Another day, another worst ever negative gearing attack

By Leith van Onselen

Uber-wealthy property investor and media director at the Seven Network, Bruce McWilliam, is not happy about Labor’s negative gearing policy. You see, McWilliam is one of Sydney’s biggest property investors with a portfolio of at least 20 eastern suburbs properties worth an estimated $200 million. And he believes it’s unfair that Labor’s policy will reduce his wealth. From The AFR:

“Labor’s changes are elitist and under them only rich bankers can negatively gear shares”…

Labor’s plans to confine negative gearing to new properties “made no sense at all”. “Property and building is a solid sphere of the economy and if you knock the investors out then the market will suffer”… “I remember back when Keating knocked out negative gearing, rents went up and that’s a fact of life”…

Actually, Bruce McWilliams, there is zero evidence that “rents went up” after “Keating knocked out negative gearing” in the mid-1980s.

The ABS’ rental data shows clearly that real rents only rose in Sydney and Perth when negative gearing was abolished in the 1980s (see red line):

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Whereas rental growth was flat or fell elsewhere:

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There was also no discernible impact nationally:

But don’t just take my word for it. Here’s what the 1987 Cabinet Submission on negative gearing said about rental growth (my emphasis):

“Data for individual capital cities suggest that, as might be expected, rents have risen more rapidly in those cities where vacancy rates have been tightest. In the twelve months to March quarter 1987, rent increases in six of the eight capitals lagged the CPI“.

Now, if there was any truth whatsoever in the claim that abolishing negative gearing pushed up rents, then wouldn’t rents have risen Australia-wide, rather than in only Sydney and Perth?

Bruce McWilliams has also conveniently left out that rents only rose in Sydney and Perth because rental vacancy rates were very low at the time in these two cities – as shown in the 1987 Cabinet Submission on negative gearing (see below table) – not because of negative gearing’s temporary ‘abolition’.

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The myths surrounding negative gearing were busted long ago. So stop lying, Bruce McWilliams.

In fact, with Labor restricting negative gearing to new homes only, there’s every likelihood that supply will be boosted, thus placing downward pressure on rents.

Bruce McWilliams also needs to recognise that by encouraging excessive ‘investors’ in the market, this has crowded-out first home buyers, thus preventing them from achieving the dream of home ownership and forcing them onto the insecure rental market:

Removing the subsidy of negative gearing on established dwellings will obviously reduce household debt (other things equal), level the playing field between investors and first home buyers, increase home ownership, and boost the federal Budget by billions of dollars.

It’s good policy all round.

[email protected]

Leith van Onselen

Comments

  1. What’s unfair is that existing portfolio investors such as above will have their negative gearing rights grandfathered, while new investors will not.

    • It makes it politically palatable. In any case, negative gearing is just the enabler, capital gain is the driver. Removing negative gearing from speculative ‘investment’ in existing housing makes the capital gain on all existing property much less likely. Existing speculators can negative gear to their heart’s content but it will be increasingly speculative and (I think) the carnage will be awesome.

    • Strange economics - negativesMEMBER

      Perhaps the writer has managed to deduct enough negative gearing to limber under 90k a year taxable income and become just another typical ” a mum and dad property investor…”.. 200 million of property at 5 % interest out and 2 % yield in gives him $6 million of deductions from his salary… Then theres the typical 15% a year capital gain at 50% tax saving…

      • If so, that would be a particular stupid strategy because he if offsetting losses against income taxed at 37% but will eventually pay tax on income and gains at 45%.

      • Strange Economics - make a loss is the best investment ?MEMBER

        This was just an extreme example –
        noting that ScoMos taxable income quotes are after all the net losses.
        But in this case – Actually he has reduced his tax at the 45% level all the way down to 90k level.
        And later capital gains are paid only at 50% of the marginal rate so 22 % – or less assuming you can’t postpone it to realise in a long distance low tax retirement…

        Anyway high end property went up at 15 % a year so he was way in the money (except worried the next punters wont be as interested to buy at a ridiculous price if they are not going to get the tax breaks any more…)

      • “But in this case – Actually he has reduced his tax at the 45% level all the way down to 90k level.
        And later capital gains are paid only at 50% of the marginal rate so 22 %”

        That’s a result of the CGT provisions which can be changed independently of NG. Plus future net rental income is taxed at full rates anyway.

      • Yes – the 1999 introduction of the CGT 50% discount made the combination with negative gearing into a no-brainer, and even better with bank deregulation came interest only loans (on fake living expenses). Buy Buy Buy….
        Why 50% discount, not 25 % or 75 % ?
        Just a random thought bubble from Costello – maybe guess was inflation was 7 % then so may have seemed like 7 years, but now its 2% and its 25 years……

      • I think it was loosely based on a US model which also has 50%.

        Don’t forget though – it is 50% of the gross gain. So to be better off than the old system you would have needed the asset to grow at more than twice the rate of inflation. Easily done in the short term during a boom – not necessarily so easily done in the long term.

    • Yes, but they face paper losses when the market craters — it kind of screws with the quality of your sleep, if you know what I mean.

  2. Negative gearing isn’t a subsidy, at best it is a timing advantage. The CGT Discount could be seen as a tax concession but that can be fixed without changing NG.

    That said, you should have called out this incorrect statement from Williams:

    “Labor’s changes are elitist and under them only rich bankers can negatively gear shares”…

    Labor’s changes will also apply to shares and other investment assets.

    • You keep saying that without any explanation as to why you say it. I tried to get you to elaborate the other day and you just repeated statements that explained nothing and in effect were circular.

      Repeating a statement over and over again until it becomes an accepted fact only works for for the generally uneducated masses.

      As far as I can see it meets all the definitions of a subsidy and I would like to understand your position but to just keep repeating it wont help me or anyone else evaluate it.

      • ok, I did cover this the other day but…..

        My definition matches the definition found at a number of sources.

        https://www.investopedia.com/terms/s/subsidy.asp

        “A subsidy is a benefit given to an individual, business or institution, usually by the government. It is usually in the form of a cash payment or a tax reduction. The subsidy is typically given to remove some type of burden, and it is often considered to be in the overall interest of the public, given to promote a social good or an economic policy”

        or

        http://www.businessdictionary.com/definition/subsidy.html

        “Economic benefit (such as a tax allowance or duty rebate) or financial aid (such as a cash grant or soft loan) provided by a government to (1) support a desirable activity (such as exports), (2) keep prices of staples low, (3) maintain the income of the producers of critical or strategic products, (4) maintain employment levels, or (5) induce investment to reduce unemployment. The basic characteristic of all subsidies is to reduce the market price of an item below its cost of production. Also called subvention.”

        or even ….

        https://en.wikipedia.org/wiki/Subsidy

        “A subsidy or government incentive is a form of financial aid or support extended to an economic sector (or institution, business, or individual) generally with the aim of promoting economic and social policy. Although commonly extended from government, the term subsidy can relate to any type of support – for example from NGOs or as implicit subsidies. Subsidies come in various forms including: direct (cash grants, interest-free loans) and indirect (tax breaks, insurance, low-interest loans, accelerated depreciation, rent rebates).”

        Interestingly wikipedia expands even more with…

        https://en.wikipedia.org/wiki/Subsidy#Housing_subsidies

        “Housing subsidies are designed to promote the construction industry and homeownership. As of 2018, housing subsidies total around $15 billion per year. Housing subsidies can come in two types; assistance with down payment and interest rate subsidies. The deduction of mortgage interest from the federal income tax accounts for the largest interest rate subsidy. Additionally, the federal government will help low-income families with the down payment, coming to $10.9 million in 2008. Removing energy subsidies is viewed as a necessary measure to combat greenhouse gas emissions as it helps decrease energy consumption.”

        Now when you look at the reasons that NG is allowed here ( and almost nowhere else in the world ) is to encourage investors to develop property. That meets the definitions used above and in the case of the “housing subsidy” discussed in the wikipedia article it is pretty much spot on.

        Sure, you cant believe always a wikipedia article because it could be written by anyone but the corollary to that is just because its wikipedia does not mean you cant.

      • “Now when you look at the reasons that NG is allowed here ( and almost nowhere else in the world ) is to encourage investors to develop property.”

        This is incorrect. NG is not property specific and it certainly wasn’t introduced as a means to encourage property investment.

        Instead it is the natural outcome of having an income tax system that treats all income the same (subject to things like anti-avoidance rules like PSI rules) and allows deductions against that income. So for instance someone like Wesfarmers can offset losses from one division against profits in another division. It is the same for individuals.

        Therefore taking it away will create a distortion in the tax system.

      • Ok, Based on that I can see what your saying but its based on a flawed idea.

        “Instead it is the natural outcome of having an income tax system that treats all income the same (subject to things like anti-avoidance rules like PSI rules) and allows deductions against that income. So for instance someone like Wesfarmers can offset losses from one division against profits in another division. It is the same for individuals.”

        Our tax system does not treat all income the same.

        e.g.
        1) Personal versus business. A business can claim almost all expenses against the income.
        2) Capital gains is a form of income but its treated different. Its the income from finalising an investment.
        3) The income of an air hostess / stewardess is treated differently in that they are allowed different deductions because of how they earn said income and arguably gender.
        4) Health professionals get tax breaks on PPOR. Again based on how they earn the income.

        If we treated all income the same we would have no differences based on the way we earn it and we would not be having this debate around this particular tax treatment.

        For a person in Australia your entire income is treated at a set rate. Then we allow deductions based on a concept called ‘allowable deductions’. NG in its current form is an allowable deduction, just like stocking for air hostesses, certain educational expenses e.t.c.

        To sum that up, for a business all expenses are acceptable deductions unless explicitly disallowed, for a person no expenses are acceptable deductions unless explicitly allowed.

      • The basic taxing and deduction sections are the same for all taxpayers. How they apply to a taxpayer (being it an individual or company etc) will depend on the facts.

        It is prima facie easier for incorporated businesses to claim deductions because by definition their outgoings are made in the course of earning assessable income (that is, there is no generally “private” expenditure for a company). Similarly interest expense on amounts borrowed to acquire an income producing asset are almost unambiguously deductible. Hence why NG is not a subsidy.

      • ” It is prima facie easier for incorporated businesses to claim deductions because by definition their outgoings are made in the course of earning assessable income (that is, there is no generally “private” expenditure for a company). ”

        So you give an example that backs up what I said. taxation for a company is treated differently because its expenditure is not private. Fact is we have whole separate legislation around corporate taxation and personal taxation. different rates etc.

        When I drive to work I am not allowed to claim the cost of transport, as its not deemed a cost of earning the living. BUT if I dont take transport of some form to get to work I dont get paid. which by the definition you used makes it ‘made in the course of earning assessable income”

        Even by your own definition NG is a tax deduction allowance, as in it is explicitly allowed. When you start from a position of nothing allowed unless specified then anything that is specified is an allowance. When you add to that the idea that is pushed by policy makers that NG is crucial to increasing the production of new residential property ( despite the evidence being the opposite ) then I would assert its by definition a subsidy.

        I think what your trying to point out is that under tax law we don’t segregate income streams like they do in other countries and apply different tax policies based on where or how that income is earned. This may be true but my argument is that while this may be the policy its not really how it plays out. CGT discounts are an example of how we treat income differently.

        We started out with an everything the same and added rules to create distinguishing categories. Other countries started out with categories and created rules to reduce the distinctions.

        Either way in my view and from what I have read the view of a lot of economists, NG is still a subsidy, the government already talks like its a subsidy they cant remove…..

  3. It’s a clear subsidy. Loss making investments are subsidised by the public as losses are able to offset taxable income earnt by any means. It’s a travesty that breeds inequality and increases debt pollution!

    It’s only vested interests and subjective view points that argue otherwise.

    Here’s an objective point of view (and I paraphrase): I nearly fell off my chair when I read about negative gearing in Australia. It’s ridiculous (source: professor of economics based in Japan).

    • If you don’t want losses being offset against other income you would also have to agree not to tax investment income based on your overall marginal rates.

  4. Forrest GumpMEMBER

    … “I remember back when Keating knocked out negative gearing, rents went up and that’s a fact of life”…

    And for the period that Negative Gearing has been restored thereafter, have a look at the huge increase in rents and property values.

    • Strange EconomicsMEMBER

      Rents are just not elastic with the property price – doubling or halving.
      Rents are capped at absolute 50% of peoples income – the current Syd Melbourne level .
      Beyond that people have to move and flats would be empty.
      Remember mortgage or rental stress is 30% plus.

      e.g. Average family median income (ABS) – about 80k or 1500 per week. Sydney median house rent – 750 per week…
      Prices doubled and the rental yield dropped to 2%.

      Owners try to turn to Air BNB or put 6 foreign workers in a flat to extract a higher yield.