Negative gearing: Everyone else pays

[metamorphosis]

Recent Article in BRW:

Taxpayer funds that subsidise investors' negative gearing could be better spent to benefit the community

http://enewsletters.f2network.com.au/cgi-bin16/DM/y/eRq10PXQ0Bn30pZ80Aj

 

[INVESTRON]

very interesting, scares the **** out of me.

this bloke and his friends are dangerous.

 

[Aceyducey]

That can be said of any taxpayer funds.....Let's see - which bits of the Federal Budget could be allocated better...

Good article though. Well-balanced and nice analysis and I like the quaratining idea. Though I'd question their point about buildings appreciating over time.....it's the land value that increases and the building does require more maintenance.

For serious investors the removal of negative gearing tax breaks would provide new opportunities.....lots of properties dumped on the market at bargain prices, shortage of rental properties pushing rents up.....

Wouldn't be good for the country however and would likely hurt all of us.....

Cheers,

Aceyducey

 

[always_learning]

I would glady swap "negative gearing" for the ability to rollover capital gains without paying capital gains taxes (ie sell one IP => immediately buy a block of flats without having to crystalize the capital gains taxes ). This would also be good for businesses who want to trade up to bigger warehouses, retail premisses, offices etc.

If I want to sell my IP for $500 which I purchased for $250 I have to pay 47% tax on 50% of the $250K profit, ie $72K a big disencentive to sell. But lets say I could sell for $500K and if I immediately buy (in 3 months or so) a $1.5M block of units rolling over the $500K into it then I would be very happy! Basically this just delays of the payment of capital gains taxes!

What I would like to see is for the government to limit negative gearing against salary income ie. quaratine losses until profit is generated BUT reduce land tax and stamp duties (yep state taxes), enable rollover of capital gains into bigger better businesses.

Actually I think the Government should send a signal, lets say limit negativing gearning to 90% against salaried income ( the remaining 10% is quantined), this wouldn't "hit" IP investors too much in the hip pocket ( much less than reserve bank being forced to raise interest rates by 2%), but would cause some to review the reasons why they are investing.

For example

Today
Income from salary: $80K
Income from IP: $5K

Costs of holding IP: $10K

Income ($80K+$5K) - costs ($10K)

Taxable Income = $75K

Proposal

Income from salary: $80K
Income from IP: $5K

Costs of holding IP = $10K

Income (80) - 90% of IP losses ( 0.9 * ( $10K-$5K) ) = $4.5K

Taxable Income = $75.5K

$500 p/a isn't a big hit, but sends a signal to those who buy IP's thinking its some kind of tax dodge.

 

[Kevmeister]

Gee, I wonder how the construction industry would respond seeing how many investors are buying into new apartments etc.

 

[Cosmo]

Hey guys,

Aren’t we just clawing back some of that horrendous stamp duty we all paid prior?

Why don’t they look at it like that.

 

[Aceyducey]

Originally posted by Cosmo
Hey guys,

Aren’t we just clawing back some of that horrendous stamp duty we all paid prior?

Why don’t they look at it like that.

Because Stamp Duty is state based & Income Tax (CGT) is Federal.

The states are screaming for more funds, they don't control many income sources any more & don't want to reduce their incomes from taxes like Samp Duty...

Cheers,

Aceyducey

 

[Peter_Tersteeg]

The most reasoned idea put forward in this article was one I'd thought about a long time ago:

Perhaps the most sensible way to deal with the issue, and the way least likely to greatly affect prices, is to quarantine losses on personal investments against income from personal investments, including the ultimate capital gain that arises when the underlying asset is sold. Investors would still get relief in full over the period they hold the investment, but the tax system would no longer fuel a feeding frenzy of inappropriate personal investment.

This solution will mean that in order to use the tax benifits, investors shall have to have a profitable exit strategy for their portfolio. This could be in the form of GCT rebates when they sell, or tax breaks when the rent increase makes the property +ve cashflow.

 

[Glenn]

I feel the fairest way to change the negative gearing rules if there were to be a change would be to only allow the deductions to be made against the income of the asset involved.....totally separate deductions for the asset and other sources of income eg salary, other investment. The initial losses could be accumulated until the the property started returning positive income. As an example, check out the following example (just made up stuff)

Year Rent Interest Other Deductions Profit/Loss Accum. Profit/Loss
1 8000.00 10000 2000 -4000.00 -4000
2 8320.00 10000 2000 -3680.00 -7680.00
3 8652.80 10000 2000 -3347.20 -11027.20
4 8998.91 10000 2000 -3001.09 -14028.29
5 9358.87 10000 2000 -2641.13 -16669.42
6 9733.22 10000 2000 -2266.78 -18936.20
7 10122.55 10000 2000 -1877.45 -20813.64
8 10527.45 10000 2000 -1472.55 -22286.19
9 10948.55 10000 2000 -1051.45 -23337.64
10 11386.49 10000 2000 -613.51 -23951.14
11 11841.95 10000 2000 -158.05 -24109.19
12 12315.63 10000 2000 315.63 -23793.56
13 12808.26 10000 2000 808.26 -22985.30
14 13320.59 10000 2000 1320.59 -21664.71
15 13853.41 10000 2000 1853.41 -19811.30
16 14407.55 10000 2000 2407.55 -17403.75
17 14983.85 10000 2000 2983.85 -14419.90
18 15583.20 10000 2000 3583.20 -10836.70
19 16206.53 10000 2000 4206.53 -6630.16
20 16854.79 10000 2000 4854.79 -1775.37
21 17528.99 10000 2000 5528.99 3753.61
22 18230.14 10000 2000 6230.14 9983.76
23 18959.35 10000 2000 6959.35 16943.11
24 19717.72 10000 2000 7717.72 24660.83
25 20506.43 10000 2000 8506.43 33167.27
26 21326.69 10000 2000 9326.69 42493.96
27 22179.76 10000 2000 10179.76 52673.72
28 23066.95 10000 2000 11066.95 63740.66
29 23989.63 10000 2000 11989.63 75730.29
30 24949.21 10000 2000 12949.21 88679.50
31 25947.18 10000 2000 13947.18 102626.68
32 26985.07 10000 2000 14985.07 117611.75
33 28064.47 10000 2000 16064.47 133676.22
34 29187.05 10000 2000 17187.05 150863.27


Note that although the property turns cashflow positive in year 12, no tax is paid until year 21

Glenn

 

[Glenn]

Here is the source file....my formatting was pretty ugly!!

Glenn

 

[abcdiamond]

Originally posted by Aceyducey
Because Stamp Duty is state based & Income Tax (CGT) is Federal.

The states are screaming for more funds, they don't control many income sources any more & don't want to reduce their incomes from taxes like Stamp Duty...

Don't the states get the GST ?

I thought that part of the original GST plan was that as the states got the GST, they could reduce the property stamp duty ?
It obviously didnt happen like that, so maybe I got the info wrong.

 

[Aceyducey]

abcdiamond,

GST goes into Federal Coffers & then is paid to states based on how much they suck up to the Fed government.

NSW & Vic basically subsidise the small states, Qld is about neutral.

Basically another way for the Fed gov to control the states & direct them where it wants to go

Of course, it must please the Federal Libs no end to have the Labour states all sucking up for funds....

Remember that income tax was state-based until WWII

Cheers,

Aceyducey

 

[abcdiamond]

I learn more about this country everyday,

This political system seems very odd to someone like me, used to the British way. Just ONE party to blame everything !

Here, you (or at least I) don't know who to blame for what !!

 

[bundy1964]

Holding over losses on investments was tried in the late 80's.

It did it's damage and was gone within 2 years.

Back to the future anyone?

bundy

 

[Tibor]

AL,

Completely agree with you. You just described the system what is in place in the USA.

I personally believe very strongly that their system is much better than ours and rather benefits investors than speculators.

Our depreciation is 40 years, their 28.5 years.
CGT rollover available under specific rules.
No write-off of losses out of real estate against personal income.
Specific Tax Credits available on specific real estate renovations.

are just some of the examples.

==============================\

Regarding to the article, I think the bloke who wrote it is living in dreamworld with a very strong communistic sense. he conveniently forgotten about

Tax revenue generated by stamp duty, land tax, CGT

Business income produced (valuers, financiares, appraiers, RE agents, developers, etc, etc) who ALL pay tax on the income derived from these transactions.

Employment and taxes from those employed in the building / RE and associated industries versus more people on the dole.

He just also conveniently overlooked the definition what is a business. Sorry mate, but startup companies (or first time and startup investors) usually make a loss before making profit!!!
I am not quite sure (according to him) how many property or what amount of money what qualifies a RE investment to become a business? 1, 2 10, 100K 500K 1 million?

He obviously does not understand the correlations between depreciation and inflation. Building DO NOT appreciate. Land DOES if there is a real or perceived shorthage of it. Due to inflation (and seasonal factors, including greed factor) the price of materials and productions of goods increases. But existing goods that were produced are loosing value in real term.

Regarding to the whinging about how good is for investors (only 50% cap gain tax)

these investors filling a hole what the goverment can NOT fill.Just look at the waiting list on housing commission properties and the funds allocated for building new ones (as well as maintaining existing ones). So if no one would invest (and become a rich bastard instanteneously in his mind) the goverment should have to increase taxes like GST quite dramatically to

pay more unemployment benefit for those who will not have a job any more

pay much more to provide housing for those in need

collect considerable less tax (direct and indirect)

the impending baby boomer retirement problems would be even more serious than it is in the future.

The guy sounds to me like RK's poor dad.

Just the 2c.


Tibor

 

[DaleGG]

HI

My personal thoughts are that "Negative Gearing" is a sting that the Government plays on us, based on:

There is a lack of housing available for the poorer people who cannot afford to buy their own housing.

The Government cannot afford the money to buy housing for all of those people, let alone maintain that housing and pay the costs of managing those properties.

So, given the above, they offer a tax incentive to attract investors and those wishing to reduce their taxes to buy this housing. A small tax refund that the Government pays is nothing much compared the costs above . . .and,

The Government knows that negatvely geared houses will become positively geared in due course, at which you will pay taxes for the priviledge of providing the housing for them.

And, if you get jack of that game and sell the property, they'll then hit you for CGT.

Don't be fooled. Negative gearing is a very powerful tool to entice us to help out.

Dale

 

[astroboy]

Love your work Dale, I agree 100%
ab

 

[adaran01]

Hello
"What they do not say is that the costs are carried by real people (widows, single mothers, the poor, the elderly, the battlers, the rest of us)"

These people pay for it either way, if negative gearing was taken away rents would go up, so as far as I can see this statement is irrelavant to the discussion, apart from demonising investors who are also just trying to get ahead in life.

It would probably be worse for the battlers, because most investment property is in the price range they would be looking to rent in.

 

[geoffw]

Originally posted by always_learning
What I would like to see is for the government to limit negative gearing against salary income ie. quaratine losses until profit is generated

Interestingly enough, The Australian government does do this- for taxing overseas income.

I had a property in England which was still negative after 8 years. I could not offset that loss against any Australian income- and I could not affset it against any overseas earned income.

In fact, they class four types of income (Interest, Other passive, offshore banking, and other- including earned)- and no losses in any class can be used to offset income from any other class.

 

[Fester]

Actually, does anyone know what happened back in the Keating days when -ve gearing was suspended for that period? Was it only new players that were affected? Was it only interest that was disallowed, or all deductions that would send it -ve, like depreciation, council rates, body corp etc? I wasn't into the property game back then!

Regards, Fester