negative gearing review by Govt - what is the status??

[plusnq]

Sadly what you cause is private investors forming companies to do their investing if we follow your suggestion. Just as when PAYG rates were 50% above $50K people looked to NG or become another entity such as a company to reduce their tax....so it will follow that if you remove NG for PAYG, people will use other structures to invest. Peter Costello ...I know I will be booed here....performed the best con trick in making NG less attractive to most lower earners by raising tax rates. It was a piece of masterful politics by selling it as reducing tax rates but infact it massively reduced the attractiveness of NG for the average wage earners.

Capital will flow and people will find a way. That is the opposite of socialism by the way.

Cheers

Shane

 

[Token Funder]

Sadly what you cause is private investors forming companies to do their investing if we follow your suggestion. Just as when PAYG rates were 50% above $50K people looked to NG or become another entity such as a company to reduce their tax....so it will follow that if you remove NG for PAYG, people will use other structures to invest. Peter Costello ...I know I will be booed here....performed the best con trick in making NG less attractive to most lower earners by raising tax rates. It was a piece of masterful politics by selling it as reducing tax rates but infact it massively reduced the attractiveness of NG for the average wage earners.

Capital will flow and people will find a way. That is the opposite of socialism by the way.

Cheers

Shane

Company structures would lead to loss of the CGT reduction and make RE investment less attractive compared to current arrangements. Credit is also less convenient under a company structure in that lenders tend to require more info or more % (relative to the 'ol Lie Doc caper).

Either way and as you point out, by being less attractive capital would flow to alternative investments. By using the savings to make new property more attractive relative to trading in existing stock, the economy achieve a better result. WE might even see a transfer of capital from static, existing property to research and production (perish the thought!).

I'm still not clear on whether you support the subsidisation of poor investment decisions by the long suffering taxpayer

 

[Lukey13]

First of all, I must say this is a great thread with some rather though-provoking discussion occurring. It's also the first time that HiredGoon has presented his arguments in a more cohesive and convincing manner - nice to see. Also good to see some broader social context.

Some things, like immigration or higher wages push prices up via fundamentals - pushing support prices up permanently. But those two tax benefits just make the amplitude of a boom higher - meaning that the correction will be from a higher point and offer no fundamental support on the way down.

HiredGoon, the above comments seem to me like an admission that immigration and maybe even higher wages play the more significant role in driving up prices while tax breaks for investors "just make the amplitude of a boom higher".

 

[dave99]

In the meantime, I will go out and look for another existing home, bid lower than asking price, sign the papers and put in a tenant and help to relieve the rental squeeze currently on.

Hi LA,

Buying an existing home will not relieve the rental squeeze! You offer it to a tenant and add one to the supply of rental properties. But by buying the house, you prevented an OO from living there. That OO must now continue to rent, and adds one to the demand for rental properties. Only by building a brand new dwelling will you relieve the rental squeeze.

And let's not kid ourselves - investors in property are in it to make money first, provide shelter second. In fact, if we could do it without having to have tenants, we'd do that.

I totally agree, property is an investment first. You're in it to make money. I'm completely happy with that. What I disagree with is the tax break. Your investment should make money without an $8bn handout from the government.

When you build a new dwelling, there is an economic benefit to our country, in employment for builders, and increase in the housing supply. So a tax incentive makes sense. But buying an existing house does none of that, so there should be no tax break. It has to make money like any other business - revenue - costs = profit.

 

[dave99]

Sadly what you cause is private investors forming companies to do their investing if we follow your suggestion.

Delighted to have people use a company structure. You can't set company losses against your own personal income to get a nice tax refund. The company actually has to make money on its own merits - without government assistance.

 

[silversands]

Hey Dave,

I hardly think it's fair to state that LA prevents an oo from buying a house to live in by purchasing it. What prevents the oo from building a home to house him/herself? This is what we did, as did many others.

For the record, we have built all of our investment properties. Yes we are negatively geared, we'd be neutral at 7.2% but this did not influence our decision to build in any way. We are looking at the long term growth as a much more important factor.

But thanks for a lively debate everyone

Regards Jodie

 

[HiEquity]

It has to make money like any other business - revenue - costs = profit.

I'm still not clear on whether you support the subsidisation of poor investment decisions by the long suffering taxpayer

Excuse me? In any other investment class losses can be offset against personal income. If I leverage 90% into shares in company x (instead of an IP) and it pays no dividend, then I can claim the interest expense on the loans against personal income, negative gearing just like an IP.

No unique tax breaks here - Why should property be any different to anything else?

 

[Token Funder]

Excuse me? In any other investment class losses can be offset against personal income. If I leverage 90% into shares in company x (instead of an IP) and it pays no dividend, then I can claim the interest expense on the loans against personal income, negative gearing just like an IP.

No unique tax breaks here - Why should property be any different to anything else?

Though I personally am against negative leveraging across all investment classes (as I highlighted earlier, tax-driven managed investment schemes are seriously screwing with legitimate agri-business), the key difference with RE is that it is not simply an generic asset class.

Inflationary pressures on housing stock and the trading of existing property rather than the creation of new accomodation impacts *on the way people live* and has significant flow-on effects to the economy.

At the peak of the UK bubble, councils were subsidising rental house for coppers, nurses and teachers because they couldn't afford to live in the areas that required their skills. Punters bidding up mining shares doesn't have those sorts of impacts.

Put simply ,residential property is different from other investments (as everyone on this forum would seem to agree).

 

[HiEquity]

Put simply ,residential property is different from other investments (as everyone on this forum would seem to agree).

Completely disagree. Negative gearing on food companies effects the capitalisation of food companies and hence food prices. NG on clothing companies likewise effects clothes prices. I assume these are just as important as property? In just the same way NG on resi property effects rents through what it does to house prices. Where do you stop?

You perceive resi property as worthy of "special" treatment, which would actually be intervention in the market to achieve a social outcome. In this case you wish to increase the supply of new housing stock. That is pure social engineering through taxation policy. This is not the purpose of negative gearing. It's there because property should be treated like any other investment and not tampered with. There should be a premium for those who are prepared to own instead of rent. Resi property is all part of the wider investment market - it just has its own unique features like every other investment.

I assume you wouldn't want NG on commercial property to be banned as well? The only difference is your social agenda to create more houses or increase home ownership in Australia further from its already high levels. There is just as much an argument to say that too many people own their house compared to international benchmarks and more should rent. NG makes renting attractive after all so it should therefore be encouraged. If you want more people to buy instead of rent from the current economic balance then you are interfering in the market for social reasons. There is nothing wrong with the housing market operating by the same rules (as much as possible) as any other investment market.

Also, if govt wants to increase the supply of housing stock for social reasons there are plenty of ways of accomplishing this without messing with the fundamentals of good taxation and economic policy.

 

[Ausprop]

Inflationary pressures on housing stock and the trading of existing property rather than the creation of new accomodation impacts *on the way people live* and has significant flow-on effects to the economy.

this ignores basic principles of supply and demand. as the prices of exisiting stock is bid up it obvioulsy becomes profitbale to develop new stock. Cuckoo arguments like this from minority interest groups are half the problem with this country - everything from bizarro tax regimes (GST exemptions etc), shopping hours in WA that ordinary citizens have to endure, market distorting luxury car taxes combined with reduced import taxes on fuel guzzling SUVs, complicated savings schemes for 1st home owners, unfathomable family benefits payments (I was paid a heap of money for reasons i have no clue why and now i have been asseased to pay it back - I never wanted it in the first place!?!), taxes on payrolls but only above certain thresh-holds, uranium mining east of the WA border but not west, GST on new properties but not old etc etc. Creates plenty of jobs for those government workers that get a white camry each.

 

[topcropper]

The regional investor scramble was interesting. It must have been 03 when I was in Armidale visiting family and I was having a chat with a local agent. He told me he had recently had a guy from Sydney who bought 12 houses over the phone - sight unseen. I'd say he's lost a bit of money by now. There were lots of places where the prices got pushed up by excited investors and then when the music stopped there was nothing to hold the prices up there. I reckon in many places falls of 30-40% from the peak would have easily happened.
Scott

I remember the regional investor scramble too. I missed the whole thing and couldn't believe what was happening, and I even sold a house in a regional town in 2001, that would now be worth double.

Anyone buying a house in Armidale in 2003 would have doubled their money, because the boom started about then, funnily enough, right as Sydney peaked. That buyer in 03 would be laughing, and prices haven't dropped at all. However yields really are pathetic now, and it won't be long till Sydney yields are higher than rural.

That's my recollections of it all. The bush [up my way anyway] has some fairly strong economic stuff happening right now. This drought disaster is really being blown out of all proportions by the city media. Sure there are farmers and business's going bust, but that's just how an efficient market works.

See ya's.

 

[asdf]

this ignores basic principles of supply and demand. as the prices of exisiting stock is bid up it obvioulsy becomes profitbale to develop new stock. Cuckoo arguments like this from minority interest groups are half the problem with this country - everything from bizarro tax regimes (GST exemptions etc), shopping hours in WA that ordinary citizens have to endure, market distorting luxury car taxes combined with reduced import taxes on fuel guzzling SUVs, complicated savings schemes for 1st home owners, unfathomable family benefits payments

Why we keep voting these useless pollies in I never know. I'll take the Invisible Hand anyday, throw in a few Darwinian theories and that would do me. Until I get belted and lose, then I'd be playing the blame game and start screaming out for hand outs because thats what losers have been conditioned to do by our govt.

 

[dave99]

Excuse me? In any other investment class losses can be offset against personal income. If I leverage 90% into shares in company x (instead of an IP) and it pays no dividend, then I can claim the interest expense on the loans against personal income, negative gearing just like an IP.

No unique tax breaks here - Why should property be any different to anything else?

I'm not saying property should be any different. I don't think allowing people to offset ANY investment losses against personal income is a good use of taxpayers money. The losses should be retained and set against future profits. If the investment never turns a profit, why should taxpayers subsidise this?

The tax treatment encourages speculating in investments which will never make a profit, in the hope of capital gain. Happy for people to do that, but you can do it without a tax break and I think the money is better spent elsewhere.

 

[dave99]

Hey Dave,

I hardly think it's fair to state that LA prevents an oo from buying a house to live in by purchasing it. What prevents the oo from building a home to house him/herself? This is what we did, as did many others.

For the record, we have built all of our investment properties. Yes we are negatively geared, we'd be neutral at 7.2% but this did not influence our decision to build in any way. We are looking at the long term growth as a much more important factor.

But thanks for a lively debate everyone

Regards Jodie

Hi Jodie,

I think it's a great decision to build a house - and you are completely entitled to tax benefits for doing so. Building new houses ensures our housing supply keeps up with population growth and helps keep rents stable. It also employs builders and helps the economy. It's reasonable to give a financial incentive to do that.

But buying an existing house doesn't provide those benefits. It doesn't reduce rents and it doesn't help the economy, except for real estate agencies. So I think you should not get a benefit from the government (i.e. an offer to reduce and defer your tax) for doing this.

 

[dave99]

Excuse me? In any other investment class losses can be offset against personal income. If I leverage 90% into shares in company x (instead of an IP) and it pays no dividend, then I can claim the interest expense on the loans against personal income, negative gearing just like an IP.

No unique tax breaks here - Why should property be any different to anything else?

I'm not saying property should be any different. I don't think allowing people to offset ANY investment losses against personal income is a good use of taxpayers money. The losses should be retained and set against future profits. If the investment never turns a profit, why should taxpayers subsidise this?

The tax treatment encourages speculating in investments which will never make a profit, in the hope of capital gain. Happy for people to do that, but you can do it without a tax break and I think the money is better spent elsewhere.

 

[HiEquity]

And let's not kid ourselves - investors in property are in it to make money first, provide shelter second.

I completely disagree LAA - providing shelter has nothing to do with it!

The tax treatment encourages speculating in investments which will never make a profit, in the hope of capital gain. Happy for people to do that, but you can do it without a tax break and I think the money is better spent elsewhere.

This conversation strikes me as increasingly superfluous. Not only do you want to change the tax system for properties but also every other investment as well! I suggest you seriously consider talking to your MP to accomplish this - and don't forget to mention the other changes that are also required to the GST, stamp duty, land tax, rates, CGT, FBT (particularly novated leases!) etc etc that will help make our country a more fair and equitable place...

In the meantime, I will concentrate on making money within the rules as they are rather than as I wish them to be - got any ideas on that?

 

[BayView]

Over time the rents will rise to exceed the holding costs, and then each person will be worse off as they now have a taxable income exceeding their costs, and they will have to pay capital gains tax when they sell, assuming they will at some time.

Those damned facts again. You must be getting sick of them by now.

What an absurd statement.

On top of saying the houses will be worth 50% of their value any day now, now you're telling us it's bad to make a profit??

If I could make say, $1 million a year from a passive income, without having to get out of bed to earn it, and then have to pay even say, $500k in tax...

Why, gee...I am really "worse off".

 

[BayView]

Yours are the words of a true employee.

Go out and run a business for a couple of decades and then see how your perspective is.

Answers in red.

Hi LA,

Buying an existing home will not relieve the rental squeeze! You offer it to a tenant and add one to the supply of rental properties. But by buying the house, you prevented an OO from living there. That OO must now continue to rent, and adds one to the demand for rental properties. Only by building a brand new dwelling will you relieve the rental squeeze.
Rental squeezes are not caused by lack of houses; they are caused by unattractive economic factors for renters to go out and buy a home for themselves.
Anyway; wouldn't that o/o simply buy any one of the other 1,000's of properties for sale that week that I didn't buy?
In any case; I have only ever offered LESS than asking price for every property I've ever bought. This means that there were no buyers for that property until I came along. I have, in fact, helped out the seller. If I didn't buy it when I did, he would have either taken it off the market, the Bank may have foreclosed, or the price would have dropped further after a time.
The reality is, if o/o's aren't buying because the economic factors are bad, but investors are, then the investors are adding to the rental pool that otherwise would not increase.

I totally agree, property is an investment first. You're in it to make money. I'm completely happy with that. What I disagree with is the tax break. Your investment should make money without an $8bn handout from the government.
The Govt introduced those rules, because it is far cheaper for them to pay us tax deductions to provide the housing than it is for them to cover the cost of the housing.
I am simply using the existing rules to my advantage. Also the effect is longer term; by providing investors with incentives to provide for their own future through property investment, it means the Govt (ultimately the tax payers) is relieved of the burden of having to support us in retirement.

When you build a new dwelling, there is an economic benefit to our country, in employment for builders, and increase in the housing supply. So a tax incentive makes sense. But buying an existing house does none of that, so there should be no tax break. It has to make money like any other business - revenue - costs = profit.
All businesses receive tax deductions, which are legislated through Govt. These provide incentive for people to invest in economic activity, provide jobs and economic growth is the result. Without the tax breaks, businesses would shut down, unemployment would increase, recessions follow etc.
The building of new houses is primarily the activity of professional builders. All of them are business owners, and receive numerous tax benefits for their efforts of building houses. This is providing an economic benefit to society. The economic climate dictates the level of activity in this regard; the Govt has no influence over interest rates, or buyer/seller sentiment. Currently, there is an under-supply of housing apparently. This is a good thing; it keeps the building trade very busy, and their income is higher. If we were to suddenly fill that supply/demand deficit, there would then be no demand for houses. Many building trade workers would be then out of work until the demand returned.
On top of this, the red tape and hoops people need to go through, as well the the lack of availability of vacant land for future building is prohibitive to build a house for many people.
If you then take away the incentives for investment from exisiting houses, and only allow it on new houses, many investors would simply not bother, and they wouldn't want to just buy new homes offered after completion by developers - limited ability to control the purchase price.
Finally, investors make up only 30% of the total housing market, which means that 30% of all houses are rented, while o/o's make up 70% - investors are a relatively minor influence on the level of housing stock.
To say that we are a negative influence on the housing industry through our Govt tax deductions is inaccurate.

 

[nonrecourse]

Alice in wonderland

What an absurd statement.

On top of saying the houses will be worth 50% of their value any day now, now you're telling us it's bad to make a profit??

If I could make say, $1 million a year from a passive income, without having to get out of bed to earn it, and then have to pay even say, $500k in tax...

Why, gee...I am really "worse off".

Hi L.AAussie, your far more patient than I am.... I read some of these posts and think "fiscal pygmies" why bother? Since the downturn in the economy somersoft seems to be mostly populated by wannabe social engineers who are going to take from us nasty rich investors (us) and give to the fiscally inept segment of our society (them)

 

[Token Funder]

Hi L.AAussie, your far more patient than I am.... I read some of these posts and think "fiscal pygmies" why bother? Since the downturn in the economy somersoft seems to be mostly populated by wannabe social engineers who are going to take from us nasty rich investors (us) and give to the fiscally inept segment of our society (them)

This conversation reminds me of the time I've spent in Darwin and FNQ over the last few years. Those areas are populated from base to apex with faux capitalists. Aggressively independent, entreprenuerial, anti government involvement in everything *except* they are addicted to handouts.
Darwinites won't be happy until they get a six lane land-bridge to Jakarta and a monorail to Tokyo courtesy of the Feds and FNQ punters would like ASIO to kidnap tourists and drop them of in Pt Douglas with an ATO sponsored credit card.

When any subset of the population is in receipt of taxpayers largesse for any period of time, weaning them off it is the same as convincing any addict to go cold turkey. I know if I was still carrying my IP mortgages or margin loan I would be reluctant to give up the NG benefits and would come up with all reasons why I deserved to have my selfless contribution to the housing and equity sectors subidised.

The reality is that any tax benefit that encourages people to deliberately enter tax-flow negative arrangements for the trading of pre-existing, non-productive assets is bad tax policy.

You can make a community benefit/economic argument in both cases if it encourages investment in adding to an asset base (new housing) or contributing capital to businesses (IPOs, capital raisng), but the rest is just welfare.

HiEquity and others, the first step to getting clean is admitting you have a problem.

Everyone, repeat after me, "Hi my name is *insert your name here* and I'm a subsidy addict".