Negative gearing losses jump

ScreenHunter_04 Feb. 08 21.40

By Leith van Onselen

The Australian Taxation Office (ATO) has just released its 2010-11 Taxation Statistics, which once again revealed Australia is a nation of loss-making landlords, with both the number of property investors and the amount of tax losses increasing over the tax year.

According to the ATO, there were 1,811,174 property investors in Australia in 2010-11, up from 1,751,679 in 2009-10 (see next chart).

ScreenHunter_06 Apr. 30 11.17

The number of property investors claiming losses also rose to 1,213,597 in 2010-11, up from 1,110,920 in 2009-10, representing two-thirds of all property investors. Meanwhile, total income losses for all property investors was $7,862 million in 2010-11 (up from $4,810 million in 2009-10), whereas total losses for negatively geared investors were $13,285 million in 2010-11 (up from $10,144 million in 2009-10):

ScreenHunter_07 Apr. 30 11.17

Some more interesting (worrying?) facts can be deduced from the above data:

  • 1 in 7 Australian taxpayers are a property investor (either negatively geared or positively geared);
  • 1 in 10 Australian taxpayers are negatively geared;
  • The average income loss for all property investors in 2010-11 was $4,341, up from $2,746 in 2009-10;
  • The average income loss for negatively geared property investors in 2010-11 was $10,947, up from $9,132 in 2009-10; and
  • 72% of negatively geared investors (877,694 in total) earned less than $80,000 in 2010-11.

An in-depth report will be provided in the MB members report for May.

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Comments

      • Yeah, I’ll have all sorts of time series data in the detailed report, which will be released in May. Need to pull the data first when it is released later in the week by the ATO (very time consuming)

      • So 691, 750 Baby Boomers with an NG property, that I assume they will want to seell before retirement, or use their lump sum super (if they have any) to pay down the loan.

        Mmmm… that sounds like stacks to come on the market then over the next 10 years or so…. Good-o….

        Peter, there you are what have to to say about 691k NG’ed boomers?

  1. reusachtigeMEMBER

    This one …
    “72% of negatively geared investors (877,694 in total) earned less than $80,000 in 2010-11”
    It aint gonna end well…

    • Even worse – it looks like almost 400,000 people earn less than 37k, and 100,000 earn less than 6k. How the hell does NG even work for them??

      • reusachtigeMEMBER

        It’s funny how a term called “negative” gearing has become such a positive in people’s eyes. All sense of reality about it actually being a loss, only partly offset by tax deductions, has been lost.

      • The category is taxable income not acessable income.

        It implies that there are 100,000 taxpayers that have negatively geared themselves down to a nil tax payable position and are relying on spouse/partner and/or capital to pay for living expenses.

      • Don’t know what happened there! Try again:

        @Swifty – yes. Also, note that ~80% of those were cash-flow positive – ie gross rent > $0 in the table).

      • “100,000 earn less than 6k”

        That can’t be right. How would they even absorb the loss?

    • The key thing is their losses are growing and house prices are at best stuck on a plateau and at worst looking into an abyss

      • This data is old though. Currently, the consensus that is forming is that property is the way to go according to the recovery in prices. Medium term though, these people will lose money they can’t afford to lose. Hopefully short term as I’m sick of waiting…

    • dumb_non_economist

      Peter Fraser has been quite firm in the past that the income figure is after all deductions.

      • The term ‘taxable income’ technically means [assessable income – deductions].

        The ATO (of all people) knows this, and I would be very surprised if they used this term to mean anything else in their published statistics.

        I’m going to have a read of the document to see if it says anything to the contrary and report back.

      • I’ve had a look now – it’s quite clear to me that they have used the term ‘taxable income’ in the 2010-2011 statistics publication with its ordinary meaning of assessable income less allowable deductions.

        This much is evident from the following:
        (page 12)
        “INDIVIDUALS’ INCOME
        For the 2010–11 income year, individuals had total income
        of $662.0 billion, and taxable income of $631.3 billion, both
        increasing by 9.3% from 2009–10. The average taxable income
        for all individuals increased by 6.9% to $51,342.”

        [distinguishes between taxable income and total income]

        (page 16)
        “INDIVIDUALS’ DEDUCTIONS
        Deductions are subtracted from assessable (or total)
        income to give taxable income, from which tax is calculated.
        Deductions fall into these main categories:
        – investment deductions…”

        [specifically refers to deductions being an element of calculating the ‘taxable income’ figure].

        Not that this necessarily changes very much – if the average loss per negative gearer is about $5k per year, that’s not really enough to knock the average negative gearer into a much lower tax bracket…

      • Well if I may add my view – Taxable Income is by definition the income figure that tax is levied on, which is pre-tax net after all allowable tax deductions. Someone with a taxable income of $80,000 might be earning $180,000 gross.

        It was predictable that NG deductions would rise during a year when interest rates peaked post GFC. I therefore confidentially predict that NG deductions will miraculously fall as interest rates fall in the 2012 and 2013 Financial Years.

        Each generation has a period where they buy investment property, and largely the boomers period is/has coming to an end as they are replaced by following generations in the IP buying stakes.

        It no longer makes sense for the BB to add to their investment portfolio, although I am generalising, perhaps some of the younger ones might, or some of the older ones might buy retirement homes that they will use within a few years.

        Gen X and Gen Y will follow the Boomers down the same path, in fact they already have.

        Negative gearing BTW just pulls forward a tax deduction where deductions outweigh rental investment income. In another tax regime where NG may not be allowed, the surplus deductions become “loss forwards” that keep being carried forward year after year until the investment become positively geared, or it is sold.

        If a loss is realised on the sale, the loss forwards may be lost if that entity has no other investments, or they may be carried over to other investments held by that entity. Otherwise they are deducted from any profit made on the sale.

        Hence my view that an abolishion of NG would replace the mum and dad investors with more professional investors who understand the issues better and are more financially able to ride the ups and downs of the market. Whether that is beneficial in the long term is difficult to predict.

      • Peter
        I would not be so sure that Gen X and Y want to buy an asset that may/may not have capital gains to offset the NG losses.
        My guess is that many a SMSF is buying NG property at the moment… not the youth.

      • I agree that removal of NG would likely replace mum & dad investors with more professional/educated investors.

        If mum & dad investors understood NG (I mean really understood it, both conceptually and practically) then there is no way so many would be geared up to their eyeballs in an asset whose NBIT yield ex debt is (in most cases) <4%, long term growth approx. inflation.

        Individual investors have to take responsibility of their own actions, but in my experience that vast majority are still taking their cue from misinformation spruiked by the RE lobby, advisers and commentators (inc. industry groups, APM, mortgage brokers, accountants).

      • “Negative gearing BTW just pulls forward a tax deduction where deductions outweigh rental investment income”.

        It doesn’t just pull forward tax deductions. It also provides a subsidy to investors, because of the 50% CGT discount.

        Sophisticated investors will not replace mum & dads, because they are financially literate, and the risk adjusted return does not make any sense. Maybe one day when prices are not ridiculous (relative to incomes) it will.

      • @Sweeper. As you say, we shouldn’t conflate the capital gains tax regime with negative gearing – they are two distinctly different issues.

      • I would have to agree with Peter Fraser on this one. The figure quoted is taxable income which is after deductions. Before deductions would be accessable income.

      • Tat’s not the deinition.

        Peter is right, assessable income is all forms of inflows, and taxable is after deductions are allowed.

        if a PAYG earner gets their tax taken out before hand, as per normal, then encumbers themselves with deductions, such as the cost of capital expense of an investment, then they get a refund fro the tax commissioner.

        it is one of the emotive buttons that works on the bogan.

        A large tax refund gives an annual dose of euphoria.

  2. ceteris paribus

    Very interesting numbers on a very interesting business, if is “business” is the right word.

  3. and Penny Wong wonders why taxation revenue is falling… here is one hole that needs plugging!

    • Actually the governments line that taxation revenue is “falling” is not true. What is hapenning at the moment, is that the tax revenue coming in is less than what was *estimated* by Treasury for this year when they did the budget forward estimates last year.

      Commonwealth total taxation revenue for FY 11/12 was ~$317B, and this year is currently (after latest adjustments) expected to be about ~$340B-ish. That looks like rising revenue to me? It’s just that “they” were expecting (hoping for?) $355B+!

  4. A well-timed release by the ATO. This report provides the ammo for the government to put NG tax hole back on the table and plug it by bringing back the quarantine of investment income/deductions.

    • Well – if this government has half a brain between the lot of them, they wouldn’t let this $12bn disaster go to waste and make some good use of it.

      But, as someone already said in another comment the other day, chances are we’re all getting a stern talking now, and a wet lettuce in the budget!

      Incompetent imbeciles… the whole lot!

    • thomickersMEMBER

      nah…there is bipartisan support for NGing

      It will get fixed by the forces of economic reality(big capital losses).

  5. So the data shows that NG is really doing nothing for anyone, particularly the <$80K bracket that is probably labor heartland to a certain degree. Deductions are clearly a major rip-off to the Aussie taxpayer ($18B!), yet the whole NG system is completely off the table when it comes to reform? I do not understand the logic, because there is none.

    • You’re too rational Jackson.

      I fear you overestimate the intelligence of at least 900,000 (or thereabouts) of those with negatively geared property assets.

      NG is a sacred cow among most “investors”. Usually because they never got round to buying a calculator and just took their bullish (BS) cut from the real estate (sales) lobby

      You would think that a govt as dead in the water as our current govt would step up to the plate and put their balls on the line for the sake of good long-term policy. Bloody spineless muppets (on all sides, I should add)

      • The removal of NG over 25 years ago has still left scars on the minds of many a current politician. There is no chance they will remove, they are all terrified of the voter back lash.

        But what about this?… a totally wild and crazy idea – how about they reduce NG to one property per house hold?

        Encourage the punters to pay off a house fully before they can get another NG property, stop the property spruikers dead in their conference rooms and reduce government costs.

        Tah Dah. Fixed it.

        Shame it will never happen.

    • You want political logic?

      How to guarantee 1,811,174 property investors don’t vote for you in the next election….

      The banks have leveraged average home owners up so much that Negative gearing has become TBTF!

  6. Interesting. Number of property investors went up just over 3% but negatively geared investors went up over 9%.
    Increasing income losses fm property is a factor of – what exactly? Lower base income of investors, or higher property prices resulting in higher debt, or both?

    Any stats available from the ATO/ABS that might indicate the average length of time before property investors break even?

    1 in 7 taxpayers is approx. 14%. Do we have comparable stats for other OECD countries?

    • Unfortunately (or fortunately) Australia’s NG rules are rather unique.

      In terms of the change in number versus neg. geared investors, it could also be due to investment properties changing hands at higher prices. The greater fool lives.

      • Well they are unique if you don’t count about 12 other economies with similar rules.

      • Which ones would those be? Most countries I am aware of do not allow offset of property losses against other sources of income, like Australia does.

        I have lived and worked (and paid tax) in Asia and Africa, and had exposure to some tax rules in the UK and the US. None of these places, at least in my experience at the time, permitted losses on property to be offset on anything other than income from property. If any of these have changed in the last few years, that would be interesting.

        Can someone point me to a source where I could understand why Australia’s tax system permitted this sort of NG in the first place?

      • and which other countries are these? As far as I can see most other countries only allow losses from and investment to be offset against income from that same investment, not from other income (ie salary).

        Certainly that is the case in the UK, although as you mentioned earlier you can offset current losses against future earnings of the same investment.

      • Give me a break.

        http://z4.ifrm.com/30078/151/0/p1146619/IP_tax.gif

        The only countries I have found that do not allow any negative gearing are the UK and Switzerland, and even they allow you to defer the losses or put the IP into a separate entity. You cannot consolidate side business losses into your salary.
        In the US you can negative gear, but you have to have the mortgage on your PPOR rather than your IP. So people who rent need to put the IPs into a separate entity.
        In France the losses are not allowed to exceed gross rent. (Quite a sensible provision in my view.)
        The Netherlands has a completely different way of taxing IPs. They levy a wealth tax on the house rather than income tax on the rent so they neither have nor don’t have negative gearing.

        The above comments are not my own, they were cut and paste – taken from a post by “miw” at another site, but I regard them as very sensible.

        Perhaps there are not 12 countries with similar tax laws, but we are not unique either.

        http://oxforddictionaries.com/definition/english/unique

  7. General Disarray

    Is there any modeling availale on the best way to remove/phase out negative gearing?

    • I think their modelling for the removal of Negative Gearing has nothing to do with the financial side of things but it involves the amount of votes they will lose at the next election.

      Let aside the fact that it is likely they will be decimated at the next election without even trying…

      You can’t be any deader than dead – but apparently in politics, you can.

      • I don’t know, there is still 6 in 7 that aren’t property speculators.

        The problem is that if house prices fall people stupidly think that’s a bad thing, and so the rest of the home owners need the speculators at the margin setting the price.

        We have become sort of locked on a stupid mass delusion that our home is wealth – our homes are the places we live, we can’t sell them or use them until we die and then give the money to our kids. The boomers are about to discover this as they retire and realise they don’t want to sell the home where all their memories are.

    • I think ultimately we need to get to the stage where we can quarantine losses against income.

      In this case, I would propose that losses can be carried forward to be offset against future income, however NOT capital gains.

      Any accumulated but unused losses cannot be used to offset capital gains.

      This will encourage investors to hold the asset for longer, value the asset on its intrinsic earnings (a basis that current priced do not support), and it would cost the taxpayer a hell of a lot less. Even with the losses carried forward, as a nominal number the value will over time reduce in real (inflation adj) value.

      Longer term the govt. could then start to apply maximum carry-forward periods for the losses. Say 5 years, then bring it in from there.

      At present NG doesn’t make a hell of a lot of sense. This kind of proposal (which is just an idea, off the cuff) would help reduce speculative investment practices (or NG for the sake of tax, as some inept accountants/advisers still recommend!!) and would save the Aussie taxpayer an absolute stack of $$$.

      Unwinding the current system is a bit like unwinding a ponzi scheme. If you’re in it, of course you want it to continue so you can pass your crap onto the next sucker. However if the music stops before you make your graceful exit, the result will be carnage.

      Abolishing NG is one (very critical) step to ensuring a sustainable market for property investment.

      • GunnamattaMEMBER

        I’m a bit late to all this but one of the things I am wondering as I read through it is about how many punters are potentially ‘trapped’ by either falling or non appreciating investment properties.

        And what would be a plausible way of extricating them? Because I think this is what it is going to come to.

  8. Politically it is probably too difficult to remove negative gearing. An alternative might be to put a cap on it. I can see a political campaign about capping negative gearing rorts fitting nicely into the so-called class warfare.

    • Oooooohh…. Very good!! VERY GOOD!

      Now… to plant this idea in their tiny minds.

      Mind you – what the hell do you do with those who are NG-ing whilst not even paying tax? Oh, screw it! 🙂 They’re royally boned anyway!

  9. Those income band figures are amazing – essentially the poorly educated tricked into leverage for speculation. Very similar to gearing into shares, except the government stopped the big come-uppance at the time of the GFC by pumping money into the market.

    If there is ever a rush to the exits it will be carnage.

    • Which means that the government and RBA will be doing everything they can to prevent this, whatever bad effect their actions have on the broader economy.

      • Since they showed their hand in 2009 (prop up property to prevent it falling), the question has always been ‘can they do enough’ and ‘for how long’?

        Interest rates don’t have much further to fall (in terms of rates for retail borrowers) and FHOG-boost-style tactics are on the nose.

        The apparent strategy is now to try to have a construction boom, but this, of course, sows the seeds of its own destruction…

      • Well that’s right – these speculators (and the place they have pushed the residential markets to) ARE the broader economy now!

        Too big to fail.

    • isn’t it likely to be retirees though bringing down the average? Less income due to life stage, and also taxed more lightly I’d imagine?

      • I wouldn’t have thought so.

        If you’re a retiree and living of your investment earnings, and you’re earnings are in the lower brackets listed in the article, then you’re shooting yourself in the foot.

        Govt. pensions are asset tested, and when they talk assets they don’t mean net assets. So if you have a $500k property with a $300k debt, then you are assessed as having a $500k asset.

        Using this as an example, let’s say you were paying 6% on your mortgage (x300k = $18k), plus rates & maintenance of $2k and your rental income was $15k, then you are negatively geared to the tune of around $5,000.

        Let’s say they also have an investment portfolio of $500k (shares etc) earning $30k ($500k @ 6%). They own their own home.

        In this case their taxable income would be $25k ($30k – $5k invest property loss). Centrelink would assess their assets as $1m ($500k + $500k) so they would probably miss out on any pension.

        ….in this case, if they were sensible they would get rid of the property and debt, and would have $700k in assets (assessed by c/link as $700k), on which @ 6% earnings = $42,000.

        Add to this they would probably get some pension. Up to $11k (or thereabouts) more than they would in the first scenario.

        So there you have it, $25k versus $53k.

        There might be some retirees who are still clinging to their IPs (I would guess there would be), but I wouldn’t expect it to be a large number.

        …now, apply this to the couple of hundred thousand negatively geared up-and-coming retirees and you see we have on our hands a potential FLOOD of stock due to come to market

  10. Did anyone else notice that these numbers suggest quite steep rental increases over the year from FY11 -> FY12? Gross rental income up nearly 10%.

    Even scaling this back by the 3% increase in the number of investors (assuming that is roughly commensurate with an increase in the number of properties being rented out), suggests on average rents went up by 6.5-7% in that year…. ouch!

  11. Stormy WatersMEMBER

    So with the new $18K tax-free threshold this FY it looks like at least 200,000 NGers will not have anything to deduct against. I wonder if we’ll see a rush of properties hit the market in Oct/Nov once people do their returns and see that they are simply losing money.

    • I doubt it – yield math does not go into this. This is raw capital gain speculation, the exits won’t get crowded if/until it is obvious that the capital gain potential has completely receded.

      • Stormy WatersMEMBER

        I’m not so sure. I think a big part of the attraction for some ‘investors’ is the feeling that they are cheating the Government out of cash via their own cleverness. They truly don’t see the truth that they are losing lots of money and then getting a little back months later. To some, the NG inflated tax return is the Gov being forced to pay them and they see it as income.

        Time will tell.

      • nail on the head there mate! Never mind all the interest they are paying to the bank on a loss making investment, as long as they are getting money back from the government it’s all good!!

      • I think that is a part of the appeal – but really this as simple as just another form of speculation. This is just like gearing into stocks right now – the reason people are doing it is because they are convinced that there will be capital gains coming, and the interest losses aren’t worth thinking about compared to the future riches coming their way.

        And to be fair to the speculators, the central banks have ensured that this has been the case for a long time.

      • Well I’m not so sure.

        Inflation is pretty much guaranteed here. In an inflationary economy (like the RBA creates) real assets are the only thing that store value and really tell you the proper inflation rate (i.e the CPI is bogus).

        The logical trade to do here would be long assets, short money. The fact that I am compensated for some of the “carry costs” of the trade by the tax payer just makes it all the more attractive.

        If you have a positive geared property or close to it the trade is even more attractive.

      • Also property is the one asset where you can leverage this trade and the risk of getting margined called and the like is a lot less.

  12. The problem with having all these people negative gearing tells me that many have not put any equity into the trade. They have borrowed 100% against the security of their home.
    This happened with Storm Financial using the “lazy balance sheet” of a lowly geared family house to support further geared investment.
    Multiple property owners have risks a plenty. Abolition of Negative Gearing is just one but the standout risk has to be increased land tax which can only be offset against future capital gains.

    • Nailed it Mitch. In the end this is all about one thing – using the ‘lazy balance sheets’ of the mugs that once owned their homes to generate fees.

      Matt Taibbi described the process brilliantly in ‘Griftopia’, and you are right this is exactly the Storm Financial model.

      The great store of lower middle class, generational savings that was the family home has been plundered. At a social level it has complex outcomes, but at an individual level it really is as simple as using the existing balance sheets of homeowners as a way to generate fees by encoraging the homeowner to place bets on asset prices

  13. Given the data, lets try to update it:

    mortgage $300k down 2% = $6k pa.
    rates etc up $2k pa.

    net improvement $4k pa.

    average punter now neutrally geared?
    average ng punter loss now $5k
    of course people could rush out and get more property – does not seem to be happening.

    I look forward to the 2012-13 figures.

  14. Suggestion for TV programmers:
    A lifestyle spruik that tracks down the more extreme examples of NG property.
    The series could be a cross between “The Biggest Loser” and “Where Do You Think You Came From”, both with a personal and property focus.
    Follow the historical legacy of some of the great loss-making properties in Australia, meet some of the biggest loss-making landlords, inspect the properties and marvel at the business model that supports it all.
    Just an idea.

  15. This whole discussion thread shows what is so great about MB.

    Big +++++’s to everyone.

    About the only original comment I can add now, is to wonder out loud when ever is Michael Lewis going to do one of his cracker articles, on Australia this time?

    I hope he follows MB for a while, and interviews Leith Van O.

  16. My prediction is that Julia Gillard will scrap negative gearing in the pre-election budget. Then she will resign and Mr Paul Keating will be installed as leader of the Labor party. Voters will then be given a clear choice. Mr Paul Keating is a man with a solid track record of reinstating negative gearing. If voters want negative gearing reinstated with certainty, then they must vote Labor. This sequence of events will give Labor the greatest chance of re-election.

    • The Patrician

      I don’t know what you are on Claw but maybe back-off the dosage a touch 😉

  17. The government would be foolish to drop the negative gearing, because that would destroy property prices just when they want to stimulate the property market as the mining investment is falling.This would be economic suicide.

    • But there will be a fast economic revival after a short collapse.. Have a look at the Iceland example. All the other nations that tried to prop up their property market (for the sake of keeping their banks solvent) are still suffering through a slow, painful recession.

      We should let our banks go bust when all the overleveraged negative gearing boomers default on their mortgages. Boomers had a good time while it lasted. The music stops now.

      • we don’t have over leverage property market, properties are conservatively priced by the banks and leveraged max to 80%, if you take negative gearing away there should be about 10% drop in property market( 1/10 leveraged) worst case, this will devastate the economy and all business confidence, this is equivalent to economic Armageddon.

      • this is equivalent to economic Armageddon
        armageddon: The last battle between good and evil before the Day of Judgment.

        You could be right there. It might be the last battle between good and evil. Evil being the lazy “investors” would like to reap where they have not sown, and good being decent people who wish to perform work for a living and require decent shelter to live in.

        Fair comment. Bring on armageddon please.

      • And here come the fear mongers! Is using such emotive language such as armageddon and economic suicide the new playbook?

        I’ve noticed that the defenders of NG are out in force on all the NG articles. Labor is looking at a landslide defeat, and as most of them won’t have an income to negative gear with following September, they could well move to get rid of NG.

    • This would be economic suicide.

      This is not a very common term. Would you care to explain what you mean by it? Would people actually be dying?

  18. I am certain it would be considered a “Crime against Australianity” if NG were to be removed.

    You can almost hear the shrill hysterics of the hard done by property class now 😉

    I suppose if it gets too expensive they could always tap into that ludicrously named future fund to pay for speculators to make a loss…sorry I meant to say investors LOL.