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

[Token Funder]

Responding to dave99, LA typed the following. Token Funder hopes that LA's patience will extend to clarifying some points:


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.


Would you would be supportive, therefore, of forgoing NG benefits (insofar as they can be offset against PAYG income) if it could be shown that a greater net benefit in housing availability or cost would be gained by application of those funds to an alternative process, taxation or otherwise?


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.

Same argument can apply to *any* form of saving or investment. If it could be shown to provide a greater net contribution to retirement savings, would you support the transfer of NG benefits to, say, the removal of tax on all forms of savings or increases in the direct contribution to super made by govt?

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.

and:

Currently, there is an under-supply of housing apparently.

I assume by "squeeze" you mean a lack of homes to rent and/or increased costs of same. Are you proposing that an under-supply of housing doesn't make the under-supplied asset harder to find or more expensive? What would your logic be here?


To say that we are a negative influence on the housing industry through our Govt tax deductions is inaccurate.

Do you agree that, given banks no longer (BTW, changes may be in the wind) charge a premium for investment properties, the purchasing power of an investor is superior to that of an OO. Do you beleive that the superior purchasing power of 30% of purchasors has no negative influence on the availability of stock or the price paid by the other 70%?

 

[BayView]

Answers in blue TF.

Responding to dave99, LA typed the following. Token Funder hopes that LA's patience will extend to clarifying some points:


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.


Would you would be supportive, therefore, of forgoing NG benefits (insofar as they can be offset against PAYG income) if it could be shown that a greater net benefit in housing availability or cost would be gained by application of those funds to an alternative process, taxation or otherwise?
No. No-one has ever helped me get ahead in my life. I don't give a rat's @rse about how tough others have it now. It was all my own bloody hard work, sacrifice and guts to take risks where many won't do any of the above. Housing has never been affordable for any generation of FHOB's that I know of - it's all save, save, save and then buy some shitbox that you can afford, then save some more, work hard and PRESTO! you can upgrade to the TAJ MAHAL after 15 years.
The bottom line is the Govt wants to see investment and economic growth to improve our society and our lifestyle. They have put in place many incentives for business owners and investors to encourage them to take risks and provide much needed housing and business activity. To take away the tax benefits may make the doogooders feel better, and there may be a short term gain, but it is detrimental to our society as a whole long term.


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.

Same argument can apply to *any* form of saving or investment. If it could be shown to provide a greater net contribution to retirement savings, would you support the transfer of NG benefits to, say, the removal of tax on all forms of savings or increases in the direct contribution to super made by govt?
See above. There are incentives in place for people to save; it's called interest. Mind you, anyone who thinks saving is an "investment" is delusional. It's a parking lot for your money until you find somewhere worthwhile to invest it. Superannuation is supposed to be the answer to that question, but I'll bet my whole superannuation policy on maturity that it will be fiddled to death by the Govt as and when they need more funds to cover their stuff-ups.
I can't see any Govt making contributions to super on our behalf. The business owners have to do it, and it is a safety net for the Govt so they don't have to shoulder the entire burden of supporting the pensioners and welfare cheats.

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.

and:

Currently, there is an under-supply of housing apparently.

I assume by "squeeze" you mean a lack of homes to rent and/or increased costs of same. Are you proposing that an under-supply of housing doesn't make the under-supplied asset harder to find or more expensive? What would your logic be here?
I didn't use the word "squeeze" initially; just repeated it. By it's use I am referring to the shortage of rental properties available in any given period. In 2001, I bought an IP, put a tenant in, and sat back for 3 years and listened to my PM saying "don't even think about putting up the rent - if they leave, you'll take a rent decrease". There was no rental "squeeze" then. So, again, I couldn't give a rat's @rse about the plight of a tenant right now. It's a cycle, and I was on the receiving end of no cashflow for a while. I'm enjoying the sunshine.
The general consensus is that there are not enough houses to supply the demand, but with rates at their current level, and sentiment on the decline, and building costs and affordability so low, that's not gunna change anytime soon. Even so, there are still a zillion houses for sale every week, so where's the under-supply?


To say that we are a negative influence on the housing industry through our Govt tax deductions is inaccurate.

Do you agree that, given banks no longer (BTW, changes may be in the wind) charge a premium for investment properties, the purchasing power of an investor is superior to that of an OO. Do you beleive that the superior purchasing power of 30% of purchasors has no negative influence on the availability of stock or the price paid by the other 70%?
Yes, we have superior BORROWING power as we can support higher debt through the use of the rent towards the servicability factor. But, having that ability and actually going out and buying an investment property is a whole different mentality. Proof of this is in the total of investors in the property market overall. I know plenty of people who could support the loans for an IP, but they don't own any. Should the Banks change the rules on their loan rates for IP loans, this will add to the negative sentiment towards owning an IP, and would decrease the investment level. This will result in even higher rents than we are experiencing now. I don't care, however. I'm in a solid position now, so this will mean better rents and less competition for me to buy them.

I take it TF that you are resentful of investors receiving neg gearing benefits on IP's?
Why?
To me, this is a victim mentality.
Those benefits are in place for EVERYONE to enjoy - if they are brave enough to go out and take them.
No-one is being excluded from this little perk.
It all gets back to the poor resenting the so-called "rich b@stards" mindset.
That's fine with me for them to think that; they'll never join the club that I just joined.

 

[Token Funder]

Answers in blue TF.

Sooooo, (and don't take this the wrong way), it's basically a self-interest argument. That is, if a better overall outcome be it (a) savings or (b) housing affordability/availability could be gained by transferring the Govt's financial contribution to PAYG investors elsewhere, the "possession is 9/10ths of the law" argument is enough from where you sit.

Don't get me wrong, in spite of the inherent stupidity in Tax Benefit B and the Baby Bonus, I take it like everyone else in my circumstances - but I still think it is poor tax policy.

Unfortunately, I suspect I'm on of the few who would support a government that agreed to take only what it needed and left the tax equivalent of bread and circuses in the locker.

I write to my MP every election cycle and remind them I can't be bought, but I guess they figure I can be rented

 

[BayView]

Sooooo, (and don't take this the wrong way), it's basically a self-interest argument. That is, if a better overall outcome be it (a) savings or (b) housing affordability/availability could be gained by transferring the Govt's financial contribution to PAYG investors elsewhere, the "possession is 9/10ths of the law" argument is enough from where you sit.

Don't get me wrong, in spite of the inherent stupidity in Tax Benefit B and the Baby Bonus, I take it like everyone else in my circumstances - but I still think it is poor tax policy.

Unfortunately, I suspect I'm on of the few who would support a government that agreed to take only what it needed and left the tax equivalent of bread and circuses in the locker.

I write to my MP every election cycle and remind them I can't be bought, but I guess they figure I can be rented

I thought the baby bonus was pretty stupid too; not because it is actually stupid per se, but because it was applied to a society of humans that are largely going broke on a daily basis due to their financial practices, so giving them a shot in the arm of cash won't fix anything - except win a few more votes no doubt.

Yeah; I'm pretty much "it's all about me" these days, having been shat on for many years one way or another, while others sponge and whine and do fugg-all. In spite of this savagely selfish attitude, I'll help out anyone who needs it and who will help themselves, but for the most part, I'm not concerned with the plight of the "battler". They make their bed.

They have the freedom to choose, and they choose a life of easy passage; no education, no planning for the future, no effort and so on.

As far as Govt policy, my thinking is that if there was a better way, they'd already be doing it. I like the current system.

I like that the Govt encourages investment, risk taking, having a go through the tax savings. There should be more money spent on this, and less spent on welfare. More money on financial education, less on defense.

I can't see how taking away the NG tax benefits from us will improve anything. How else would the dollars be allocated?

More handouts? A bigger FHOG? A bigger pension? More super contributions from each worker via their boss?

No. sorry - that's already happening, and is not encouraging our fat and lazy society to get off their dumb @rses and do something with their lives.

End of soap-box rant now.

 

[Token Funder]

I take it TF that you are resentful of investors receiving neg gearing benefits on IP's?
Why?
To me, this is a victim mentality.
Those benefits are in place for EVERYONE to enjoy - if they are brave enough to go out and take them.
No-one is being excluded from this little perk.
It all gets back to the poor resenting the so-called "rich b@stards" mindset.
That's fine with me for them to think that; they'll never join the club that I just joined.

I'm resentful of poorly managed or strategically dumb government spending, wherever it is. Don't have an issue with anyone taking advantage of the stupidity of governments (been there, done that), but the attempts by NG (property and equity) beneficiaries to take high moral ground on the issue is a little silly (and I take as evidence of at least a *little* bit of guilt).

The shrill defensivenes is telling in my view (not that I'm suggesting you're shrill LAA, I read your threads with a deep baritone and slighly Americanised vowels). It has the same tone you get when tarif reduction gets talked about.

I am forever surprised (and somewhat irritated, as you can probably guess) that groups/industries/political parties that are the first to espouse free-market principles are the last leave the government teat.

Probably why we social progressives/economic conservatives can't find a political party to join in Australia. The socialists can join the Greens or the National Party, the full-time political class get the Libs or Labor, people with beards and dream catchers the Dems, and the paranoid schizophrenics One Nation and related sub-species.

We got bupkiss!

Anyhoo, I figure I can change you mind, but then again,I don't need to.

I need to change tax legislation, which may, I suspect, be easier

 

[BayView]

Answers in red TF.

I'm resentful of poorly managed or strategically dumb government spending, wherever it is. Don't have an issue with anyone taking advantage of the stupidity of governments (been there, done that), but the attempts by NG (property and equity) beneficiaries to take high moral ground on the issue is a little silly (and I take as evidence of at least a *little* bit of guilt).
No guilt here. I actually take great glee in being able to rake back several thousand dollars of tax each year. I am sure I speak for everyone on that too.
I don't take a high moral ground normally; everyone can live their lives how they want, as long as they don't criticise us for having a go and receiving an incentive in the process - an incentive that was offered. Everyone is free to live a miserable life of less; but shut up about it and don't whine when others do well. It's all tall poppy syndrome, and it always gets viewed as though the rich are being looked after by the Govt, while the poor miss out.
I still can't see how allowing NG tax benefits on IP's is stupid. It was taken away in the mid-80's, and it immediately caused a massive sell-off of properties, and a huge shortage in rental properties which led to a rental spike. Let's say they take it away again tomorrow, and no-one sold off their properties. There would be no new investors coming into the IP market going forward as the incentive to buy them would have disappeared - no-one can guarantee cap gain, and not many could afford to buy and hold. Only the very high income earners could afford to do it, shutting out the low income earners from a chance to get rich even more. As I've said; it's cheaper for the Govt than building and holding the properties themselves - less taxpayer burden.

The shrill defensivenes is telling in my view (not that I'm suggesting you're shrill LAA, I read your threads with a deep baritone and slighly Americanised vowels). It has the same tone you get when tarif reduction gets talked about.
No US accent here, and I haven't a clue about tariff reductions. What is that referring to?

I am forever surprised (and somewhat irritated, as you can probably guess) that groups/industries/political parties that are the first to espouse free-market principles are the last leave the government teat.
I think this is referring to industries trying to constantly use the Govt to further their own interests? I don't blame anyone for that; it's simply "working the rules of the game" to your advantage, and it's human nature; you'll never change that. The answer is for the Govt to give them less, but there's the rub; you need to have some incentive for big business through tax concessions etc, but how generous do you be?

Probably why we social progressives/economic conservatives can't find a political party to join in Australia. The socialists can join the Greens or the National Party, the full-time political class get the Libs or Labor, people with beards and dream catchers the Dems, and the paranoid schizophrenics One Nation and related sub-species.

We got bupkiss!

Anyhoo, I figure I can change you mind, but then again, I don't need to.

I need to change tax legislation, which may, I suspect, be easier
Ok, what would be your solution to your perceived problem of NG tax benefits; where would you re-allocate the funds so that the Govt still received more dollars for the coffers, but didn't destroy the IP investment climate we have today?

 

[vincenzo]

How about this fellow landlords:

If every other business agrees to not deposit thier tax refund cheques this year, then we won't cash our refund cheques from our own investment businesses.

Sound fair? As all businesses are an investment, aren't they?

And considering the rental squeeze, i think we should also visit out tenants and give them a nice squeeze/hug, and if they have been good customers, then a little kiss on the cheek aswell.

And also, since we shouldn't be stealing houses from the oo's existing housing market, or delaying oo's from building either, by clogging up all the builder's waiting lists, we should build all future properties ourselves, by hand, using mud & straw, on vacant land in the middle of nowhere.

 

[Token Funder]

How about this fellow landlords:

If every other business agrees to not deposit thier tax refund cheques this year, then we won't cash our refund cheques from our own investment businesses.

Sound fair? As all businesses are an investment, aren't they?

Business don't get to offset losses from PAYG earnings. Set up a company, submit yourself to the same regulatory and tax environment and then you can claim to be running a business.

Businesses (as a consequence of the above) don't deliberately structure their affairs to make a cash-flow loss.

 

[Token Funder]

LAA replied and asked a couple of questions including:

Ok, what would be your solution to your perceived problem of NG tax benefits; where would you re-allocate the funds so that the Govt still received more dollars for the coffers, but didn't destroy the IP investment climate we have today?

I would allow losses to be capitalised and deducted from CG and at the same time reduce the CGT discount. I would apply the same regime for all leverage-based tax losses currently set off against PAYG income. Obviously, investors managing via a company would be entitled to the same tax arragements as any other company.

I would expect to see a decrease (moderate) in housing prices and an increase in yields which would in due course attract value driven investors back to market.

And let's leave the Keating myth alone - plenty of work as been done since (referenced somewhere earlier in the thread) that makes it pretty obvious the tightening that occured in that period can't be put down the the NG changes. The hypothesis won't stand up to scrutiny.

What to do with the money.? Skills and infrastructure.

We've allowed ourselves to develop into a country with a second-rate education system that continues to rely on Americans and South Africans to dig stuff out of the ground that we sell to Asian countries so they can send us poorly made crap we don't need and run our current account up to banana-republic level proportions.

We need world class schools, technical colleges and unversities and need to about triple our R&D efforts.

Patents last longer than open-cut mines.

On the infrastructre front, Australia is like a 40 yo IP that hasn't had a buck spent on it since day one. Urban transport, water, industrial handling - you name it, it needs updating.

What would you do with a few bill?

 

[plusnq]

Hi Token Funder,

I went yesterday to a presentation by Bill Zheng who has modelled the contributory components of price growth for housing and the effect of each component on the price over the last 25 years. I thought I'd share some of his thoughts with you as it was relevant to this discussion.

His conclusions were that real wage growth and real rent growth have contributed negligibly to the prices over that time. Based on real rental and wage data alone house prices were 25-40% overvalued. He modelled the effect of removing/adding in negative gearing and negative gearing's contributory effect was approx 11% over that time. He showed that removing negative gearing in fact would have lead to much higher rents and or a greater contribution from government toward public housing or rental assistance. Investors needed a minimum 6% rental yield with a 30% NG concession to make the investment in property worthwhile over this time period.

His models showed that 43 % of the nominal price growth was due to inflation. This was the major contributor. The next major contributor to growth was the increased ability and willingness of Owner Occupiers to pay more for a property. According to Bill Zheng, in 1984 people paid 38% of an average single gross wage gross wage in interest for a median priced property. The current value is about 64% of an average wage in interest for a median priced property. The reason that price was so affected by OO purchases rather than investors and negative gearing effects was that they controlled 70% of the finance for property so their willingness to spend more of their money as a percentage of income had a far greater effect on prices than the investor components. It's contributory effect on prices was 24% over the last 25 years.

During the last twenty five years we have had one tipping point of affordability in 1989/1990. At this point OO interest was 84% of average single wage in Australia at the time. It also occurred in the UK and their tipping point at that time was 120% of average wage.

Bill said that in the outer areas of cities (mortgage belts) that OO had already exceeded their capacity to pay and that was why property was falling in these areas atm. He expected greater falls in these areas especially if interest rates rise or unemployment rises as most or all of their discretionary income was gone with rising interest rates and inflation.

He felt that the inner affluent areas had more capacity for growth due to the higher wages and more discretionary income left after mortgage payments. He said there was no significant difference between the sizes of mortgages for inner and outer areas and that the affluence effect should keep the inner areas growing for another 1-3 years dependent upon no major global financial meltdown occurring.

For the investors,

Bill advised that we look for properties that

1. Have 40-70% land content
2. Are within 100-150% of median price for area
3. Have had 7-10% capital gain over the last 15 years
4. Are high demand properties in established areas. Avoid town of less than 5000 people.
5. Look for properties that we can add value to.
6. Avoid mortgage sensitive areas
7. Avoid non-standard properties (exotic or unusual)
8. Avoid low yield properties.

I thought that was pretty standard stuff but worth repeating.

He also said that using debt to meet lifestyle costs (LOE) was dangerous atm due to funding costs and a possible (death) spiral with debt.
He expected price growth in inner affluent areas to continue in line with inflation but outer areas could expect the bulk of price fall as people default. He expected real price growth (after inflation) to be flat over the next six to ten years.

TF
You might find it interesting to see his presentation. If you can't make one of his seminars then it will be available on DVD after the seminar series is finished.

Hope this is useful.

Cheers

Shane

 

[BayView]

How about this fellow landlords:

If every other business agrees to not deposit thier tax refund cheques this year, then we won't cash our refund cheques from our own investment businesses.

Sound fair? As all businesses are an investment, aren't they?

And considering the rental squeeze, i think we should also visit out tenants and give them a nice squeeze/hug, and if they have been good customers, then a little kiss on the cheek aswell.

And also, since we shouldn't be stealing houses from the oo's existing housing market, or delaying oo's from building either, by clogging up all the builder's waiting lists, we should build all future properties ourselves, by hand, using mud & straw, on vacant land in the middle of nowhere.

Now you're talkin!

Let's take it further; give the refund cheques to all our tenants who want to buy/build a house - but can't afford to.

And, I'm moving into my tent down on the foreshore so someone who needs to rent the place I'm living in can have it.

 

[BayView]

Answers in blue TF

LAA replied and asked a couple of questions including:

Ok, what would be your solution to your perceived problem of NG tax benefits; where would you re-allocate the funds so that the Govt still received more dollars for the coffers, but didn't destroy the IP investment climate we have today?

I would allow losses to be capitalised and deducted from CG and at the same time reduce the CGT discount. I would apply the same regime for all leverage-based tax losses currently set off against PAYG income. Obviously, investors managing via a company would be entitled to the same tax arragements as any other company.
Isn't this really only a dollar-swapping exercise? At the moment, we get tax deductions NOW, and they are added back onto the CG when working out the cap gain for taxation. In your model, we don't get to take those tax deductions now, but we can when the property is sold. This makes holding the investment almost impossible for many.
No-one would structure the investment as a company and run it like a normal business, as there is usually a neg cashflow from the IP investment. People buy/create businesses to produce a pos cashflow, then take their deductions from the income they receive, then pay tax on what's left. They can live off the cashflow from their businesses. In your model there is no incentive to make the investment (other than cap gain - which is an unknown). The pool of rental properties will shrink, but even so, the rents won't skyrocket to the point that they are high enough to create a pos cashflow good enough to attract investors.

I would expect to see a decrease (moderate) in housing prices and an increase in yields which would in due course attract value driven investors back to market. See above. Unfortunately, this would then create a bigger demand for IP's as the yields improve, then the prices will rise and destroy the yields again. Back to square one.

And let's leave the Keating myth alone - plenty of work as been done since (referenced somewhere earlier in the thread) that makes it pretty obvious the tightening that occured in that period can't be put down the the NG changes. The hypothesis won't stand up to scrutiny.
So why did they introduce NG tax benefits again a couple of years later? Not because they were feeling generous.

What to do with the money.? Skills and infrastructure.

We've allowed ourselves to develop into a country with a second-rate education system that continues to rely on Americans and South Africans to dig stuff out of the ground that we sell to Asian countries so they can send us poorly made crap we don't need and run our current account up to banana-republic level proportions.
I disagree. Many foreign students come here for the education standards. Just go and stand outside the Box Hill TAFE, or Monash UNI, or Mentone Grammar - it's bloody Hong Kong.
The problem is, they then bugger off to wherever the pay rates are highest. They should be forced to give back by working in Aus for a minimum amount of years; say 10 after receiving their quals. We need to retain these highly qualified students in our workforce after all the training we have provided them.
Our problem is mainly the cost of labour in regards to production. As a previous business owner, I can promise you that while our Aussie employees are enjoying such wonderful working conditions and rates of pay (of course; they will dispute this), it remains that the cost of an employee is actually around 50% more than their hourly wage after you factor in workcare, superann, hoilday pay, penalty rates etc. The average Chindian is on what - about $1 per day? We have no hope of ever competing and attracting production back into this country with such an imbalance.

We need world class schools, technical colleges and unversities and need to about triple our R&D efforts.
We already have this. What makes you think our country is behind places like the US for example, which I would dispute. Many innovations in medicine, inventions, science are being made right here in Aus. We bat way above our average for a small nation.

Patents last longer than open-cut mines.
Our resource industry does well because we have them, whereas other countries don't. Just like the oil countries in a way. We can easily support the labour component because the demand for our resources is high, so we can charge a premium and factor the labour cost into this. If they ever find the same volume of resources in places like Chindia we are stuffed - that will be a good place to invest then.
Again, labour costs kill any production here generally. In my industry - golf; as an example - there are now NO companies producing golf equipment in Aus, except for a very small section of the Spalding factory in Roweville, where they make around 1% of the golf balls they sell (they make Sherrin footballs too!). Everything else is imported. Every golf company is owned by an overseas parent company, and the production is OS - mostly Chindia.
This is the case with most big companies operating in Aus today. All the income is going back out of the Country. Some is spent on wages and maintenance, but the lion's share is gone. This one factor is worth many thousands of times more dollars to our country than your proposed hamstringing of the investors for a few billion dollars of pocket change.

On the infrastructre front, Australia is like a 40 yo IP that hasn't had a buck spent on it since day one. Urban transport, water, industrial handling - you name it, it needs updating.
What about things like the Eastlink freeway, Telstra Dome, Docklands, Westgate freeway, Western Ring road, Martha Cove Marina - all Victorian projects. Or, Darling Harbour in Sydney, Homebush, the Hume hwy - just to name a few projects. Not much in that example I know, but there IS activity.
Things like water; try getting a much needed dam built without some stupid greenie saying "you can't build a dam there; I saw a purple tree frog nest there. It's nearly extinct", and then the pollies sit on their hands to keep them happy until there's no water. The govt needs to never listen to special interest groups and the noisy, loony left. It's the entire country that is more important; not some crazy ideas of a few.

What would you do with a few bill?
Use it to start buying back some of our successful companies and keep the money in this country. This is called "acquiring assets". It creates cashflow - money to be used on our infrastructure if you like.
Use it to provide more incentive to employers to take on subsidised staff, apprentices and training, upgrade hospitals, schools, public utilities etc.

The problem with this TF, is you still have the issue of the IP investor not being able to service their IP's without the tax benefits (in most cases). If you increase the cap gain component through offsetting the losses against it, there is still not a lot of incentive as to buy and sell real estate is hard work, and no fun for most people, and the costs to buy and sell are high, irrespective of the CGT aspect.
Your model would encourage "churning" - a popular little trick used on share market investors, which makes more money for the brokers than the investors. Your model is great for r/e agents, because there would be an increase in the volume of sales, and the Govt would do great out of the extra stamp duty, but the investor would lose, as they would need to buy and sell on a regular basis to see any financial gain to help cover the cashflow drain from the neg cashflow. Any small gains would be eaten up in costs and work, and the whole idea is to make bucket-loads of wealth for no effort, right?

 

[dave99]

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?

I've got lots of ideas for making money under the current rules.

But I think the current rules are not fair or equitable. I truly believe NG for existing properties is a waste of money and is just capitalised into prices. Use the $8bn to give everyone a tax cut - or invest in education and infrastructure.

This is how the tax system evolves - by people thinking about what they wish it to be, talking to MPs, and the Government changing it. It may not interest you to think about that, but it will affect you if the rules change. So just from self-interest you should be aware of what people are wishing for.

 

[HiEquity]

Patents last longer than open-cut mines.

On the infrastructre front, Australia is like a 40 yo IP that hasn't had a buck spent on it since day one. Urban transport, water, industrial handling - you name it, it needs updating.

What would you do with a few bill?

Hate to be pedantic but in most jurisdictions patents last only 20 years. I know quite a few open cut mines with longer lives. Don't get me started on the usefulness of the vast majority of patents in my industry...

If we have the cheapest and most reliable mines around, why shouldn't we capitalise on them instead of someone else? And foreign investment is often required coz we just don't have the available cash to build a NW shelf gas project as well as see to the needs of the rest of the country. I hope you're not suggesting we reduce outside investment in our economy? That would be a retrograde step - we don't have to become like China to succeed. Their long term success is by no means guaranteed with such a controlling and dominating government.

To me this question is about diversity. We don't need to be the best in the world at everything or anything. We just need to be able to fall back on something else when this resources "supercycle" inevitably falls back to earth. To that extent, I fully agree we should be using the current windfall royalty gains from resources to build up our infrastructure and educate our people. A decent national rail and public transport system would be a good start...

On the education front, note that fee paying foreign students subsidise domestic students at our universities already. It's not a matter of more places for them and less for us. Mind you we could certainly reduce HECS fees for courses like engineering and science which actually create value, instead of these courses being much more expensive than the arts degrees they print on the back of the toilet paper! (no offence to arts graduates but I really think we have our priorities back to front there...)

And restrictions on where people can work post graduation, after already paying for much of their education themselves, will only serve to reduce the number of students who will think further study would be a good idea...

Reading back through that, I can see we have got well off topic! Sorry about that - back to the thread...

 

[dave99]

The problem with this TF, is you still have the issue of the IP investor not being able to service their IP's without the tax benefits (in most cases). If you increase the cap gain component through offsetting the losses against it, there is still not a lot of incentive as to buy and sell real estate is hard work, and no fun for most people, and the costs to buy and sell are high, irrespective of the CGT aspect.

Hi LA,

I totally agree - and I think that is the whole point of removing the tax incentive for existing properties.

If the property investment returns so little that people won't do it without a tax benefit, it means the money is better invested elsewhere - like in a productive business (which actually employs people and generates wealth), or in building a new house. Basically the tax system is distorting the market by subsidising poor investments. That's what I think is a waste of money.

 

[HiEquity]

But I think the current rules are not fair or equitable. I truly believe NG for existing properties is a waste of money and is just capitalised into prices.

This is I think at the core of our disagreement.

Not fair or equitable for whom? People who rent? I think we can all agree that without NG, or a >$8bn public housing program, then renting would be much more expensive. So a reduction in NG would raise rents on precisely the people who could least afford it. Fair or equitable for landlords? It gives landlords with a high income possibly an "unfair" advantage over those on low incomes - this is hardly a massive level of "unfairness" as there should be some benefit to a higher income given the punitive level of taxation imposed by governments as incomes rise. Give us a flat rate of taxation across all incomes and I'll gladly agree to give up NG...

Fair or equitable for OOs? NG is capitalised into prices? OOs make up 70% of the market so they set price anyway, as they are willing to pay a significant premium for the security of tenure to be gained through ownership in their desired location. Any affordability problems are predominantly caused by OOs, being a much greater portion of the market, so I would suggest we talk to them about price problems before we go messing with NG...

Like any tax reform, reducing NG will create winners and losers and I would hate to see Centrelink payments have to increase so that all those on pensions and other benefits can still afford to rent somewhere. In combination with other tax reform (eg a flat 30% tax rate and a truly broad based emissions trading scheme) then I can't see a removal of NG as a problem.

 

[BayView]

Hi LA,

I totally agree - and I think that is the whole point of removing the tax incentive for existing properties.

If the property investment returns so little that people won't do it without a tax benefit, it means the money is better invested elsewhere - like in a productive business (which actually employs people and generates wealth), or in building a new house. Basically the tax system is distorting the market by subsidising poor investments. That's what I think is a waste of money.

From the Govt's point of view, they are not subsidising "poor investments".

They are subsidising investors so the Govt doesn't have to provide the housing themselves.

I am getting rather sick of repeating this.

LET ME REPEAT THIS ONE MORE TIME; THE COST TO THE GOVT OF PROVIDING TAX BENEFITS TO INVESTORS THROUGH NG IS WAY CHEAPER THAN THE COST TO THEM TO PROVIDE THE HOUSING.
THIS IS WHY THEY ALLOW IT.

From my point of view, property has returned a lot, and it definitely is NOT a poor investment. It's only a poor investment for the person behind the steering wheel.

I agree it would be good to see more people go into business, but many people cannot afford to buy an existing business - LVR ratios are lower than resi property, so bigger deposits are required, and many of the traditional small businesses are dying due to larger multi-national chains. Symptoms of a free market I'm afraid.

Also, let's face it; most people are struggling to be able to afford their own home repayments, let alone save for a deposit for a business. On top of this, most people want security - of a job, and aren't brave enough, or won't take the risk of starting a business that may fail.

The tax system is not distorting the market, as the rules have been in place for everyone for many, many years. Anyone can take advantage of them, but few do. That is their own fault. If the entire population was to suddenly become landlords over night, I'm sure the Govt would change the rules. But this will never happen as most of the population are consumers and not investors - at least in property.

If you want to see a rule change, it should be in the share market, where the only "reason d'etre" for a share is to make money for the owners of the share and the company. There is no direct benefit from a share increase to society. If a share drops in value, most investors flip it off quick smart.

If a house drops in value, they are more likely to hold it as the transaction cost/process is painful, and the tenant has a roof. See how many tenants you can fit in a share of BHP.

What has changed to make the boom occur in housing, is the credit climate, and this is just a cycle like the property cycle. The last 10 years has seen a very large relaxation of the credit rules, so people were able to access finance like never before. This has resulted in a world-wide boom.

Now, all those financially marginal Vendors are "coming a gutser", and are selling at a loss, so the Banks are losing, they got caught with their pants down, and have closed the shop.

The next few years will see a contraction of eligible borrowers as the criteria gets tougher to qualify for a loan, so the housing markets will slow down in many areas, prices will stall. While this is happening, the rents and wages will continue to slowly increase, and the equilibrium will return.

 

[LynnH]

LA_Aussie

Well said, Marc!! I'd give kudos, but have to share them around!

That is the exact point I've made in several posts over the past year or two: subsidising investors (via NG) is much cheaper for the government than providing housing for tenants (regardless of arguments about what caused past rental shortages, particularly in the mid-late 1980s). It is also a political reality: governments want to get themselves re-elected, so they're not going to change dramatically policies that have been shown to work.

Unfortunately, the 'non-believers' will continue to be just that. I have become increasingly deaf to the cries of "that's unfair" or "this shouldn't be allowed". Take a reality check, folks - rules are rules and life ain't fair - you either have to learn to live with the rules or find a (legal) way around them.

Cheers
LynnH

 

[dave99]

Dude, there's no need to shout. Why are you getting so angry and defensive? I understand you have a different point of view to me. I just don't agree.

Again, I want to stress my point. If you don't build a house, you don't provide a house. You just take over ownership of a house that's already there. You don't provide any more housing than there was before you got there.

90% of the $8bn a year is spent on subsidizing people who do just that. Buying existing houses, and not providing any additional housing at all.

So, keep paying the 10% which actually does help provide housing - to people who build a new house or apartment. With the other 90%, remove all those charges and fees on building a new house, which actually stop people building houses.

Now THAT would help keep rents down way more efficiently than the current system.

 

[HiEquity]

Now THAT would help keep rents down way more efficiently than the current system.

An interesting end game to post on a property investment forum. This is the social engineering I disagree with. Reduced rents is not an end in itself, nor particularly desirable. We just end up with a lot more empty houses due to the increased supply. Hired Goon and Yield Matters can elaborate much more eloquently than I on how empty houses are such a massive curse on society already...

Fully agree on the wealth sapping costs of building or transacting property by the way. State governments have treated property as "fair game" for ages primarily because they have very few other options to raise revenue compared to the Feds. And it is politically convenient to pick on "landlords"...