Conclusions from the Financial System Inquiry

The Financial System Inquiry Final Report was released today and echoes some of the themes that I and others have put forward here in the past...

Negative gearing and capital gains tax

Capital gains tax concessions for assets held longer than a year provide incentives to invest in assets for which anticipated capital gains are a larger component of returns. Reducing these concessions would lead to a more efficient allocation of funding in the economy.

For leveraged investments, the asymmetric tax treatment of borrowing costs incurred in purchasing assets (and other expenses) and capital gains, can result in a tax subsidy by raising the after-tax return above the pre-tax return. Investors can deduct expenses against total income at the individual's full marginal tax rate. However, for assets held longer than a year, nominal capital gains, when realised, are effectively taxed at half the marginal rate. All else being equal, the increase in the after-tax return is larger for individuals on higher marginal tax rates.

The tax treatment of investor housing, in particular, tends to encourage leveraged and speculative investment. Since the Wallis Inquiry, higher housing debt has been accompanied by lenders having a greater exposure to mortgages. Housing is a potential source of systemic risk for the financial system and the economy.

http://fsi.gov.au/publications/final-report/appendix-2/

Good chance we see changes in this space over the next few years.
 
The Financial System Inquiry Final Report was released today and echoes some of the themes that I and others have put forward here in the past...



http://fsi.gov.au/publications/final-report/appendix-2/

Good chance we see changes in this space over the next few years.

All part of the debate - i'm doubtful of whether this will lead to any action on this. But its good to see someone come at the tax treatment from a funding and system risk angle. Although the implementation of this one will be completely in the Governments remit - whereas much of the prudential recommendations sit with APRA (independent).

Political capital will be burnt in changing tax treatment. - and the current government has very little capital to burn. Although this recommendation will be followed with the Tax White Paper which will presumably make similar recommendations.

Cheers,
Redom
 
Political capital will be burnt in changing tax treatment. - and the current government has very little capital to burn.

True but we're talking about facsimiles of Bill and Ben (Abbott & Hockey) the flowerpot men aren't we?

Revenue or the lack of will in all likelihood drive whatever policy/legislation is developed around PI. One the one hand you have Fed tax policy and the other State stamp duty vs a land/property tax/levy coming down the pipe.

I haven't seen anything that suggests gubimint is all that serious yet.
 
Political capital will be burnt in changing tax treatment. - and the current government has very little capital to burn.

True.

But that also assumes that (in terms of pure voter numbers) those adversely affected by changes to negative gearing > those who potentially benefit from it.

And that could come down to the spin doctors and public discourse that happens - particularly if changes to Negative Gearing become an election issue (like the way the GST did in 1998).

But - and I think it is unlikely - how does it play out if Abbott curbs Negative Gearing.... is the ALP going to oppose it?

(Like they did with the GST? Though, imo, it seems unlikely to me that the ALP would reject any curbing of NG - if anything they might take a harder stance on it).
 
True.

But that also assumes that (in terms of pure voter numbers) those adversely affected by changes to negative gearing > those who potentially benefit from it.

And that could come down to the spin doctors and public discourse that happens - particularly if changes to Negative Gearing become an election issue (like the way the GST did in 1998).

But - and I think it is unlikely - how does it play out if Abbott curbs Negative Gearing.... is the ALP going to oppose it?

(Like they did with the GST? Though, imo, it seems unlikely to me that the ALP would reject any curbing of NG - if anything they might take a harder stance on it).

As much as numbers, it's who is affected. Labor supporters don't matter and Libs are unlikely to change their political affections as they know that Labor would like do the same, whatever their protestations to the contrary. The Libs could also use it for political advantage "look we're spreading the pain everywhere", in contrast to the current perception.
 
Labor supporters don't matter and Libs are unlikely to change their political affections

True believers on either side don't matter a great deal in elections.

The middle ground (dominated by swing voters) are where elections are won or lost.

If (and I think it is an if, I don't see it happening any time soon) Abbott fiddles with NG, the spin doctors on both sides will go to work.

Depending on policies both sides could see it as an opportunity.

Who knows - the ALP might pre-empt it all and come out with their own NG policy (they may have one already, I have not looked).
 
Article in the paper today: http://www.news.com.au/finance/real...for-house-prices/story-fncq3era-1227150976541

On the one hand:
Matt Grudnoff, senior economist with the Australia Institute think tank, says negative gearing and capital gains tax concessions are pushing up residential house prices.

?Negative gearing is a tax break that primarily benefits the wealthy,? he said. ?Most houses are sold at auction, and about half there will be there to buy the house in order to rent it. Almost all of those would be for the purposes of negative gearing. Obviously with more people bidding, the price will go higher.?
So Mr Grudnoff thinks people buy housing because they want to lose money?

On the other hand:
On the other side of the debate is property analyst Terry Ryder, director of Hotspotting.com.au. He says the effect of negative gearing on house prices is negligible. More than that ? the entire ?affordability crisis? is a complete myth.

?The general rhetoric in terms of the impact of negative gearing on pricing is a storm in a teacup,? he said. ?The reality is it?s only Sydney that?s had a house price boom in the last few years. A few other cities have had moderate to solid growth, and others have gone backwards.?

Mr Ryder claims the debate has been misrepresented. The section of the market most responsible for pushing up house prices is the section that never gets discussed: the ?next home buyers?, owner-occupiers who are upgrading or relocating.

?They comprise the bulk of the market and they have the capacity to pay top price. They never get talked about and generally they?re the impetus for rising prices.?

Investors comprise roughly a third of the market, but generally they don?t pay top dollar for properties, he argues. Their motivation is to get properties at the lowest price, seeing as they?re not going to live in them.
Personally, I don't buy investment properties to lose money and I don't pay top dollar either. I think the main residence CGT exemption is a much bigger driver for house prices than NG.

Either way, it wouldn't bother me at all if they got rid of NG for established homes. Within 2 years I want all my properties to be positive cashflow anyway.
 
Abolishing NG would definitely be controversial. I think realistically it would require bi-partisan support to do which I can't see happening.
 
Negative gearing costs the government several billion dollars a year, and it's become an increasingly expensive tax break over the last decade. Given the intention to get the budget back on track, I wouldn't be surprised if it's reformed.

That doesn't necessarily mean it'll be removed, but rather I think that there'll either be restrictions (e.g. applies to new builds only), or it'll be quarantined.
 
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