill this gap? Would property prices drop across the board?..

Increased investor activity is good news for housing activity, market confidence, and keeping a lid on rents…

The most important part of Goodwin’s statement is the assertion that negatively geared investors would exit the market en masse, leaving renters on the street and forcing-up rental costs. Unfortunately, it does not hold-up to scrutiny.

Reserve Bank of Australia (RBA) data clearly shows that the overwhelming majority of investors – almost 95% – buy pre-existing dwellings, not newly built dwellings, and that the proportion of investors buying new dwellings has fallen spectacularly since negative gearing was re-introduced in September 1987 (see next chart).

ScreenHunter_946 Jan. 21 16.38

Moreover, the amount of investor funds going into new housing has barely shifted in 25 years, whereas investment in pre-existing dwellings has skyrocketed:

ScreenHunter_947 Jan. 21 16.44

Because investors primarily purchase pre-existing dwellings, negative gearing in its current form simply substitutes homes for sale into homes for let. As such, negative gearing has done little to boost the overall supply of housing or improve rental supply or rental affordability.

In the event that negative gearing was once again quarantined and a proportion of investment properties were sold, who does Goodwin think they would sell to? That’s right, renters. In turn, those renters would be turned into owner-occupiers, in turn reducing the demand for rental properties, leaving the rental supply-demand balance unchanged.

Nor would rents be expected to rise. The below chart plots the Australian Bureau of Statistics (ABS) rental series from 1972, with the period where negative gearing losses were last quarantined (i.e between June 1985 and September 1987) shown in red. As you can see, there was nothing spectacular about this period, with much higher rental growth recorded in earlier periods when negative gearing was in place: ScreenHunter_32 Oct. 22 07.40

Similarly, if we deflate the above series by CPI, in order to remove the effects of inflation, we again see that rental growth over the period when negative gearing was last quarantined was nothing special, with periods of higher rental growth recorded both prior to and subsequently:

ScreenHunter_33 Oct. 22 07.42

The fact remains that negative gearing is costing the government billions in lost tax revenue, but is doing nothing to boost supply. It also creates additional demand from tax subsidised investors, placing upward pressure on home prices and locking-out would-be first time buyers.

In short, there is little policy rationale in favour of keeping negative gearing, whose foregone funds could instead be used to fund schools, hospitals, housing-related infrastructure, or any number of other worthwhile endeavours. That said, while I strongly disagree with Goodwin’s support of negative, I do strongly agree with him that negative gearing is not the major impediment to affordable housing, with supply-side barriers a bigger problem:

It is true that many first-home buyers are struggling to get into the market…

A good place to start is with reducing the excessive and inefficient taxes on new housing, and untying the red and green tape that add further costs to building. At the same time, we need to reverse years of anti-development mentality that have created road blocks at every turn. While everybody has a story about a friend or family member that can’t buy their first home, too many people also oppose residential development in their suburb…

More accurately, there has been a decade of neglect and an absence of political will to address housing supply, which has delivered an inevitable concoction of renewed demand amid a contraction in relative supply.

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110 Responses to “ “Busting the negative gearing myth”

  1. Monkey says:

    Whenever I see that table showing 72% of negatively geared property investors earn less than $80,000 and a large proportion less than $6,000, I immediately suspect tax fraud. My bet is that a lot of those investors have a healthy cash income which they are not declaring. Almost every time I deal with a tradie I get asked for cash which goes straight into the wallet.

    • Felix Frost says:

      I find it pretty hard to imagine how you can afford an investment property if your real income is less than 80 grand- especially in rip off Sydney.

      • mine-otour in a china shop says:

        Are a lot of them retired with no income, or farmers in rural Australia perhaps with the property safety net in a city?

        Would be interesting to see the data broken down by age of deductor and occupation?

      • runalltheway says:

        Mine,
        The tax stats are here if you’re interested:

        http://tinyurl.com/lefbd6s

        Check out table 6a, columns GO to Gt for the net rental gains/losses by postcode.

        Anecdotally, wealthier farmers have places in the city, but the tend to be left empty as crash pads. More typically, farmers tend to buy an IP in the largest nearby town.

    • runalltheway says:

      Felix & Monkey,
      I think you’re overstating the extent of tax avoidance – at least by individuals.

      A lot of IPs are owned jointly (Mum and Dad). One of them may have a high income, the other a low income. If they haven’t been clever about it, then the negative gearing benefit is being split evenly between them and reported as such to the ATO. Thus a lot of ‘low’ income earners with IPs.

      Also, it is possible to hold an IP on <=$80K, just obviously not the more expensive ones in certain parts of capital cities. It all depends on personal circumstances and the extent to which people have been able to get money from family, etc for the deposit.

      Agree about tradies dealing in cash. Just not convinced that it's the best explanation for IPs being owned by mid-income earners.

    • Rod77 says:

      Tax Fraud is not the big issue here. Macroeconomic stability is. Can you imagaine what happens when unemployment moon shots to over 8% to all these people holding negative geared properties. How do you offset a loss against your income when you don’t have an income?
      This is a house of cards. The negative gearers will blow up, followed shortly by the LMI businesses bringing the the whole edifice down to earth.

      No one will talk about housing affordability after that.

      • Escobar says:

        Rod

        True, but I wonder what level the unemployment tipping level is.

        If unemployment is say 6%, I’d imagine people in their 30′s and beyond are say 2% unemployed while under that amount are say 15% unemployed then at what level of unemployment does it take to make the (in my mind) portion of over 30 years of age start selling IP.

        Figures are illustrative only.

    • Explorer says:

      If you have enough negatively geared property making tax losses of course you will be a lower income earner on an an after tax basis than you otherwise would be.

      That’s why you do negative gearing in the first place – to reduce your income and therefore your tax.

      • DrBob127 says:

        Yes Explorer, this occurred to me also.

        So say that the majority of negatively geared housing investors are low income earners is a circular argument.

        Many property investors may be low income earners BEACAUSE OF negative gearing

    • Rusty Penny says:

      The figure shows “taxable income”, not assessable income.

      The common strategy is to load up on enough debt so that your interest expense drops your taxable income to the 32% (+medicare levy) threshold.

      Some people obviously go hardcore a shifting to sub $6k as to fund all their other living expenses.

      • flyingfox says:

        It would be good to get similar figures for assessable income.

      • DMc says:

        Take a look at the figures in the table again. There were approx. 485,000 negatively geared investors in the $37k-$80k income range, with total losses of $4.6bill. That’s a loss of about $10k per person, nowhere near enough to drive someone from the top tax bracket down to the sub-80k bracket.

        Those in the >$180k bracket had larger deductions but you would expect that; larger income, larger investments, larger costs and deductions.

  2. briefly says:

    There is a further consideration as well. Housing is not an asset in an economic sense. It is a consumption good. The current system of tax subsidies increases the real cost of owning or renting (consuming) houses, retards consumption of other goods and services and, indirectly, also reduces the opportunity for households to save. This system both reduces real incomes and effectively diverts savings into consumption: that is, it wastes household savings. In an economy that is experiencing stagnant income growth, feeble investment rates and which in any case relies on foreign capital for its development, negative gearing is a ridiculous policy.

    The abolition of negative gearing would be a significant pro-growth measure. Considering the weakness in the domestic economy as well as the stress on the budget, the repeal of these subsidies should be a very high priority.

    • Frederic Bastiat says:

      Excellent post briefly

    • pelych says:

      +1 Well said.

      Further, his argument re share trading is irrelevant. Nobody needs to own shares etc but there are three basic need of all humans ( Maslow ) Food, SHELTER and freedom from harm.

      How any government can sit by while a basic human need is commoditised and speculated into the stratosphere is beyond me!

      • gonderb says:

        You don’t have to OWN land/houses to have shelter – Maslow’s need can be met by renting as well. There is no basic “right” to property ownership, both in Australia, nor anywhere else in the world I am aware of?

      • Sweeper says:

        One of Maslow’s needs is security. Is that provided by renting?

      • pelych says:

        Gonderb

        Agreed, rental does provide shelter but at what cost? Affordability of home ownership and rental are one in the same – higher house prices = higher rents. Further, our house flipping landlord favouring laws that provide no security of tenure exacerbates the problem.

        Housing costs are the single most pernicious problem in our society today.

      • gonderb says:

        Sweeper – in Maslow’s theory, security referes to physcial security – so yes, that is provided by renting shelter. You are referring to security of tenure, which is not in the classical heirarchy of needs.

        And besides, renting does provide security of tenure for the duration of a lease agreement right? But it’s moot wrt Maslow’s Heirarchy regardless.

      • Sweeper says:

        It was more broad than that. By security Maslow also meant financial security and a sense of predictability about future events.

      • Rusty Penny says:

        That’s probbaly why it’s called Maslow’s theory, and not Maslow’s law.

      • drsmithy says:

        One of Maslow’s needs is security. Is that provided by renting?
        With proper tenants rights laws ? Yes.

    • m8 says:

      +10000 briefly

      and drsmithy, well pointed out, we don’t have proper tenant rights laws. 2 weeks behind in rent and get evicted, heard it happen before 1st hand.

  3. The Patrician says:

    Thanks Leith for your measured and dispassionate rebuttal. I envy your restraint.

    If I may add one point that seems to get lost in the noise.

    I find it bizarre that an industry association, whose aims are to promote policies that increase the supply of new housing, would not advocate for an adjustment to NG that would see an unprecedented increase in the investment in new dwelling construction.

    NG for new-builds only.

    Its members need to ask, why does the HIA instead continue to advocate for a policy that actively diverts investment funds away from new dwelling construction ?

    p.s. Is the revenue forgone $2bn or $4bn+p.a.? Can we get some clarity on that?

    • Frederic Bastiat says:

      I have also often thought that Pat.

      I thought the same thing about the FHBer boost…why didnt the HIA kick up more noise about the grant going on existing dwellings during the Rudd stimulus program.

      My only conclusion is that the HIA are more than happy for any policy that promotes higher house prices, as that allows their industry more room to make a profit margin on the build side of the equation.

      • AB says:

        My only conclusion is that the HIA are more than happy for any policy that promotes higher house prices, as that allows their industry more room to make a profit margin on the build side of the equation.

        As someone who also wonders why the HIA spruiks for NG on existing stock, I think that must be at least part of the reason.

      • The Patrician says:

        The bizarre thing is the HIA eventually saw sense and campaigned successfully recently for FHBGs for new-builds only (see Qld, NSW etc) but not NG.
        HIA don’t even need to go that hard, all they need to say is “if you are thinking of changing NG, at least consider keeping it for new-builds only”.

    • Escobar says:

      Patrician

      Closer to $4-5bn

      • The Patrician says:

        Saul Eslake certainly puts it in that $4-5bn range.

      • gonderb says:

        I believe the $4B-$5B figure represents the reduction in taxable income – meaning the actual benefit is about $2B as stated. A lot of people get this figure wrong, as you have to be careful about what is being referred to – total interest expenses, total expenses/deductions, or the “negative gearing” dedection (where the investment income has been deducted from the total expenses). Also, the FY2011 year had quite high interest rates, I expect the figures for 2012 to be significantly lower.

        By the way, the amount of stamp duty, CGT, and state land taxes paid by property investors each year is far greater (10x) than either figure each year. Except for the stamp duty, if there were less investors due to removal of NG, then the over-all effect would be aggregate lower over-all government revenue from housing. Just saying…..

      • The Patrician says:

        “Eslake sees no policy rationale for negative gearing. It costs taxpayers a fortune – roughly $5 billion in revenue foregone”

        gonderb, Have you got a data source for your $2bn revenue forgone claim?

      • gonderb says:

        @patrician – that figure is from the main article on this page. But I do recall seeing a figure of about $5B as the *net* NG deduction total claimed against other income by property investors from the 2011 tax office data, which would equate to about $2B forgone tax revenue (ie average 40% marginal tax rate) – I will dig up the actual number and confirm.

      • Escobar says:

        I read the article above to show $13.3bn rental loss. @40% (moving people to a higher bracket plus rounding) is $5bn.

        So $4-5bn sounds right.

        I read another article in 2013 (can’t locate) that reported the same sort of figure.

      • gonderb says:

        Ok here is good source for the 2011 data, with correct terms & interpretation: http://blog.rpdata.com/2013/05/there-were-1213595-individuals-with-a-negatively-geared-property-over-the-201011-financial-year/

        The ~$13B figure is the total net loss made on only those property investments that made a loss. The ~$8B figure is the net loss made on *all* property investments (including those that were positively geared).

        So I think the $2B figure I quoted from original article we are all commenting on probably understates the “subsidy”, as if NG were aboloshed for everyone, today, then the positively geared properties would still be paying tax on the profit, and the NG ones would no longer be able to claim a deduction against other income in the same year – so for that we need to use the $13B figure, which would make the “cost” about $4b-$5B as Saul Estlake claimed.

        Of course, you wouldn’t actually save the $4B-$5B, as those losses would just be carried forward and deducted from in the future when the property became positively geared, or from any capital gain tax liabilty, reducing future taxation income. So the “real” saving to the tax payer would be a lot less than this amount – basically the difference between the FV anf PV of that taxation cash-flow discounted by the average time it would take to get from a to a NG -> PG investment.

      • Neville Gearless says:

        gonderb: “Of course, you wouldn’t actually save the $4B-$5B, as those losses would just be carried forward and deducted from in the future when the property became positively geared, or from any capital gain tax liabilty, reducing future taxation income.”

        No, only if the investor has purchased within a Trust structure would he be able to carry forward losses. Anyway, the removal of NG would increase the price of entry for investors, an even keel with upgraders and FHB’s, and when the 50% rebate on CG is removed I’d expect to see investors ranks thinning at auctions thus definite savings for the taxpayer.

    • netti says:

      Last article I read:
      “investors now claim rental losses of almost $8 billion on their income tax returns”
      http://www.abc.net.au/news/2013-08-30/janda-home-ownership-and-future-aged-underclass/4924862
      Agenda: underplay the losses to placate MSM readers.

      • Escobar says:

        netti

        The question was about revenue forgone, so of that figure tax forgone would be around 40%?? maybe?

        So that’s $3bn lost revenue.

        Very very rough.

        I saw one article identifying rental losses at $13bn.

        Around $4-5bn lost revenue.

    • lisdillon72 says:

      I thought why the HIA doesn’t just support NG for new builds, but when you take into account that renovations and additions, no matter how minor, to existing property’s (investment property in this case) are a major source of work for the membership of the HIA (builders, trade contractors, design professionals, kitchen and bathroom specialists, manufacturers and suppliers) you can understand their support for the current NG regime.

      • csfn says:

        Yes, that’s my guess too. It’s the ‘wealth effect’ doing its magic again. Rising asset prices mean the asset owners start thinking about how to add value to the asset, to maximise the gain.

        It would be interesting to compare the value of new build activity with the value of renovations. And also the numbers employed in each sector, though obviously there will be overlaps with some doing both. I’d guess the value of new builds might be higher, but that the number of people employed by renovations might be more.

  4. squirell says:

    Happy to remove it for both property and shares, in fact if we don’t then residential unit trust companies would probably be set up as a way to bulk buy into the market and negatively gear. Agree also that supply is important issue but the easiest way to relieve the undersupply is to not bring in so many immigrants and put blanket restrictions on purchases by those who don’t have residency. Easy credit and negative gearing effectively throw fuel on the fire of the supply demand imbalance, they exacerbate a pre existing problem so need to be part of the solution.

    • Rusty Penny says:

      Trusts can’t distribute losses to beneficiaries.

      It can offset losses with profit from other assets within the trust.

      But that’s not the main drivers.

      Credit has chased residential property because UGB’s have in effect rationed housing, thus driving prices upwards.

      It’s been amplified by cultural and psychological drivers.

      All negative gearing does is make it more affordable, thus more credit can be accessed

      A working market cannot allow extraordinary prices in the long run, thus the acquisition of extra credit,is futile and no extraordinary gain can be sought.

      UGB’s prevent a working market, by permanently restraining the supply side.

  5. Turnitup says:

    “There is little policy rationale in keeping negative gearing”. Yes, except that it’s a vote winner, and that’s all the rationale the bastards need. Just ask the children detained in our detention camps.

  6. Mav says:

    HIA members should be busting Shane Goodwin’s b@lls for speaking against their interest and in favour of other interest groups like RE agents, merchants of debt and ponzi little landlords.

  7. Janet says:

    Drop the Cash Rate to 0.5% and remove NG at the same time. NG should disappear at 0.5%, surely! Then, when rates ‘normalise’ NG will be a thing of the past, and must remain so (NB: I’m no fan of lower interest rates in isolation. But in tandem with real economic reform – then that’s fine by me)

    • Frederic Bastiat says:

      That seems like a drastic measure to stop Negative Gearing…engaging in more financial repression and benefiting speculators in housing even further…all so we can remove a stupid subsidy that should have been removed two decades ago…how about we drop NG tomorrow, let the chips fall where they may and stop trying to fiddle with markets.

      Surely negative gearing, FHBer boost and government land release policies show the futlity of ALL Government policy in this area.

      When are people going to realise who the ‘bad guys’ in this whole fiasco really are?

    • Ino says:

      Oi!!! Is it not enough that my bank account is getting raped at this already low rate, why do I have to take another one for the team?!!

      Nah – bugger that! I want more in exchange for this! A whole lot more!

      Knowing politicians – they’re going to back-flip on the NG decision and leave the IR at 0.5 as you suggested! Then what?!

      • Janet says:

        Ummm….How else are you going to convince a politician to change an institution like NG?! Financial repression, sorry – yield compression , is a reality. It will be for yonks. So let’s get something out of it! Everyone wants to make Australia/New Zealand a better place in the future, “as long as it doesn’t affect me….”.Someone has to make the first moves. Sure, it will be ‘the good guys’, again. But what other choice is there? Do we eventually want property prices at +20 times the average income? (Just for the record, again – I am 100% in cash, and have been for years. No one will get ‘hurt’ more than me if deposit rate fall.). If we really want a competitive marketplace/manufacturing sector; if we reall want a lower exchange rate; if we really want to reform the economy, now and for the foreseeable future, then someone tell me what will trigger that without financial pain on someone’s part.

      • Escobar says:

        Janet has a point.

        NG has to go without popping the bubble. Without popping the economy.

        Better to be phased out some how.

    • Many NG-ers don’t do it for the tax benefit.

      They think they do, but they don’t. Reducing debt will only fuel the fire – cheaper debt will prop up prices as that 3% gross rental return starts to move toward being positively-geared (cheered on by the real estate lobby – buy now, buy now!!!). We’re not dealing with rational people here.

      I agree that removing NG at an interest-rate low-point would make for the smoothest unwinding of NG. However an alternative (and more politically palatable) could just be to remove NG for properties purchased after, say, 30 June 2014. It might take 10 or 15 years for inflation to turn them all positively geared, but we have to start somewhere. …Of course in tandem to this the govt. could announce that from 30 June 2020 (for example) all NG provisions on existing properties will be removed. People have very short memories, and for many the idea of 2020 seems light years away.

  8. Peter Fraser says:

    A tax deduction is a tax deduction whether it’s brought forward against other income sources or stored for use as a later deduction doesn’t really matter from an accounting POV.

    • Escobar says:

      Peter

      You know the drill. The NG cash flow saving allows one to Leverage more borrowings than they otherwise could.

      Leaving owner occupiers at a disadvantage either locking them out of the market or paying higher prices.

      • Peter Fraser says:

        Not being able to deduct the cost of home ownership is a disadvantage, but getting rid of NG isn’t about cancelling the ability to claim interest and associated home ownership costs, it’s only about allowing any losses that exceed rental income as a loss against wages.

        IE if an investment home earned $25,000 per annum and cost $27,000 in interest and costs, then the amount negatively geared against personal income is $2000.

        That $2000 would be treated as a loss forward and claimed against the income when the property became positively geared, or against the capital gain on sale.

        Is that really a big deal?

      • flyingfox says:

        @PF I think the terminology is very confusing. Most is not all that are against NG are against claiming losses against current income. I have no problems of carrying forward losses. That is a universally accepted accounting method.

      • Peter Fraser says:

        FF – fair enough you have a good grasp of the accounting reality, but I get the idea that many think that wiping NG would stop the tax deduction – it wouldn’t, it would have some effect in the short term but not much especially in an interest rate environment where gross rental yields should be covering the interest on an IP with some owner equity.

        Perhaps the US tax rules that allow a PPOR owner to claim interest against their income is a better solution to gain a more level playing field. Of course that tax change would force other tax changes to rebalance the governments income stream, but it would work.

      • JohnsonM says:

        Couple things Peter:

        What about those who continually draw down equity to purchase new homes? They don’t get positively geared. Many don’t sell either.

        Clearly a loss deducted in the future is worth less than a loss deducted today (discount rates and all that).

        If it was really such a complete non-issue then why is anyone for or against it? You make it sound utterly impotent.

      • Peter Fraser says:

        JohnsonM – if an investor has a number of properties and uses one to draw down equity, then that should mean that at least one of his properties is positively geared.

        You would need to look at the position of the whole portfolio and not just one property in isolation. To the best of my knowledge no one is saying that each property becomes an income earning entity on its own.

        I wouldn’t say it’s impotent, but it’s not the steroid driven monster that it’s painted to be, except at RE seminars where it’s sold to the gullible as a way to wealth. Get rich by losing money doesn’t cut it with the better informed. Forgoing income for later capital gains will work as a sales tool, but the tax deduction bit has little appeal to experienced investors. Note the word “experienced”

      • Pat20 says:

        Ideally, I think it would be preferable to allow the interest deductions as they are incurred, but tax any capital gain as it accrues. This would be applied across most appreciating assets for neutrality (you may want to preserve the existing treatment of owner occupied housing). Taxing capital gains on accrual is not an approach that is often
        adopted, but it is not difficult.

      • Escobar says:

        Pat20

        Will you refund the tax when house prices drop?

      • Pat20 says:

        Escobar
        The tax system doesn’t generally refund losses (though ideally it would).
        If you were taxing gains on accrual, you would also allow a deduction for any capital loss on accrual.
        You would no longer need to quarantine the deduction for the capital losses under accrual treatment (because there would no longer be an incentive to realise losses but defer gains).

      • drsmithy says:

        That $2000 would be treated as a loss forward and claimed against the income when the property became positively geared, or against the capital gain on sale.

        Assuming those things actually happen…

    • dumb_non_economist says:

      Peter,

      Most of those IP owners I know use NG for “cash flow” purposes, while the tax loss can be carried forward they use NG to subsidise their costs, either to allow them to borrow more or keep the same lifestyle. With NG gone it would reduce some of the pressure on prices.

      In addition to this what is the effect of inflation on your tax losses carried forward, how long before your IP is +ve geared. If inflation can be used against debt, then surely it must have the same effect on a tax loss carried forward?

      • Peter Fraser says:

        Hi DNE.
        As part of my job I often look at loan servicability for IP owners. Removing NG wouldn’t remove all of the tax deduction, it would just remove the tax refund on the deductions that are in excess of the rental income. How that would affect an IP owner would very much depend on the individual circumstances.

        Banks factor the currect tax deductions into the equation, but they also reduce the gross rental income by 30% as a buffer to cover other issues like periods without a tenant, rates, insurance, agents fees etc – thats a large buffer in most cases much more than the actual costs.

        I don’t know how the banks would change their servicability calculation to accomodate the change. They may absorb it into that 30% buffer knowing that the deduction will be claimed later when the property becomes positively geared, or they may reduce the borrowers borrowing capacity slightly.

        I suspect the latter, but I don’t think that it would make a lot of difference except on some cases. In periods of very high interest it would make a difference, but I can’t see rates of 10% returning for a decade or more.

        Sure inflation would eat some of that tax deduction, but what is the current inflation rate? Most IP’s that I see turn positive in about 5 to 6 years, less at current interest rates.

        As an investment property owner, I don’t even bother claiming depreciation, I would rather account for 50% of that when I sell because in that year my marginal tax rtate will increase significantly, but then I’m not negatively geared either, I’m also lazy and I don’t like complex tax structures. Commercial properties BTW.

      • dumb_non_economist says:

        Peter, thanks for the reply.

        I can see that in the present climate that’s the case. Maybe a decade to see IRs @ 10%, not too sure for 7 or so, an increase of 50% in interest. A 500k loan goes from 25 to 37 and there I think NG would help.

        As an aside not many on the lower tax brackets seem to appreciate that NG isn’t that beneficial to them.

      • Peter Fraser says:

        Yes, I sometimes wonder if NG isn’t really a means of stabilising the system in times of high interest rates. It has been almost 30 years since we saw extreme interest rates, around the time when NG went and then reappeared – co-incidence?

        Lots of people choose the wrong investments for their situation. It’s a difficult choice and housing is easy to get into now. It was once very hard – before about 1990. Shares are volatile and margin loans are dangerous – so for the average Joe that means housing is their vehicle of choice – rightly or wrongly.

  9. Moody Cow says:

    Can we also please bring back the old inflation indexing for CGT? It wasn’t hard to divide one number by another, then multiply the result by the purchase price. Simples!

    Oh, and averaging. I can’t remember whether that was removed, but it added some fairness to the whole thing.

    • gonderb says:

      Averaging was removed – which I agree was a backwards step. It encourages people to hold “in the money” assets and only sell when they retire etc and have lower income.

      It’s worth remembering this as well for those who think NG might cause a lot of PIs to sell – if they are holding capital gains, I don’t think they will, for the above reason. It would probably discourage many from expanding their portfolios, or from investing in property for the first time, so would have some impact on the market for those reasons.

  10. N.C. says:

    On the demand/supply issue, let the tail wag the dog.

    NG stimulates demand.

    Demand stimulates supply.

    Problem with NG is that it is stimulating the wrong demand.

    Tweak NG to stimulate the right kind of demand, and watch gov’t and industry start to seriously tackle all those supply side problems.

  11. lloydie says:

    This is simple to fix. Only allow NG on new builds from now. All existing NG to be quarantined. If existing Inv prop is sold, losses carried forward.

    • netti says:

      Yes, it can be that simple.
      With 1.2 million renters as potential buyers, one would think there would be enough voices to demand a change. Housing needs to be treated primarily as shelter.

  12. Powermonger says:

    I always have issues with pro-NGers claiming NG is available for shares so should be available for property investment also. This is like comparing apples with oranges, over investment in property has far more social ramifications and direct effects on daily life then shares. They are anything but equal, shares are purpose built investment instruments, property is not.

    The statistic too that 77% of property investors earn $80,000 or less is a little misleading I find too. If you look at the stats for distribution of investment properties, 72% of property investors only have 1 property accounting for 51% of the investment properties. 28% of the other property investors own 2 or more investment properties which accounts to 49% of investment properties. These figures are a bare minimum too as the ATO includes no stats for investors that own 7 or more.

    As I’ve mentioned previously, I know 6 individuals that own roughly 130 houses between them. It stands to reason then that the multiple IP holders have a greater amount of properties held then can be extrapolated.

    The likelyhood is that those on more than $80,000 a year control more investment properties and taking great advantage of negative gearing.

    • Sweeper says:

      If it keeps the real estate lobby happy, I’d be happy to see negative gearing on shares abolished. Compared to the effect on property it will hardly make any difference anyway:

      1. Because unlike real estate speculators, most shareholders are somewhat financially literate and know the difference between investing for return and investing to minimize taxable income.
      2. LVR’s on shares are a lot lower than residential real estate.

      So if it stops them whining, abolish negative gearing on all assets.

    • Deo says:

      I always have issues with pro-NGers claiming NG is available for shares so should be available for property investment also. This is like comparing apples with oranges, over investment in property has far more social ramifications and direct effects on daily life then shares. They are anything but equal, shares are purpose built investment instruments, property is not.

      Other than the above reason, it is also unfair to compare the NG for residential properties and shares because of other factors that made the property investments supposed to be “safe” compared to the sharemarket.

      The following government policies that prop-up the property market are not there in sharemarket:

      Limiting supply and increasing demand at the same time by restricted urban/council planning and out of control immigration program. If these to be replicated in the sharemarket, it will be like the government makes a share ownership a compulsory for new migrants and bans further capital raising/new share issuance by the company at the same time.

  13. China-Bob says:

    Goodness me comments morally justifying the unconscionable.

    Lets just be clear :
    Negative Gearing is Economic RAPE!

    Just like the physical act of rape its all about projecting power and control over hapless victims. This process starts with the UGB’s and limited land releases and is supported by policies like NG, its morally wrong and definitely not a victim-less crime.

    Maybe if we can nurture this image of NG’ers as economic rapists than politicians will find it in their own self interest to end these policies.

  14. Jono says:

    I would suggest that if we abolish negative gearing, then we need to abolish all forms of business deductions.

    Businesses should not be allowed to claim for interest expenses, or for operating costs like electricity, rent, water, stationary, utilities.

    We could raise more revenue… and by “we”, I mean Canberra bureaucrats of course with their grand visions of utopia and social engineering.

    • Rusty Penny says:

      I would suggest that if we abolish negative gearing, then we need to abolish all forms of business deductions.

      Why do you make that suggestion?

  15. OMG says:

    As an investor one of the main reasons I went for property was NG, the ability to subsidise losses in the first few years was hard to resist, three years in and I can no longer NG due to the low interest rates.

    My friends on double the average yearly wage and above have multiple investment properties, being taxed at the top rate means not having an investment to NG is lunacy

    The thing here is that due to NG they are able and willing to rent out their propertes at well below market rate, this is good for tenants, however, it means a bigger cheque from the ATO at the end of the day and they have no interest in paying down their loans (most are interest only)

    Their main purpose for buying was to reduce taxable income, any capital gains are a bonus

    I also heard on ABC radio about a plan for a not for profit rental agency that offers landlords properties well below market rental rates, ok so this is good for those struggle to find affordable rents, but does this mean that a Vaucluse home can be rented out for $300 pw when the owner has a $1.2 million intesrest only loan on the property, wouldn’t you love that kind of tax return cheque in the mail?

    • Rusty Penny says:

      My friends on double the average yearly wage and above have multiple investment properties, being taxed at the top rate means not having an investment to NG is lunacy

      Or paying your tax burden.

      The thing here is that due to NG they are able and willing to rent out their propertes at well below market rate, this is good for tenants, however, it means a bigger cheque from the ATO at the end of the day and they have no interest in paying down their loans (most are interest only)

      They plan on living forever?

      And the ‘below market rate’ lie.

      Allow the land market to work, then lets see what the ‘market rate’ is.

      Their main purpose for buying was to reduce taxable income, any capital gains are a bonus

      Rubbish, even twice the average wage is still ‘only’ the 38.5% tax bracket.

      Any interest expense disparity from rental income, they are paying 61.5% of out of their own pocket.

      Are they going to pay out of pocket 61,5% for the duration of ownership, then sell it at book value?

      No, they are aspiring solely for capital gains.

      I also heard on ABC radio about a plan for a not for profit rental agency that offers landlords properties well below market rental rates, ok so this is good for those struggle to find affordable rents, but does this mean that a Vaucluse home can be rented out for $300 pw when the owner has a $1.2 million intesrest only loan on the property, wouldn’t you love that kind of tax return cheque in the mail?

      Erhh no.

      At best, I still have to pay 53.5% of the interest expense out of pocket.

    • Escobar says:

      OMG

      GTFOOH

      “Their main purpose for buying was to reduce taxable income, any capital gains are a bonus”

      Reducing your tax with NG means you’re making a loss.

      So you’re saying “Their main purpose for buying was to MAKE A LOSS to reduce taxable income, any capital gains are a bonus”

      So no Gains are ok?

      WT…

      ALSO, having multiple properties only works when they’re in different land tax groups (better if across different states) as the Land Tax will make the marginal return on each new property minuscule.

    • DrBob127 says:

      “Their main purpose for buying was to reduce taxable income, any capital gains are a bonus”

      if that is truly the case , then make a donation to a registered charity of your choice.

      donations are tax deductable.

    • drsmithy says:

      Their main purpose for buying was to reduce taxable income, any capital gains are a bonus

      Can you walk me through the reasoning how losing money on property is preferable to paying taxes if you are assuming no capital gain on the property ?

      Because I’m struggling to make sense of it.

  16. DMc says:

    You show one side of the equation, the revenue foregone through NG, but ignore the other side which is revenue gained through capital gains tax, tax on positively geared properties (that may have started as NG properties), and state land taxes.

    How much of the revenue lost to NG deductions is recouped through other taxes?

    • flyingfox says:

      @DMc

      Forgone revenue is just one part of the equation. The bigger issue is that NG and CG concessions encourage capital appreciation as the means of investment return.

      This is not sustainable.

      To answer your question though, assuming the CG event does not trigger a bracket jump and all property loses are converted one-one into CG, the government forgoes exactly half of the revenue due to CG discount.

      • DMc says:

        @flyingfox,
        Absolutely, I’m not arguing that NG on residential property encourages productive behaviour, I’m just querying the validity of the argument that property investment and NG results in a large revenue reduction for the government.
        And yes, the CG discount is 50% and that’s well understood, but your assumptions are not likely to be a good representation of what happens in reality.
        “Property losses are converted one-one into CG” is not a good assumption and I’ll explain why:
        Gross rental yield has been above 4.5% for a while and retail mortgage rates fluctuate around 6.5% (lower at the moment, but let’s use the longer term average).
        With 1% other costs, that would give a NG deduction of 3% of property value per year.
        House prices almost tripled between 1999 and 2011, that’s a growth rate of about 9%p.a.
        Based on those figures, even with 50% discount the CGT collected would be 150% of the revenue foregone by allowing NG. This is even before the effect of bracket creep is considered, which would add further to the CGT collected and reduce the impact of NG (through reverse bracket creep). It also ignores other taxes paid by investors, such as state land tax and stamp duties.

        So the claim that property investment has an overall negative effect on government revenue is difficult to believe without further evidence.

        Reference charts:
        http://www.macrobusiness.com.au/wp-content/uploads/2011/09/Rental-Yield-vs-Mortgage-Rates-Units.gif

        http://1.bp.blogspot.com/_c9sjMyNxqqw/TJV50ugzp3I/AAAAAAAAAO4/nFRZce5GPXs/s1600/ScreenHunter_01%2BSep.%2B15%2BM.jpg

    • drsmithy says:

      Why would this revenue not remain if NG was removed ?

      • DMc says:

        To quote Leith can Onselen in the post above, “Such deductions … artificially increase demand, which leads to higher prices.”
        You can’t logically argue that NG is causing price increases and also claim that the price increases would continue if NG deductions are abolished.

      • Escobar says:

        That’s right, it causes “price” / revenue increases for FIRE.

        Increasing tax revenue….

        Reducing if NG abolished.

      • dumpling says:

        “You can’t logically argue that NG is causing price increases and also claim that the price increases would continue if NG deductions are abolished.”

        +1 DMc

        A simple thought experiment will be useful in which NG was banned in Year Zero and then introduced in Year One. The tax receipts will rise in Year One, because of the higher stamp duty per transaction AND the higher volumes. Abolishing NG in Year Two will NOT further increase the tax receipts. Otherwise, the government can keep increasing its revenue by simply changing the same rule back and forth every financial year!

      • drsmithy says:

        You can’t logically argue that NG is causing price increases and also claim that the price increases would continue if NG deductions are abolished.

        I don’t see the part where it is claimed that prices increases would continue if NG deductions are removed.

        Regardless, you certainly claim that if you think – as I believe Leith does – that NG is a relatively minor driver of property price increases.

        I interpreted your statement to mean that without NG, there would be no (or insignificant) revenue from CGT, land taxes and rental return incomes.

      • DMc says:

        “I don’t see the part where it is claimed that prices increases would continue if NG deductions are removed.”
        It’s implicit in your question, “Why would this revenue not remain if NG was removed?” The only way the revenue WOULD remain is if price increases continue.

        There are two views with different conclusions, and you can’t logically mix-and-match those conclusions.

        The first view is that NG creates investment demand for housing, pushing up prices. If this is the case then removing NG would negatively impact future prices and CGT revenue. This is Leith’s view, as evidenced by his statement, “They also artificially increase demand, which leads to higher prices…”

        The second view is that NG does not push up prices. In this case, abolishing NG will have no effect on housing affordability, other than possibly increasing rents, so what’s the point?

        “I interpreted your statement to mean that without NG, there would be no (or insignificant) revenue from CGT, land taxes and rental return incomes.”
        Replace “NG” in that statement with “investors” and you’d be interpreting it as I intended; without investors, there would be no revenue from CGT, land taxes and rental return incomes

        My aim was to point out that while Leith consistently paints investors as a drain on the federal budget through their NG deductions, in reality the presence of investors in the market has a positive effect on revenue because a 50% CGT discount is a lot less of a discount than the 100% discount owner-occupiers enjoy.

      • drsmithy says:

        The only way the revenue WOULD remain is if price increases continue.

        Huh ? The revenue from CGT and stamp duty will only _stop_ if property transactions cease. It certainly won’t continue growing – probably even decrease – but it won’t _stop_.

        The revenue from rental income will obviously continue regardless.

        Your premise appears to be that removing NG will turn everyone into owner-occupiers who never move house. Because that’s the only way CGT, Stamp Duty and tax on rental incomes stop.

      • DMc says:

        “The revenue from CGT and stamp duty will only _stop_ if property transactions cease.”
        Wrong. CGT would stop if property values stop rising. There would be no capital gains to tax.
        In reality, values won’t stop rising because of a NG abolishment but they might not rise as much as they otherwise would. If the property price doesn’t rise as much as it otherwise would, the capital gain will be smaller and there will be less tax payable. If you believe NG is inflating prices, then you must also believe it is inflating CGT revenue.

        “Your premise appears to be that removing NG will turn everyone into owner-occupiers who never move house. Because that’s the only way CGT, Stamp Duty and tax on rental incomes stop.”
        No, that’s not my premise at all. Removing NG may turn SOME (not all) houses from being investor-owned to being owner-occupied; the CGT and tax on rental FOR THOSE HOUSES will stop because owner occupiers are exempt from these taxes. Therefore the total tax revenue for the government will reduce because these taxes currently outweigh the tax foregone through NG.
        Having said that, even if it was my premise that all homes would become owner-occupied, your statement is incorrect. People don’t need to “never move house” to stop CGT and tax on rental incomes – owner occupiers don’t pay these taxes regardless of how often they move house.

      • drsmithy says:

        Wrong. CGT would stop if property values stop rising. There would be no capital gains to tax.

        Of course there would.

        * Properties that have not been transacted for a long time.
        * Properties where value has increased due to genuine improvements in utility (eg: new train line going in, new businesses starting nearby).
        * Inflation.

        If you believe NG is inflating prices, then you must also believe it is inflating CGT revenue.

        Certainly, but you’re not saying CGT revenue will decrease, you’re saying it will cease.

        Those are two very different propositions.

        Therefore the total tax revenue for the government will reduce because these taxes currently outweigh the tax foregone through NG.

        And how about the greater tax revenue that then reappears through income tax and GST ?

        To say nothing of the greater economic activity resultant from less money being pumped into unproductive property and ticket-clipping from banks.

        No, that’s not my premise at all. Removing NG may turn SOME (not all) houses from being investor-owned to being owner-occupied; the CGT and tax on rental FOR THOSE HOUSES will stop because owner occupiers are exempt from these taxes.

        Yes, but THOSE HOUSES are not all houses.

        Therefore the total tax revenue for the government will reduce because these taxes currently outweigh the tax foregone through NG.

        I think that’s a statement based on a rather large amount of assumptions.

        Having said that, even if it was my premise that all homes would become owner-occupied, your statement is incorrect. People don’t need to “never move house” to stop CGT and tax on rental incomes – owner occupiers don’t pay these taxes regardless of how often they move house.

        You forgot stamp duty and land tax.

        There are situations in which owner-occupiers pay CGT.

      • DMc says:

        “Properties that have not been transacted for a long time.”
        I didn’t say CGT would stop immediately, I just said it would stop. There will be a tapering period as properties have their gains realised. I thought that was obvious.

        “Properties where value has increased due to genuine improvements in utility (eg: new train line going in, new businesses starting nearby).
        “Inflation”
        You must have missed the part where I said, “if property values stop rising.”

        “…you’re saying it will cease.”
        I never said that removing NG would cause CGT to cease. If I did, please provide quote. I only said it would cease in the hypothetical situation of property value increases halting.

        “And how about the greater tax revenue that then reappears through income tax and GST?”
        Through what mechanisms? These would be negligible, if any, other than the removal of NG deductions which I’ve already said are more than offset by CGT returns.

        “To say nothing of the greater economic activity resultant from less money being pumped into unproductive property and ticket-clipping from banks”
        I agree with this and have said so several times. Now you’re just shouting at clouds for the sake of it.

        “Yes, but THOSE HOUSES are not all houses.” *
        Your point?

        “I think that’s a statement based on a rather large amount of assumptions.”
        Assumptions I’ve clearly presented and you are free to challenge. Can you identify any specific assumptions that you believe to be off the mark?

        “You forgot stamp duty and land tax.”
        I didn’t forget them, I ignored them because they are not the main issue or point of discussion. But if you insist… Owner occupiers don’t pay land tax, so less investors would mean less revenue. Stamp duty is largely unaffected by the difference between investor-owned or owner-occupied. It is marginally affected by turn-over rate and property values. Although small, these two effects would reduce revenue further in a market with less investor owned properties (ignoring a transition phase as investors exit the market), so thank you for bringing it up to strengthen my case.

        “There are situations in which owner-occupiers pay CGT.”
        This statement shows that you either have no idea about taxation in Australia or you are being deliberately pugnacious. The statement above that I’ve marked with an asterisk (*) is evidence of the latter but I’ll give you the benefit of the doubt… can you describe a situation where an owner-occupier pays CGT on a property that has never been made available for rent?

      • drsmithy says:

        I didn’t say CGT would stop immediately, I just said it would stop. There will be a tapering period as properties have their gains realised. I thought that was obvious.

        Except it won’t stop.

        You must have missed the part where I said, “if property values stop rising.”

        Yes, I did miss where you moved that particular goal post.

        Are you trying to argue that all property price increases would cease with the removal of NG ? Because that’s certainly not the position being presented by Leith.

        I never said that removing NG would cause CGT to cease. If I did, please provide quote. I only said it would cease in the hypothetical situation of property value increases halting.

        Huh ? YOur whole position in this discussion is that removing NG will stop property prices increasing.

        My point is that this position is untenable and not supported by any reasonable interpretation of Leith’s article.

        Through what mechanisms? These would be negligible, if any, other than the removal of NG deductions which I’ve already said are more than offset by CGT returns.

        Major gains through CGT windfalls are once-off events. Revenue from income taxation and GST are ongoing.

        Your point?

        That they will still be generated from houses that aren’t owner-occupier houses.

        Assumptions I’ve clearly presented and you are free to challenge. Can you identify any specific assumptions that you believe to be off the mark?

        Uh, the assumption that the removal of NG will cause property prices to stop increasing across the board ?

        This statement shows that you either have no idea about taxation in Australia or you are being deliberately pugnacious. The statement above that I’ve marked with an asterisk (*) is evidence of the latter but I’ll give you the benefit of the doubt… can you describe a situation where an owner-occupier pays CGT on a property that has never been made available for rent?

        You keep moving the goalposts to suit your argument. Clearly this discussion is pointless.

      • DMc says:

        “YOur whole position in this discussion is that removing NG will stop property prices increasing.”

        You are arguing against a position I don’t hold, never said I hold and have never presented an argument for. I asked you for a quote but you can’t provide one because it doesn’t exist. I don’t know how many different ways I can say it, so I’ll say it the same way as earlier:

        I never said that removing NG would cause CGT to cease. If I did, please provide quote.

  17. King Pez says:

    Abolishing NG would be political suicide.

    Keating danced around the idea and he even walked away from it.

    Surely Abbott will remain in self-preservation mode.

  18. willy_nilly says:

    Not before have approx 700,000 boomers who have a NG’ed property been heading into retirement, when they will not want it.