On Tuesday night’s Lateline program, Saul Eslake debated the IPA’s Sinclair Davidson on Labor’s reforms to negative gearing and the capital gains tax (CGT) discount. You can watch the video here. And below is the transcript:
EMMA ALBERICI: A short time ago I was joined by independent economist Saul Eslake from Hobart; and in Melbourne, Sinclair Davidson, professor of institutional economics at RMIT University and a senior research fellow at the Institute of Public Affairs.
Gentlemen, welcome.
SINCLAIR DAVIDSON, PROF., RMIT UNIVERSITY: Thank you.
SAUL ESLAKE, ECONOMIST: Thank you for having me, Emma.
EMMA ALBERICI: Saul Eslake, for 30 years you’ve held the view that we should be getting rid of negative gearing altogether. Sinclair Davidson you say no curbs on that area of the tax system are needed at all.
First to you, Saul Eslake: why are you so opposed to negative gearing?
SAUL ESLAKE: Well, first of all because it has a significant cost to the budget, which I estimate is somewhere between $4 billion and $5 billion per annum – although in recent years, when interest rates have been very low, it’s at the low end of that range.
But it’s a lot higher that it was before the change to the capital gains tax regime, back in 1999, that has made negative gearing much more popular since then than it was before.
Second, that cost to the budget achieves very little in terms of the stated aim of promoting increased investment in rental properties that are actually available for rent. Over 90 per cent of geared investors now purchase an established property.
So the main impact of negative gearing, in my view, is to put further upward pressure on the price of established dwellings, to the detriment to those who are looking to buy dwellings to live in them as home owners.
And I think it’s one reason – it’s certainly not the only reason – but one reason why the home ownership rate among people aged 25-55 has fallen by an average of nine percentage points since the 1991 census.
And since the figures show that someone in the top income tax bracket – that is, with a taxable income exceeding $180,000 per annum – is almost three times as likely to be a negatively geared landlord as someone with a taxable income of below $80,000 a year, I think it undermines the integrity and equity of the tax system from a fairness perspective as well.
EMMA ALBERICI: OK. Sinclair Davidson: abolishing negative gearing would free up, if you agree with Saul Eslake, somewhere in the vicinity of $4 billion to $5 billion. Is that tax measure worth the cost?
SINCLAIR DAVIDSON: There is no real cost, because what happens now at the moment is: you have a deduction against other income in the present. But as a small business, if you were losing money on a negatively geared property, you would simply deduct the money in future.
So it’s not a cost to the economy so much as a transfer in time: you either deduct money now or deduct money in the future. So it’s actually swings and roundabouts. It’s not a cost to the economy. Money or wealth hasn’t been destroyed. It’s simply been moved in time.
So it’s nothing to worry about at all. We should get on with the serious business of managing budgets by cutting spending, more or less.
EMMA ALBERICI: I’d like to unpick some of the claims and counterclaims surrounding this issue.
First from the Treasurer: Scott Morrison says it’s “a complete and utter myth” to say negative gearing benefits the rich. Sinclair Davidson, you’ve gone some work analysing the numbers. The Prime Minister says nearly two-thirds of Australians who make a capital gain on their investments have a taxable income of $80,000 or less. Is he right?
SINCLAIR DAVIDSON: More or less, yes. The numbers that I crunched showed that 80 per cent of the beneficiaries of negative gearing have a total taxable income – that includes their income from their negative-geared property – of less than $150,000 per year.
So if you are thinking a schoolteacher or a policeman or somebody of that category of worker earning about $80,000 a year, having a rental income of just $20,000 a year: all of a sudden, they are looking at $100,000 or more.
And there’s going to be people saying, “Well, on $100,000, you are pretty rich.” Well, in actual fact, you’re not if that is an expense before deductions, before maintenance, before rates and taxes: all these sorts of things.
So the idea that this is a lurk or a rort for the rich is completely misleading. This is a stock-standard tax principle that benefits all investors and to a large extent benefits middle-income earners.
EMMA ALBERICI: Saul Eslake, Scott Morrison says Labor’s plan will attack mum-and-dad investors whose are just trying to get ahead?
SAUL ESLAKE: Yeah, it’s funny how they keep saying the same the same things every time. I mean, when I hear people say that negatively geared investors are just “mums and dads trying to go get ahead,” part of me wants to ask: ahead of whom are they trying to get ahead?
And the answer is, when you examine it: their own children or their children’s peers who are finding it increasingly difficult to enter the housing market as home owners in competition with investors who get their interest costs subsidised by other taxpayers through negative gearing.
And let’s just unpick that a little bit, if I can. I mean, it’s not true, I believe, to say that all negative gearing does is transfer income through time with no net result over time.
What negative gearing allows investors to do is to deduct, at their full marginal rate, the excess of the interest they pay over the net rental income they earn. But when they subsequently sell the assets, hopefully at a profit, they pay capital gains tax at half their marginal rate.
So what negative gearing does is allow predominantly high wage and salary earners – even some on moderate wages and salaries – to defer and permanently reduce the amount of tax they would otherwise have to pay on their wage and salary income.
The Reserve Bank made the point more than 12 years ago, in its submission to a Productivity Commission inquiry into first home ownership, that Australia’s tax system is much more generous to property investors in this respect than the tax systems of broadly comparable countries like the US, the UK, Netherlands, France and Germany, among others.
And moreover: it’s simply not true that other businesses can offset their losses against their wage and salary income as readily as property investors can do.
And finally, if I can make this point: that yes, as a matter of arithmetic it is true that a large proportion: according to the most recent Taxation Office statistics, 64.3 per cent of taxpayers who have rental property losses have taxable incomes of less than $80,000 a year. But that’s not surprising, because they account for – that is, people with taxable incomes of less than $80,000 a year – account for just over 80 per cent of all taxpayers.
What the same set of figures show is that, of people with taxable incomes of less than $80,000 a year, fewer than eight per cent are negatively geared landlords. Whereas people with taxable incomes of over $180,000 a year: 23 per cent of those are negatively geared landlords.
SINCLAIR DAVIDSON: The moral panic or outrage around negative gearing to a large extent is that housing prices are very high and people are worried about affordability.
And people then look around and they say, “What is this? Why is this happening?” And they pick on negative gearing.
Now, it is true that housing prices are high; that younger people are struggling to get into market. But there are both supply and demand conditions that are driving that. And I think people who just pick on negative gearing are only touching on the demand side.
I’ve been very disappointed that the Liberals, for example, have abandoned the supply-side arguments that they’ve made for a long time in justifying why negative gearing wasn’t the problem to be looked at. And I think they’ve kind of dropped the ball on that.
We should be looking at supply constrictions and those sorts of things, that happen at the state government level, that the Federal Government has probably got very little control over.
So I hear the concern there, but I’m still not convinced that this has been driven by negative gearing which, as I say, has been around for a long, long time. Now, it is true that we are probably a bit more generous than a lot of OECD countries on this, because we allow landlords to offset their negative losses against all other income, which other countries very often don’t do – they quarantine.
But that in turn rises all sorts of other distortions. So we’ve actually moved towards a system where you have more tax neutrality, which is a good policy. Now, it may be true that you can’t always offset everything. And I really think that the ATO should be making our system more tax-neutral if that is the case.
But in any diversified company, you can offset losses in one division against losses in another division. And the better way to be thinking about negative gearing is that this is an unincorporated business that people of relatively modest and, sometimes, maybe slightly higher incomes undertake, in order to provide for their own security and the security of their children.
There is nothing wrong with going into a small business, making investments to improve your lot in life. I actually think we should be encouraging more of that.
EMMA ALBERICI: This did begin as a debate about housing affordability. Malcolm Turnbull says the changes being proposed by Labor will smash property prices. Is there any substance to that claim, Saul Eslake?
SAUL ESLAKE: No, I don’t believe there is. And I’m astonished that someone as intelligent and sophisticated as Malcolm Turnbull would continue to promote it.
You know, it’s interesting to see that over the last few years governments, mostly Coalition governments, have presided over three distinct policy changes that have been explicitly designed to dampen the demand for established housing in particular.
You’ve had state and territory governments abolish the grants they used to give to first-time buyers of established properties. You’ve had the Foreign Investment Review Board beef up its oversight of the purchase of established properties by foreign investors. And you’ve had, as the Treasurer and Finance Minister have been pointing out today, APRA leaning on the banks to impose stricter lending criteria for loans to investors.
All of those things have been designed to – or have had the effect of – dampening down demand for established properties, bearing in mind that over 90 per cent of borrowing by investors is for the purchase of established properties.
Has the housing market been smashed by any of those? Answer: no. House prices have continued to go up.
What’s Labor’s policy intended to do? It’s intended to discourage new investment in established housing by denying access to negative gearing for that. Existing investors will be grandfathered: that is, they will have an incentive to hold onto their properties rather than to sell them.
I’m not a great fan of grandfathering, but I understand for political reasons why the Labor Party has made that compromise, as the Reserve Bank said in a note that wasn’t about the Labor Party’s policy: it was about the recommendations of the Murray inquiry that negative gearing be wound back and the capital gains tax discount be reduced.
It said that if negative gearing changes were grandfathered so that existing investors weren’t affected by it, there is no reason to expect large-scale selling of properties. And if you don’t have large-scale selling of properties, then you won’t get big falls in prices.
You might not get as big increases in prices, but that’s a good thing. That’s the whole point of the policy that the Labor Party is putting forward: to reduce upward pressure on property prices that works to the detriment of those who are seeking to become home owners.
EMMA ALBERICI: Sinclair Davidson, can Labor’s policy be seen as “reckless”, as the PM says: akin to putting a “sledgehammer” to the property market?
SINCLAIR DAVIDSON: I wouldn’t use such strong language in those terms. But I think, certainly, it could be seen as irresponsible, given that we can’t really be sure what would be happening to housing prices – though they could actually decline by a substantial amount.
EMMA ALBERICI: The Grattan Institute estimates Labor’s policy would see housing prices fall around two per cent. Within the context of a property market that’s grown something in the vicinity of seven per cent over the last 10 or 15 years, does a two per cent fall really justify the panic around Labor’s negative gearing policy?
SINCLAIR DAVIDSON: Well, it depends on how well you trust their modelling. They certainly are forecasting a decline and certainly that would be a transfer from existing home owners to potential future home owners. And I think existing home owners would be pretty annoyed about a policy-engineered decline in the value of their single largest asset.
EMMA ALBERICI: Sinclair Davidson, Saul Eslake, we do need to leave it there. Thank you both very much.
SINCLAIR DAVIDSON: Thank you so much.
SAUL ESLAKE: Thanks very much for having us.
That’s a comprehensive victory if ever I have seen one.
Unlike Saul’s testimony, which presented the case against negative gearing and the CGT discount clearly, I can’t see any sound arguments from Sinclair Davidson on why the current tax lurks should be maintained. All we got were some spurious concerns around “tax neutrality” and that we “can’t be sure what would happen”.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
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I watched this on Tuesday, and I can say how much of a Saul Eslake fan I am. Not so much because I agree with his view, but also how well he can argue a topic (and he is ability to draw together all related threads). He is a seriously impressive economist.
as opposed to Sinclair D who couldnt have made less sense if he had argued that a giant rabbit would breathe fire on us all (unless we sacrificed a vrgin at 12 noon on the 4th day of the month) if there was any chage to NG
He’s right we shouldn’t “pick on negative gearing”, we should look at the supply side. That’s definitely the issue here.
Gavin, how supply side can improve affordability if both parties say that drop in property prices is bad and should be avoided? Moreover Labour claim their reforms of NG won’t lead to price drop. What is the purpose of this reform then? Libs are saying if NG is removed then prices will drop as if it’s something bad. But Libs are saying they will improve affordability by increasing supply. Somehow they believe that increased supply won’t lead to price drop? How else affordability can be achieved?
What is wrong with all of them???
Love the terminology property parasites choose – “pick on” negative gearing. As if a tax regulation was a person with feelings. Why is it the good prof had no argument?
Sadly Gunna, that giant fire-breathing rabbit argument would probably hold more sway over a large proportion of Australian voters. They can take that image and imagine it, see what a giant fire-breathing rabbit is capable of. When someone like Mr. Eslake talks he uses a range of words and facts that are too foreign to make sense. And that is why the IPA guy did the right thing for his ignoble cause, he didn’t go down the economics path, he dropped the words that straight to amygdala. On the subject of housing, go for the reptile brain for the win every time.
Yep give the masses an amygdala hijack, by saying it will destroy their home values and the Turkey’s will vote for Christmas each time. I’m sure MT will get back in because of the fear campaign being spruiked.
I dunno, 56% or so of the electorate think NG should go, the reptilians can’t be the majority. Lots of home owners recognise a drop in price would’t affect them, in fact, it would reduce the necessity of their kids asking for a loan. A lot of boomers can see that.
Davidson came across as a smug arrogant c..t and for a Professor, not particularly articulate or knowledgable.
Great factual arguments Saul, full respect… the other bloke was wishy washy as anything – basically an opinion piece.
Ipa first for the guillotine
Institute of Private Affairs.
Good arguments made by both, maybe a slight edge to Eslake, but it was dumb of him to start on the budget saving aspects of negative gearing, Sinclair is absolutely right on this point:
“So it’s not a cost to the economy so much as a transfer in time: you either deduct money now or deduct money in the future.”
What about the half capital gains tax discount though? That surely costs the budget… The current arrangement encourages wage earners like me on > $100K per year into property investment to take advantage of how generous it is…
I totally disagree that negative gearing is just a transfer in time.
Plenty of properties are bought and sold without the property ever becoming cash flow positive, so they would never be able to claim those interest expenses without negative gearing.
If property investors had to think ahead and ponder on WHEN they might turn a rental profit and be able to claim their interest costs back, it would bring a great discipline to property investing that is currently sorely lacking. And for the stubborn ones who refuse to do the sums on loss-making properties, us taxpayers will be happy for the federal budget savings that they so generously contribute.
I’m not an accountant, but as I understand it the costs could be carried forward and then offset against capital gains (i.e. no need for it to turn cash flow positive).
True, but that requires a capital gain. And you don’t get the benefit until you sell.
Which means you’re not subsidised to buy the property at the outset, but your possible gain is taxed more forgivingly. Has the potential to totally change the mindset. Heck it actually sounds productive.
Exactly correct Gral.
The landlord industry combined loses around $9 billion per year (plus or minus a couple of billion). This is all of the net rental profits (around 600,000 of them) added to all of the net rental losses (around 1.2 million of them).
If most property investors negative geared for a few years until debt went down and rent went up and then made a net rental profit that eventually outweighed their early year losses (as Sinclair Davidson is arguing), then the minus $9 billion number would be a positive number instead. Also, property investors would have no problem with Labor’s proposed policy.
So it’s not just “many” property investors – it’s “most” property investors that make a net rental loss over the time that they hold their investment property.
The fact that around 40% of outstanding loans in Australia are IO loans also strongly suggests that many property investors have no intention of paying down debt and ever making future net rental profits.
Delaying tax take reduces cashflow and therefore is a very measurable “cost” to the economy.
It is completely possible to negatively gear for your entire working life and then suddenly go positive at retirement.
Thus completely avoiding taxes.
It’s completely wrong:
He is assuming the house is sold at a profit, and if it isn’t that other assets will be sold at a profit in the future in order to recoup the capital losses. Neither of these are guaranteed.
Then he forgets that capital gains are taxed concessionally (like Eslake said)
Plus he misses the point that deductibility on revenue and capital account are determined by unrelated criteria.
Plus capital gains are taxed on a cash basis. Revenue gains on an accruals basis.
Then he ignores the fact that a transfer through time is in fact always a permanent gain/loss (even assuming capital gains materialise and the CGT concession doesn’t exist), because one dollar in the future is less valuable than a dollar today.
I’ve been commenting on some articles at The Australian – y’all should try it – it gets the arguments outside the echo chamber, and some of the responses you get are funny.
Only under the assumption house prices rise forever.
I expect they will (nominal over a long enough time frame).
If you believe timing is not worth anything, then I say you have never been in business. Having the money now rather than later is EVERYTHING and is the reason why NG is such a gift.
When rates are at 2% the impact on the budget (which is what matters) is pretty negligible.
When the property market is distorted to the max as it is now, what matters is its repair. And the removal of incentives for speculators will achieve that. $4b saving is not negligible, its not what matters, it is a bonus though.
But the costs of doing nothing is huge, if the people can’t buy homes to live in, that will impair their retirement greatly and put even more pressure on the welfare system.
The point is, it’s not a $4b saving. It’s 2% of $4 billion dollars.
I fully agree with the unconventional economist. Liberals were heading to wind back Neg gearing and cgt until labour beat them to it. The disappointing political element that says lib never agree with labour let Turnbott to do a 180 degree turn and look stupid. I am a lib voter but they seem unable to manage the country and much as labour may not manage any better I respect the neg gearing reform. I now feel like a swinger!!
Guys big hole in the story here from the punters perspective.
NG does in fact transfer tax credits through time, (very elegant way of saying that) so the assumption is that the deferred tax NG’s are not paying now is settled when the property is sold “at a profit” so the capital gains are then somewhat (1/2)taxed.
BUT, should, the property not be sold at a profit, the tax payer has carried the NG investor for the period of the NG, at a significant loss to the tax payer.
From a punter tax payers perspective the risks are now very one sided, ie the pending property collapse will render null the expected benefits of collecting ANY capital gains tax.
Best to eliminate NG now, when the whole market collapses from other forces.
I wonder who is going to ask one simple question:
-How affordability can be achieved without substantial drop in prices? For all parties it’s time to confess and declare what is obvious. Both Libs and labour are simply lying.
Exactly. Halving prices nominally will bring prices to fair value for a healthy economy… further if economy deteriorates. Affordability *starts* at half price houses, anything else is utter bullshit.
How are you going to buy a house if you have no job which is what will inevitably be the case if house prices halve.
@Jason well the current situation equates to an absolutely certain unaffordable housing outcome. I disagree that losing my job would be inevitable if house prices fall to fair value, sure it’s a possibility, but not a certainty – A risk I would happily wish for, given it will force many required changes in the economy. The pain of some unemployment vs another fkn decade of unaffordable housing hell is an easy decision for me.
+1. Especially when non-housing inflation and wages growth are bugger-all.
They should just call a spade a spade, say “lower house prices is what we want, it will be bad for owners of multiple properties but good for everyone else including business and jobs”, and cop the wrap from the unhappy ones.
Absolutely agree Kerry, but it’s the politics of it. ALP knows it can’t come out and say “we want house prices to drop”. It’s a weakness in their argument but I guess the ALP’s angle should be the one Tony Jones offered on Q&A last week “so Liberals want house prices to keep on rising then???”.
You guys are easily impressed. Eslake gave the game up in saying it is about raising revenue (although that is unlikely in the next few years with low rates) and later effectively agreed that it is not NG that is the problem, it is the CGT discount.
Ultimately Eslake does say what the aim of the ALPs policy seems to be – that house prices don’t rise as quickly as they might otherwise rise. That may or may not happen (the only argument in favour of it is the Turnbullesqe “it makes sense that house prices won’t rise if there is less demand” argument but there is little evidence that this will be material and, more importantly, that this is will significantly change the shift in OO v IP (it might mean that wealthier IPs own more because they aren’t competing with middle income earners).
That that extent, Davidson is right (although I generally hate agreeing with the IPA) – the gains are limited and at best years away but in the meantime you are messing around with the largest asset class in the nation as well as a fundamental aspect of the tax system (shares and other investments are brought into the net as well) . The risk-return tradeoff is poor.
I’ll repeat my halfway house alternative – leave NG as it is, change the CGT discount to one of indexation and averaging, abolish the 2.5% building allowance.
Negative gearing allows investors to outbid owner occupiers on the same cashflow.
It encourages over leveraged speculation in one asset class – an asset class that is essentially non-productive and adds a layer of cost over your economy.
These are negatives.
The positive I see for negative gearing is encouraging the housing supply. This is why the ALP policy makes sense.
Australian tax on investment is way too high but negative gearing creates too many unwanted consequences.
Jason what is your thought on this?:
Reduce CGT discount to say 25%, restrict NG to one property in a lifetime and put a cap of say $50k, apply NG to homeowners as well.
All a bit arbitrary.
What do you mean by “applying NG to homeowners”?
“Apply NG to homeowners” means apply same principal as for Investment Property to PPoR, deduct renovation costs and mortgage rates from main income (only up to certain level of course). In other words erase existing advantage of someone buying 2nd or more house in comparison to soneone buying only 1 house for living.
Why should indexation apply for capital gain. It doesn’t apply anywhere else.
Business can only deduct the historical cost of buildings/plant (depreciation) and inventory (COGS). Why should be passive investment be treated any differently?
Businesses can offset depreciation deductions against other income. You can’t offset capital losses against income. Therefore the indexation is at least compensation for an otherwise asymmetric tax treatment.
If you taxed gains in full but quarantined losses, you introduce a whole new level of risk to an investment.
“Businesses can offset depreciation deductions against other income”
Yes I agree. What I mean is, they can’t index the cost of plant/equipment and adjust their depreciation accordingly. So in effect income gets indexed (sales increase with inflation), whereas COGS for inventory and cost of fixed assets doesn’t.
ie. taxing nominal gains is a feature of the system. CGT shouldn’t be treated differently.
That’s fair enough but as I said if you tax the nominal gain in full you need to give deductions for losses. Otherwise you are introducing additional risk to the investment analysis. Alternatively, people will structure their investments to be on revenue account (which would create a huge structural risk to the economy because tax receipts will dry up in a downturn even more than they currently do).
“Alternatively, people will structure their investments to be on revenue account (which would create a huge structural risk to the economy because tax receipts will dry up in a downturn even more than they currently do).”
Would they?
I would have thought asset prices are more volatile than earnings (especially publicly traded ones).
Negative gearing is an issue as it unfairly advantages some in ability to purchase a house. For those disadvantaged they lose a home and prices go up.
Housing is next affected by affordabiltiy(interest rates, leverage against price and income after tax) and thirdly by competition from overseas buyers for limited property especially close to work and family suitable. The law happily encourages the carving up of good homes to put up boxes built from one fence to the other often for ‘investors’ and ‘new’ so saleable to asians. We have exceeded our 22 million SUSTAINABLE POPULATION so providing for future immigrants is stupid. Its irresponsible.
If the govt would PASS the Anti money laundering Bill by housing which they have left hanging for 10 YEARS then concerns about negative gearing by those excluded from it would diminish.
And the real-estate agents, brokers, and banks and lawyers and lobbyists and mates who been profiting would be caught.
Changing the issue to whether or not it was a worthwhile tax grab is mere sleight of hand and damm evil. Worrying about overseas people competing for our HOMES does matter. And the beneficiaries seem to have the media under control.
Australia is known as a top money laundering destination. Who benefits? Who is keeping it that way? our politicians.
Negative gearing is the way conservative parents tell their children how little they think of them.
The assertion that negative gearing simply allows property (and other) investors to do what businesses can – which Jason King makes here at 3:33pm, which Professor Davidson made during our debate on “Lateline” on Tuesday night, which Malcolm Turnbull has repeatedly made since his ‘road-to-Damascus-like’ conversion (not an analogy that appeals to someone with a name like mine) on the morality of negative gearing, and which is endlessly trotted out by other proponents and defenders of negative gearing – needs to be corrected.
Hear ye what the Australian Taxation Office sayeth, on its website:
“If you’re a sole trader or an individual partner in a partnership and you make a net loss from your business activity, you may be able to claim that loss by offsetting it against your other income (such as salary or investment income) for that year.
You may be able to offset the loss against your other income if one of the following applies:
(a) your business is a primary production business or a professional arts business and you make less than $40,000 (excluding any net capital gains) in an income year from other sources
(b) your income for non-commercial business loss purposes is less than $250,000, and either:
(i) your assessable business income is at least $20,000 in the income year
(ii) your business has produced a profit in three out of the past five years (including the current year)
(iii) your business uses, or has an interest in, real property worth at least $500,000, and that property is used on a continuing basis in a business activity (this excludes your private residence and adjacent land)
(iv) your business uses certain other assets (excluding motor vehicles) worth at least $100,000 on a continuing basis.
(c ) you have been granted a Commissioner’s discretion allowing you to offset the loss.
If you do not meet any of these requirements, you cannot offset your business loss against any of your other assessable income for that income year. However, you can defer the loss or carry it forward to future years. If your business makes a profit in a following year, you can offset the deferred loss against this profit”
(Source: https://www.ato.gov.au/Business/Income-and-deductions-for-business/Claiming-tax-losses/Offsetting-current-year-losses-against-other-income/).
Now, if these rules applied to negatively geared investors – and if (yes Jason) there was no CGT discount (just like companies don’t get the CGT discount) – then I would have no problem with it continuing.
But in fact the rules applying to investors are much less restrictive than those applying to businesses which are actually producing goods and services which people want to buy, and employing people.
That’s why, as the Grattan Institute points out, only 240,000 taxpayers claimed $4 billion in business losses (compared to 1.2 million people claiming $10 billion in losses on property) in 2013-14.
Errr… if you are referring to my comment at 3.33, I was just responding (perhaps not very well) to the strange argument that since businesses can only deduct depreciation at historical rates that somehow justifies not giving a discount for capital gains to individual investors.
As for your broader post, you are falling into the same trap that Leith keeps falling into. The non-commercial loss rules that you have quoted are not about quarantining losses from one source from income from another. They are a relatively recent anti-avoidance rule designed to shift the burden of proof on activities which are in the grey area between private and business expenses back to the taxpayer. The obvious example is the hobby farm (which inevitably has a dual use as a weekender). What the non-commercial loss rules say is “you prove that this is business and not a personal expense by passing one of these tests or convincing the ATO that you are engaged in a proper business.”
Investing (in houses or shares etc) doesn’t have that problem. By and large, the costs are obviously only related to the earning of the income (yes, there can be some tightening up in practice around things like inspection trips but those are mostly immaterial). So there is no need to shift any burden of doubt back to the investor – you are already not allowed to deduct those costs if they don’t relate to earning of income.
In any case, looking at the tests, you only need to show you’ve earned $20k in income (ie gross revenue) in a year. Very easily met by most property investors.. But that aside, the Commissioner has the discretion to allow you to offset losses if you can show the activity you are in naturally has deferred income. This is what the agri schemes typically rely on to give upfront deductions. Clearly, an investment in a rental property would fall into the same boat.
As for companies not getting the CGT discount – well that is true. But other that less than wholly owned subsidiaries, companies don’t generally have substantial CGT assets in the first place (plant and equipment is of course depreciable). Financial assets and land are generally held on revenue account by companies.
I might as well also point out that the $10b losses on property is entirely misleading. Property is one of a number of assets someone can invest in. Your income from investing doesn’t just include rent, it also includes dividends, interest, trust distributions and capital gains. And the overall income and capital gains that people earn (around about $150 billion on 2014) utterly swamps the relatively small amount of net rental losses.
For what it’s worth, I have asked the ATO if they can produce stats showing “Net Investment gains or losses” (like they do for rental losses) but they said I wasn’t important enough for them to do that. So Saul, if you know someone who knows someone and can get the ATO to extract that info, we might all save ourselves a lot of time!
Sorry for the long post. If you are still reading at this point, thanks for taking to the time to post at places like here, by the way.
PS – I did try to make the above point in the “Lateline” piece (which was pre-recorded) but it was edited out, for reasons of time, incomprehensiblity or both.
On the transfer through time myth. The clearest way to imagine how NG is a real subsidy to the negative gearer or cost to the taxpayer (even assuming guaranteed CG’s and no discount) is in terms of interest on government debt. Money has a time value to government as well. Since the government is a permanent debtor, the cost to the taxpayer of NG purely as a deferment of tax, is the real cost of interest on government debt.
Saul ate that chump for breakfast….