Media - Neg Gearing limit to New IPs

[Paul@PFI]

So its finally leaked. Neg gearing "may" be limited to new housing. Retrospective or from budget night?

Who wants to predict what effect this could have on existing / old homes, units, factories etc. Which taxpayers stand to win / lose. What might this do to prices, rents ??

I would imagine it may trigger a two tier market. New property would be valued highly by negative gearing investors v's property that cant be geared. Price for new housing rise. Old properties may fall?? How could that look ?
Could it also apply to a SMSF ?
What about a business that rents loads of properties ? ie nine properties and 3 are negative and others positive ?

I would argue that if I were property investor with a contract signed I would want exchange unconditional by budget night. And I bet more than a few investors who might not like Saul Estlakes view.

 

[allsuccess]

I would argue that if I were property investor with a contract signed I would want exchange unconditional by budget night

Budget is on 13 May 2014.

http://www.aph.gov.au/about_parliament/sitting_calendar

 

[perthguy]

"While Treasury does not comment on budget speculation, rumours of cuts to negative gearing circulate at budget time nearly every year. And with good reason. Each year Australians enjoy about $36 billion worth of tax breaks on the family home."

negative gearing ... tax breaks on the family home. Wait... what?

What do negative gearing and the captial gains tax 'main residence' exemption have to do with each other? I'm confused!

 

[perthguy]

Who wants to predict what effect this could have on existing / old homes, units, factories etc. Which taxpayers stand to win / lose. What might this do to prices, rents ??

All speculation at this point. But factories and other commercial property may be exempt from the changes. In terms of residential, it's unlikely to impact prices in the medium to long term after a short term possible price reduction.

Say prices dropped in the short term as investors sold off some of their NG resi properties. These properties may be picked up by owner/occupiers. With less rental properties on the market, it is possible that rents may increase in some areas. This might motivate more renters to convert to buyers, increasing the demand for property and pushing up the prices.

At the end of the day, the number of existing (as opposed to new build) housing stock is relatively constant. Changing policy is really just tinkering with the % mix between investors vs owner/occupiers. Making existing resi housing more attractive for owner/occupiers and less attractive for investors simply transfers demand from one segment of the market to another segment of the market.

I'm not sure it will make too much difference. I certainly have not taken negative gearing into consideration when evaluating an investment property purchase. It's a bit short sighted to buy a property that is only attractive if you NG.

 

[neK]

So what does this mean for people who are leveraged, but are positively geared?

While negative gearing is about using income losses (which are usually a result of interest costs) to reduce tax, however people do associate negative gearing with the claiming of interest, and I wonder if they will simply abolish the ability to claim interest costs altogether.

 

[perthguy]

So what does this mean for people who are leveraged, but are positively geared?

Nothing. It will be business as usual for them. This is just changes to negative gearing for real estate investors.

 

[coastymike]

Maybe a potential opportunity for unit trusts. Will the legislation be worded such that interest deductions to acwuire units in a unit trust which in turns buys a residential property might be excluded. Will be interesting to see things closer to the date if anything does happen and maybe a potential opportunity at the same time.

 

[NewYork]

Maybe a potential opportunity for unit trusts. Will the legislation be worded such that interest deductions to acwuire units in a unit trust which in turns buys a residential property might be excluded. Will be interesting to see things closer to the date if anything does happen and maybe a potential opportunity at the same time.

Does that mean that currently it is not allowed to claim interest deductions to acquire units in a unit trust which purchases residential property? So if I buy a Listed Property Trust and borrow to buy the LPT units I can claim my interest as a deduction. If i setup my own trust and buy units in it and it buys property can I claim the interest deduction?

Purpose being to say then transfer units later on into a SMSF or change ownership % when one partner stops working - and at that point paying the relevant CGT but hopefully not stamp duty?

 

[coastymike]

NY

Yes at present if you borrow to acquire units in a unit trust which holds resi property the interest would generally be deductible.

What im curious about is that your comment is spot on. A unit trust in this sort of situation isnt really any different to LPT except in size. So if they remove or change the ability to negative gear resi then would be interested if a unit trust might be a way to get around it. Anyway a month before we know.

 

[neK]

Nothing. It will be business as usual for them. This is just changes to negative gearing for real estate investors.

I was referring to real estate investors who were positively geared... whats happens to them.

 

[Breamster]

with over a 1 million investment properties, I'm no expert or guru far from it, but surely the word that comes to mind for the market generally and the large majority of investors is 'devestating'..

I agree people generally speaking do not buy because a property is NG. But, most properties these days are NG, and perhaps cashflow+ with the tax return. So..without the tax return, this will no doubt have a dramatic effect on investors who haven't yet 'built' the portfolio and have certain plans to create wealth.

'Will be interesting to see things closer to the date if anything does happen and maybe a potential opportunity at the same time'.

IF this does eventuate, I think the only real 'opportunity' will be for accountants to generate more fees by putting investors into complex structures..

 

[wategos]

I was referring to real estate investors who were positively geared... whats happens to them.

Like he said, nothing.

'Will be interesting to see things closer to the date if anything does happen and maybe a potential opportunity at the same time'.

IF this does eventuate, I think the only real 'opportunity' will be for accountants to generate more fees by putting investors into complex structures..

There will be plenty of opportunities, with rents unchanged but lower property prices (due to a lot of speculative demand being removed from the market) yields will be higher. Property investment will actually be more attractive without negative gearing.

 

[HiEquity]

Rents will need to be higher if investors are actually going to keep building new subdivisions and houses for other people to rent. Subdivision and construction costs won't drop at all and it's hardly a money spinner to build a new house for someone else to rent right now, once you tot up all the costs in the value chain, with the government having their hand out at every step.

Anyone who think it's all tied up in the value of the land has never tried developing a subdivision. Those roads, retaining walls, power cables, sewage pipe, surveys, development and environmental approvals etc etc etc don't happen by themselves!

BTW the idea to quarantine -ve gearing to new builds is ridiculous. The vast majority of developers don't hold the product they develop - there is no money in subsidising other people's lifestyle at their cost of capital. Instead they take the development margin and flip it to investors with a tax problem who are happier to put up with the shocking returns on the cost of construction to be received in the rental market.

The only way, without negative gearing, to solve this problem and actually get investors to build new stock for rent is for those rents to rise significantly to at least yield a reasonable return on the cost of construction - if our population keeps increasing this is indeed the only possible outcome.

With IRs around 5%, to me that means gross yields of at least 7% on the cost of construction. So for a new 4x2 DLUG on a postage stamp block in the middle of nowhere that costs around $400k to subdivide and build, that means rents of around $550 per week. As we all know, rents in a growing market are set by the marginal cost of the new entrant... I know a few tenants who might suddenly think that this wasn't such a good idea after all...

BTW ACOSS should be all over this issue but once again they demonstrate how much they let ideology blind them to the real interests of those who are actually in poverty and struggle to afford to pay the rent already. The road to hell is paved with good intentions!

 

[Dazz]

Been done before.

Introduced in 1985 by a Labor Govt.

Total disaster.

Reversed in 1987, by the same Labor Govt.

Forget the speculation.

We have a Liberal Govt.

Investors can provide housing for the masses far cheaper than the Govt can. What they can't or won't do is carry the burden for free.

The Liberal Govt know that. The Labor Govt didn't, but eventually learnt the hard way.

The cost of 13.2 Billion is the bill for negative gearing, far lower than what it would cost the Govt to step in and do it themselves.

Looking at Nassim's photo, I'd say she was in primary school at best when this was last tried.....so she didn't really understand what forced Keating and Hawke to bring it back.

Saul should know better than to whip up and add to speculation ahead of the Budget to some lefty SMH rag.

 

[wategos]

Been done before.

Introduced in 1985 by a Labor Govt.

Total disaster.

Wasn't a disaster at all...It was only reinstated by a government spooked that they might lose an election because of its removal. The Liberals are in a much stronger position to initiate the phase out of negative gearing.

Removal would not increase social housing costs at all since more people would own their own homes.

 

[redwing]

From that link

In Eslake's view the government should abolish negative gearing entirely, rather than restrict it to new homes. "If you restrict to only to people who buy new dwellings that might tweak it in favour of new dwellings and that would be a desirable outcome," he said. "The only problem is that negative gearing is available at the moment for all investments ? if you borrow money to buy shares, gold, taxi licence plates, you're entitled to use it . . . I think the answer instead is deny it to everyone."

In Sauls view, no ability to carry forward or deduct losses for Commercial, New Buildings, New Businesses (Big or Small), Existing businesses (including Major Australian Companies), Shares, Gold, Taxi licence plates etc etc etc

Negative gearing is off-setting a loss in any one of those investment classes throughout the year and then claiming that loss on your annual tax return with the expectation that over time your investments growth and yield increase, turning a loss-making investment into an income producing one.

That seems like a big stick to wield and he's not just looking at residential property investors

Capital Gains Tax was introduced in Australia on 20 September 1985, maybe he can review that also, along with Stamp Duty

 

[hobo-jo]

In Sauls view, no ability to carry forward or deduct losses for Commercial, New Buildings, New Businesses (Big or Small), Existing businesses (including Major Australian Companies), Shares, Gold, Taxi licence plates etc etc etc

I was under the impression that NG (at least deducting interest on a loan) could only be used for income producing assets, so wouldn't be applicable to Gold?

 

[redwing]

I got carried away Hobo

 

[hobo-jo]

Was not a criticism of your post, I though you were just paraphrasing Eslake, who appears to have got carried away in the first place (he did mention Gold)

 

[Dazz]

Wasn't a disaster at all...

Yes, I've read your theories and arguments made in the other thread.

They are exactly the same as what Keating put forward to Cabinet in '84 before he convinced them to get rid of it in '85.

Took him just over 2 years to realise the theory doesn't always work out in real life.

There is no need to rely on your theories. The Australian people have a concrete verifiable example of why you are dead wrong.

It was only reinstated by a government spooked that they might lose an election because of its removal.

That's not correct....but if you are willing to ignore the political ramifications of policies and be na?ve enough to think that elected Govts are going to ignore the will of the people, then you belong up the front of some economics lecture hall, with all the other dirt poor professors.

Leave the real policy settings to the adults in charge.