Negative gearing: the elephant in the Budget room

By Leith van Onselen

Independent economist, Saul Eslake, has today published an essay analysing Tuesday’s Federal Budget, whereby he argues that negative gearing is still the elephant in the room for the government which undermines its other Budget objectives, especially its savings measures around superannuation. From The Conversation:

…The budget seems to be saying to people with taxable incomes of less than $80,000 – if you want to pay less tax, get yourself a negatively-geared property investment.

Negative gearing still the elephant in the room

The budget is also arguably saying the same thing to people with taxable incomes of over $250,000, people who have already contributed $500,000 to superannuation over the course of their lifetimes, or people who already have at least $1.6 million in their superannuation accounts. The message is if you put any more into superannuation, we are going to tax you more, but if you put it into a negatively-geared property investment, we won’t touch you, because (in the words of the Treasurer’s budget Speech), “that would increase the tax burden on Australians just trying to invest and provide a future for their families”.

Of course, we are not talking about a large number of people here: and the ones we are talking about are extremely well-off. We are actually also talking about people who are much more likely to have a negatively geared property investment (or indeed, more than one), than people with taxable incomes of less than $80,000 per annum.

The budget’s proposed changes to superannuation arrangements make sense. But I can’t see why people – even wealthy people – who are “just trying to invest” through superannuation should be singled out for less generous tax treatment, while people who are doing exactly the same thing through negatively geared property (or other) investments remain unscathed.

The Treasurer reportedly toyed with the idea of limiting “excesses and abuses” of negative gearing, with caps on claims. This would have more or less exactly paralleled what the budget seeks to do with regard to superannuation.

The decision not to go down that path was reportedly “a political – and not an economic – move”.

But it has, and will have, economic consequences.

Combined with the Reserve Bank’s latest cut in official interest rates, the budget’s decisions and non-decisions with regard to income tax cuts, superannuation and negative gearing are likely to encourage more Australians to borrow more money in order to invest in the property market. As if Australia didn’t already have one of the developed world’s highest ratios of household debt to GDP or personal income, and amongst the developed world’s most expensive residential real estate. And as if we might not be near the bottom of the interest rate cycle and the peak of the property price cycle.

Is it really consistent with building a “stronger, more diverse, new economy” – as Scott Morrison’s budget speech proclaims – to encourage still more Australians to bet, with borrowed money, that property prices will continue to rise at a faster rate than their incomes?

Hear, hear. If you crackdown on one area, but leave the door wide open in another, then those seeking to avoid paying tax will gravitate towards the tax-effective area.

Thus, the Turnbull Government has erred badly in maintaining the negative gearing and capital gains tax lurks, which Malcolm Turnbull himself described as “tax avoidance” and “tax shelters” in 2005.

The cynic in me believes that pushing property prices higher is precisely the point. Treasurer Scott Morrison used to be head of research at the Property Council of Australia after all.

In Tuesday’s Budget speech, Morrison noted that making changes to property tax concessions “would increase the tax burden on Australians just trying to invest and provide a future for their families”. He has also previously stated that “for most middle-income people it is the one chance they’ve got to build some wealth”, while telling Fairfax Media that the Coalition “have no wish to undermine the value of Australian’s homes”.

So it would seem that property is Treasurer Morrison’s preferred path to retirement saving for Australians and that ever-rising house prices are part of this equation.

This is a government managing a bubble, not an economy. So we should not be surprised that its policies are aimed at channelling even more of the nation’s resources into maintaining the ponzi.

Unconventional Economist
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  1. Yep. The changes to super and retention of NG is by design and intended to keep property bubbling and maintaining the ensuing wealth effect.

    Check this out from last week’s Victoria State Budget:
    “Solid consumption growth is being supported by low interest rates and wealth effects flowing from growth in the value of housing assets. Further, the household savings ratio has generally been declining in recent years, after peaking during the global financial crisis. With stronger consumer sentiment, the savings ratio is expected to continue to fall in the medium term, supporting solid consumption growth despite below trend wages growth.”

  2. The Patrician

    Leave the door open on NG=> juice existing house prices
    Leave the door open on AML=> juice existing house prices
    Leave the door open on FIRB enforcement=> juice existing house prices
    Leave the door open on cheap debt=> juice existing house prices
    Leave the door open on excessive population growth=> juice existing house prices
    The room is full of elephants

  3. Sillly stuff from Eslake. NG is a timing advantage, Super is permanent. At low interest rates, a timing advantage isn’t worth a hell of a lot.

    Eslake should only be advocating for CGT changes.

    • Gra ManMEMBER

      Jason. A timing difference is very valuable when it comes to servicing a mortgage and the price you can pay for a house.

      • Maybe it helps for middle income earners, less for for the wealthier end that everyone seems so hung up about.

      • Neville Gearless

        Hung up about? It’s the big investors who lost their super tax break, but property still maintains it. No prizes guessing where this money will go. Is it because you are a spruiker you don’t see the elephant.. er, the obvious?
        NG is a tax advantage, I’ve already explained to you how it advantages speculators over OO’s, but explain what “timing” has to do with it, and how low interest rates don’t help. I’m up for a chuckle..

    • You don’t see a systemic risk issue behind encouraging people to invest in one asset class using debt (crowding out home owners and blowing out the general cost of living) vs investing cash in a diversified fashion in a tax advantaged environment like super?

    • SweeperMEMBER

      Going broke, and not going broke is also just a “timing difference”

  4. Daylight Robbery

    If this is going to set another fire under house prices (with the rate cut too), then should we be loading up on debt and property now, instead of hitting the bid? Ride this Ponzi to the moon! After all, that’s what the general public will be doing, and there’s safety in numbers, even if it’s morally corrupt.

    • Mining BoganMEMBER

      Yep, go large. After all, there were more survivors than victims in the Hindenburg disaster. And look how airships went on to dominate the skies, even to this day.

  5. The budget is working exactly as intended.

    Prime Minister Malcolm Turnbull’s harbourside electorate of Wentworth has the biggest proportion of earners who will benefit fully from income tax cuts unveiled in Tuesday’s budget.

    More than a third of income earners in the Prime Minister’s seat will get the $315 annual relief from the government’s decision to lift the threshold at which the second top tax rate applies from $80,000 to $87,000 – the largest share of the 150 electorates in federal parliament.

  6. Let’s see the stats on NG.

    How many Chinese or foreign origin owners ? are falsely claiming negative gearing on a falsified rental income, versus the actual cash rent being paid.

  7. fitzroyMEMBER

    I think the government believes the property market to be fragile. They have shut down the massive tax break that was super, but they have opened another for startups which has just passed the senate on Wednesday with labor support. The example that is given is this:

    “Jessica is the founder of a startup business called PaySmart Pty Ltd that is developing a software application to automate bill payments. She is looking to raise $200,000 in equity finance to continue developing of the software.

    Alex is an experienced early stage (angel) investor and believes that PaySmart has excellent growth potential. He invests $200,000 and claims a 20% non-refundable tax offset, reducing his income tax payable by $40,000.

    In addition to contributing capital, Alex uses his business skills to help PaySmart grow. He sells his shares for $400,000 four years later. As Alex has held the investment in PaySmart for the minimum three year period and less than 10 years, the full capital gain of $200,000 is exempt from capital gains tax.”