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

[vincenzo]

Um Token Funder, you say:

"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."

ANY company or business or even employees can offset thier losses!

The same basic formula of revenue - expenses = profit

And we are all taxed on this profit!

So when businesses & emloyees are not allowed to make claims on thier tax returns, then ill say property investors shouldn't be allowed to make claims either.

Like many if not most property investors, i would rather have a heap of profitable properties working for me than a heap of negative earning properties... i'd be using that +ve cash to just get another one or two of course but i could say the same thing about other businesses or companies.

And dave99, you say:

"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."

Lets pretend that there is only one house left in australia, and i buy it, and rent it out.

And lets just say that there is only one other buyer in australia, looking for a place to live, and i took it. He is now forced to build, while i sit there with this empty house available that i am providing for rent.... ah look, babies are growing up & immigrants coming from the airport, problem solved.

If i built a new house, then he would have simply had the choice to either build a new house, or buy that only available existing house.

If he bought that only available house, and i was forced to build a new one, can i say that he is guilty of not providing housing? Is he guilty of selfishly not providing a new house?

If anything, i'd say that everytime existing houses are bought, there is one less existing house on the market, which just increases the demand for others to build new houses.

So buying an existing house puts pressure on new houses to be built.

Buying an exisiting house promotes the growth in the number of exisiting houses!

So it still is providing housing! If the buyers need a house to rent for 6 months while the new house is built, then no problem! Landlords are providers in more ways than 1!

Even if i don't rent out the house, i just keep it as my holiday house, then i am still promoting growth of the number of houses, as it is still just putting more pressure on others to build a new house.

If i buy an existing house, and subdivide, or build an apartment block, well, then i'm the santa clause of housing provision aren't I?

 

[BayView]

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.

Every house we own, except the one we live in, is tenanted.

Conversely, I have 2 mates who between them own 4 holiday houses; 2 at the beach, 2 at the snow. They all sit vacant for round 48 weeks per year.

In the street where our PPoR (now an IP) is, there are 10 houses (we live in a court). 8 are empty all year - holiday houses.

We currently rent in a complex of 4 townhouses. 3 are vacant - holiday houses.

Given that investors control only 30% of all properties (30% of the population are renters), we are not the people who are costing the community any significant volume of housing, as you will usually never see an investor owning a vacant property - there's no rental return from empty properties.

Also, only 30% of property owners are eligible for the neg gearing tax deductions (the investors), while every single business has a tax deductibility. In the overall scheme of things, I'd say that property investors are not diving into the Govt's pockets by too much.

Someone like Bill Gates pays several hundred million in taxes every year, but gets to deduct several hundred million more, and he's only one entity.

The people who are tieing up houses that could be used for renters are the o/o's who have holiday houses.

 

[Token Funder]

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

Rubbish.

This isn't about fairness, it's about effective application of government capital (taxpayer's money).

Let's say a government figured the best way to keep rent down and properties available was to subsidise the cost of borrowing to enable landlords to purchase properties. If new properties aren't being constructed then essentially the transaction costs are a range of fees, management of the properties and - the big one- interest.

We'll put aside for the moment the fact that the likelihood of the subsidy being passed on in lower rent is a simple function of supply v demand. Ultimately, landlords are entitled to charge what the market will bear and have no obligation to reflect their lower costs in lower rents. If you really want to pursue that argument, would you agree to the govt. set maximum rents (the joys of mutual obligation!)? If not the "it's all aout lower rents" is a furphy.

Let's further suggest the government then asked the question, "That sounds easy, could we do it ourselves at a lower cost?".

Major costs:

Fees - well we charge the buggers so, not net loss here. WE just won't charge ourselves!
Management - hell, private investors just outsource that so we could put it out to tender and, given our volumes, get a cheaper rate.
Financing - jeeze, we're the government so our borrowing costs are lower than a bank.

Short version, the government could clearly do it at a lower cost and historically has.

 

[Token Funder]

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.

So why should the taxpayer subsidise gearing against property or shares?

 

[Token Funder]

Um Token Funder, you say:

"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."

ANY company or business or even employees can offset thier losses!

The same basic formula of revenue - expenses = profit

And we are all taxed on this profit!

So when businesses & emloyees are not allowed to make claims on thier tax returns, then ill say property investors shouldn't be allowed to make claims either.

Like many if not most property investors, i would rather have a heap of profitable properties working for me than a heap of negative earning properties... i'd be using that +ve cash to just get another one or two of course but i could say the same thing about other businesses or companies.

And dave99, you say:

"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."

Lets pretend that there is only one house left in australia, and i buy it, and rent it out.

And lets just say that there is only one other buyer in australia, looking for a place to live, and i took it. He is now forced to build, while i sit there with this empty house available that i am providing for rent.... ah look, babies are growing up & immigrants coming from the airport, problem solved.

If i built a new house, then he would have simply had the choice to either build a new house, or buy that only available existing house.

If he bought that only available house, and i was forced to build a new one, can i say that he is guilty of not providing housing? Is he guilty of selfishly not providing a new house?

If anything, i'd say that everytime existing houses are bought, there is one less existing house on the market, which just increases the demand for others to build new houses.

So buying an existing house puts pressure on new houses to be built.

Buying an exisiting house promotes the growth in the number of exisiting houses!

So it still is providing housing! If the buyers need a house to rent for 6 months while the new house is built, then no problem! Landlords are providers in more ways than 1!

Even if i don't rent out the house, i just keep it as my holiday house, then i am still promoting growth of the number of houses, as it is still just putting more pressure on others to build a new house.

If i buy an existing house, and subdivide, or build an apartment block, well, then i'm the santa clause of housing provision aren't I?

Vince,

Re-read my post. My issue is offsetting contrived losses against PAYG income. Companies do not get to do that. As I said, have no issue with any investor setting up a company for geared invesment and running it exactly the same way and under the same rules.

 

[Bill.L]

Hi all,

Token, I already explained it to you and others several pages ago......

People do it for the money. If the NG and CGT (50% reduction) were removed for existing property, then prices would stall/fall. There is no incentive for a developer to build new, because his clientele would be gone.

Nobody would be buying them to rent out, because at even $300k you would need a $600-$700 pw rent return to even consider it.
Existing OOs would receive less for their house and be reluctant to trade.
FHBs will be harder pressed to buy, as a greater percentage of their income is already going to rent, plus banks will have more strict lending criteria in a stagnant/falling market.

The ones hurt the most would be those at the bottom of the market, who could not afford the rent. Pressure on the Govt to spend vast amounts on cheap housing would lead us back into the large inappropriate developments (ie housing commission flats).

Keeping demand up for existing is what makes people develop new. If existing stock starts to fall, then new development stalls.

The other part that annoys me is the "taxpayer subsidies" to property investors. Sorry but I'm not being SUBSIDISED at all. I maybe paying a little less tax, but I am not receiving a subsidy.

Many high income earners who have the highest NG would simply change to some form of tax minimisation (say trees). The $8b that you mention would not be all gained by the govt.

A further cost to govt would be the amount paid out in 'rent assistance' to the low income earners. Most low income households are housed in OLDER houses. Removing CGT 50% exemption and NG would harm these people/chuck them out into the streets over time.

bye

 

[HiEquity]

So why should the taxpayer subsidise gearing against property or shares?

They're not subsidising either. NG is only allowed when there is a "reasonable expectation of a gain over the life of the investment". If you aren't going to make a gain in future and hence pay tax on the gain, then you don't get to write off annual losses against other taxable income in the intervening years. And any depreciation you claim is gained back through the CGT rules anyway.

That's like saying the ability of companies to offset costs from revenue prior to paying tax is a subsidy?? And if companies gear into shares and make a cash flow loss in a particular year on those shares they are also allowed to offset this against other income - why should individuals be any different? If either companies or individuals lose money in any given year they are able to carry forward that loss to offset against future income - there are no differences here.

There is nothing wrong with a profitable investment making a small loss in some initial years - that's the real world of investing!

 

[Bargain Hunter]

Major costs:

Fees - well we charge the buggers so, not net loss here. WE just won't charge ourselves!
Management - hell, private investors just outsource that so we could put it out to tender and, given our volumes, get a cheaper rate.
Financing - jeeze, we're the government so our borrowing costs are lower than a bank.

Short version, the government could clearly do it at a lower cost and historically has.

You missed the most important cost, that is opportunity cost.

While the government goes ahead and provides all this cheap housing what happens to the rest of their commitments? Considering the state of affairs at present I would suspect a very quick demise into third world conditions.


Regards

Andrew

 

[Token Funder]

You missed the most important cost, that is opportunity cost.

While the government goes ahead and provides all this cheap housing what happens to the rest of their commitments? Considering the state of affairs at present I would suspect a very quick demise into third world conditions.


Regards

Andrew

We do it to obtain a capital gain.

They can acquire and manage the assets cheaper than we can.

They get the same same capital gain.

They (we, as taxpayers) make more quids or, alternatively, see a reduction in housing costs.

If the government invests money to enter the same business as we do at lower cost more money is made from the transaction. I'm not suggesting they should, I am just highlighting that the " the government couldn't do it argument" is a straw man.

 

[Token Funder]

They're not subsidising either. NG is only allowed when there is a "reasonable expectation of a gain over the life of the investment". If you aren't going to make a gain in future and hence pay tax on the gain, then you don't get to write off annual losses against other taxable income in the intervening years. And any depreciation you claim is gained back through the CGT rules anyway.

That's like saying the ability of companies to offset costs from revenue prior to paying tax is a subsidy?? And if companies gear into shares and make a cash flow loss in a particular year on those shares they are also allowed to offset this against other income - why should individuals be any different? If either companies or individuals lose money in any given year they are able to carry forward that loss to offset against future income - there are no differences here.

There is nothing wrong with a profitable investment making a small loss in some initial years - that's the real world of investing!

*sigh*

(1)
Companies get to offest losses WITHIN THEIR BUSINESS. They don't get to offset it against PAYG. As I've said, no issues with anyone starting a company for their RE investment and accessing EXACTLY THE SAME TAX BENEFITS AS ANY OTHER COMPANY.

You.Are.Not.A.Company.

(2)
How you characterise things is often a function of where you sit:

I'm a social drinker; you're a raging drunk.
I'm an effective tax planner; you're a tax cheat.
I get reasonable government support. You get a subsidy.

Google definitions of "subsidy" in order:

a grant paid by a government to an enterprise that benefits the public; "a subsidy for research in artificial intelligence"
wordnet.princeton.edu/perl/webwn

In economics, a subsidy is a form of financial assistance paid, usually by the government, to keep. Subsidies can be a regarded as a form of protectionism or trade barrier by making domestic goods and services artificially competitive against imports. ...
en.wikipedia.org/wiki/Subsidy

financial support or assistance, such as a grant; money granted by parliament to the British Crown
en.wiktionary.org/wiki/subsidy

An economic benefit, direct or indirect, granted by a government to domestic producers of goods or services, often to strengthen their competitive position against foreign companies.
countrystudies.us/united-states/economy-12.htm

Economic assistance granted directly or indirectly to individuals or organizations to encourage activities designed to satisfy the needs of the public or a particular group. A subsidy is discretionary and revocable, and generally conditioned upon certain rules being observed.
www.ccmproject.org/glossary.php

sub·si·dy (sbs-d)
n. pl. sub·si·dies
1. Monetary assistance granted by a government to a person or group in support of an enterprise regarded as being in the public interest.
2. Financial assistance given by one person or government to another.
3. Money formerly granted to the British Crown by Parliament

I'd be interested in seeing a definition that would exclude circumstances in which the government reimburses a % of losses deliberately entered into by an investor

The government writes you a cheque. It's a subsidy. No need to be shy about it.

 

[HiEquity]

I'm not suggesting they should, I am just highlighting that the " the government couldn't do it argument" is a straw man.

The government can and does do it all around this great country of ours through the provision of public housing. The fact that pretty much all governments are doing their level best to reduce new public housing investment speaks volumes for how profitable they feel the investment is for them.

In theory, government should have an unassailable advantage for any form of investment over private enterprise. As you say, cheaper financing, effectively pay no tax etc etc. Why limit it to property? They should also do all the share investing as well? Where do you stop? And we all know that governments make a complete flop of it whenever they try anyway!

The reality is, as anyone who has spent some time in the bureaucracy would know, governments are hopelessly inefficient at looking after small investments like houses and units. Private investors run rings around lumbering bureaucracies. So governments know full well through their own figures that $8bn in incentives for private investors goes a lot further than what they could achieve trying to build houses on their own. So government wouldn't be able to achieve the same level of rent suppresion that can be achieved through negative gearing with the amount of new supply that $8bn per annum would afford. There would just be too many public servants driving around in white camrys making sure that no money was being wasted on unnecessary tap washer replacements!

 

[HiEquity]

*sigh*

(1)
Companies get to offest losses WITHIN THEIR BUSINESS. They don't get to offset it against PAYG. As I've said, no issues with anyone starting a company for their RE investment and accessing EXACTLY THE SAME TAX BENEFITS AS ANY OTHER COMPANY.

You.Are.Not.A.Company.

(2).....

I'd be interested in seeing a definition that would exclude circumstances in which the government reimburses a % of losses deliberately entered into by an investor

The government writes you a cheque. It's a subsidy. No need to be shy about it.

Sorry but both of these are plain wrong.

If BHP borrows to buy shares in company X and BHP's borrowing costs exceed the dividend payout from that company, then they get to offset this loss against their other income prior to paying any tax. Likewise if BHP borrowed to buy property and the holding costs exceeded the rent...

If BHP's holding costs were so high that the whole company's profits were negative for a year then they would get to carry forward that loss for tax purposes until a year when they did make a profit and offset it against that.

Both these scenarios are exactly the same as for an individual. Where is the subsidy? An entity (company or individual) is offsetting its total costs against its total income before working out its profit in any given year. No cheques involved. The fact that a PAYG person may pay too much tax to the ATO before getting it back at the end of the year is irrelevant. That what an ITWV is for... it's a fundamentally commercial arrangement and happens all the time in companies all over Australia!

 

[Token Funder]

A good example of why ultimately the govt. will go through NG like a dose of salts. Interested in the forum's view of the public good/entitlement arguments around this one (othe than "cos we can"):

http://www.propertyinvesting.com/forums/property-investing/help-needed/4325442?t=1217413056

 

[Token Funder]

Sorry but both of these are plain wrong.

If BHP borrows to buy shares in company X and BHP's borrowing costs exceed the dividend payout from that company, then they get to offset this loss against their other income prior to paying any tax. Likewise if BHP borrowed to buy property and the holding costs exceeded the rent...

If BHP's holding costs were so high that the whole company's profits were negative for a year then they would get to carry forward that loss for tax purposes until a year when they did make a profit and offset it against that.

Both these scenarios are exactly the same as for an individual. Where is the subsidy? An entity (company or individual) is offsetting its total costs against its total income before working out its profit in any given year. No cheques involved. The fact that a PAYG person may pay too much tax to the ATO before getting it back at the end of the year is irrelevant. That what an ITWV is for... it's a fundamentally commercial arrangement and happens all the time in companies all over Australia!

Apples and oranges. The taxation rights and obligations of companies and PAYG are fundamentally different (CGT, FBT etc etc). As I've mentioned before, the reason RE investors don't generally establish company structures in spite of the asset protection it provides it that it provides a poorer after tax outcome.

More importantly, the sheltering provisions provided through geared investments (RE or equities) is just plain 'ol bad policy for reasons that do not apply to companies engaged in productive activity:

• it is prodigously expensive and growing exponentially
• it provides few indisputable benefits
• it increases income equality as it disproportionately benefits already wealthy PAYG taxpayers, in spite of the "it's all about the battlers arguments". The more tax you pay, the more effective the subsidy is.
• it favours investment in unproductive, passive assets rather than productive ones.

NG allows conversion of income into (discounted) capital gains and effectively allows a reduced tax liability in spite of an increase in income. This is inequitable and inefficient.

There is a reason that of all developed industrialised countries only Japan, NZ and Australia have unlimited negative gearing arrangements - it's expensive and delivers little value...both good reasons for limiting it.

 

[HiEquity]

More importantly, the sheltering provisions provided through geared investments (RE or equities) is just plain 'ol bad policy for reasons that do not apply to companies engaged in productive activity:

• it is prodigously expensive and growing exponentially
• it provides few indisputable benefits
• it increases income equality as it disproportionately benefits already wealthy PAYG taxpayers, in spite of the "it's all about the battlers arguments". The more tax you pay, the more effective the subsidy is.
• it favours investment in unproductive, passive assets rather than productive ones.

Methinks we will have to agree to disagree. I see no reason why individuals should be treated any differently to companies from a tax point of view and this includes having the same tax rate regardless of how much they earn. If everyone was paying 30% flat income tax regardless of income would you still have a problem with NG?

Your arguments against NG for individuals are akin to companies with higher incomes being taxed differently to companies with lower incomes. This makes no sense from a company point of view - how can it make sense for individuals?

I should be able to offset my total investment costs from my total income prior to paying tax regardless of whether I am joe selling his time or BHP selling iron ore. Plenty of companies buy their premises or invest in CIP at 6-7% yields and taking advantage of NG (plenty do it in resi too) - are they engaging in "unproductive activity" if it serves to offset their tax bill from other income? Or strategic investment?

NG for individuals only begins to offset the inherent disincentive to earning a high income that seems to be so entrenched in this country. There is no "subsidy" - just an acknowledgement that high tax rates are a bad idea and that it's a bad idea to not do what you can about them...

 

[BayView]

TF wants us all to set up companies and run our IP's through them like a normal company, and only then can we take our tax deductions from NG.

The problem as I've said before; no-one will do it if there is going to be a neg cashflow. With a real business, the owners can live off the earnings of the business. With IP's most investors can't, unless they are close to retirement and can sell off a few IP's to retire the debt and live off the rent.

However, as per TF's wishes, I am more than happy for my wage to be paid to me without any tax witholding. I will become effectively my own company, who subcontracts my work to my employer.

Then, I am more than happy to claim my food, car, utilities, clothes, phone, tools, insurances, office supplies, and so on.

Then, I'll pay tax on my income at the end of the year after I've claimed the hell out of my living expenses. Love it. I'll be looking forward to turning my $100k income into a taxable income of about $10k, and pay about $3k tax, as businesses are apt to do, and can do - legally.

Oh, but wait; I'm not allowed to do that; I have to be an employee and pay tax as I earn my money.

Bloody Govt.

 

[Token Funder]

Methinks we will have to agree to disagree. I see no reason why individuals should be treated any differently to companies from a tax point of view and this includes having the same tax rate regardless of how much they earn. If everyone was paying 30% flat income tax regardless of income would you still have a problem with NG?

Yes, because it's hugely expensive, provides no indisputable economic benefit and is inflationary. It's not economically sensible because...it's not economically sensible.

Outcomes matter and NG doesn't deliver outcomes that merit the cost.

 

[Token Funder]

TF wants us all to set up companies and run our IP's through them like a normal company, and only then can we take our tax deductions from NG.

The problem as I've said before; no-one will do it if there is going to be a neg cashflow. With a real business, the owners can live off the earnings of the business.

Exactly. Real investments - as distinct from tax driven transactions - are supposed to to make a quid from the business, not in the capital gain of same.

HG's Gruen Transfer ad (there's a bloke with too much time on his hands ) makes the point well.

I like property and have done very well from it. I just don't feel the need to tap other taxpayers on the shoulder.....

 

[RPI]

The government could do it cheaper- maybe in some dreamworld somewhere.
'
In my humble experiences governments always spend way more than a private person or business could to get it done.

someexamples:

Retaining wall- I live on the water in inner Brisbane next to a park. I had quotes for a 20 m sandstone retaining wall in the waterway $11,000. Brisbane City council same size retaining wall in park next door. $35,00 grand on drawings for a bagged rock wall (1m chicken wire cubes filled with rocks). Total cost for construction $150,000

I heard in interview with Afghanistan finance minister. village can build a school for $50k if govt or aid agency builds same school cost $250k due to all the bureacracy.

I could give dozens of examples.

There must be figures available somewhere to see what a state govt housing dept costs to run divided by the number of houses and then compare this to the ng cost per investor. even allowing for non market rents in public housing teh difference would be astronomical.

 

[rastus2]

HG, investors don't bid up the price of houses - EVER. The investors who do; don't remain investors for long.

That is what the emotional owner occupier does who wants to live in it.

I've made offers on dozens of houses that I would love to own as an investor, but some whacker outbid me. Good for them; the figures for me wouldn't have worked, so I walked away.

I want to find the $500k house that I can buy for $200k, and rent out for $500 p/w. Or figures similar to this at a lower price point maybe.

We simply work out what we can afford to spend, then go out and find the best property we can find, in the best area we can find, for the cheapest price we can, with the maximum rent we can get.

You talk about investors using debt to fund the purchases like it's a new thing, and a bad thing - it's been done for centuries.

I may have reduced my taxable income; but I still pay a fair whack of tax like everyone else. Don't start grouping me in with all the single-mother-with-five-kids-to-different-fathers set, who pay NO tax and live off our endeavors.

In any case, the Govt makes the rules of the property investment game, and we simply play by them. You can't blame us for the status quo. If you're so upset by the structure, go into parliament and get it changed. Good luck with that.

The simple act of borrowing money doesn't drive up the prices. It's what the borrower then does with those borrowed funds that drives up the price.The same can be said for credit. If people only ever used their hard-earned, there would be no consumerism; at least not at the current levels.

A person on $200k per year can borrow a lot of money, and can then afford to buy a more expensive house. They are not likely to go shopping for a $100k dog box, and try to low ball the Vendor just to keep the prices down (unless they are an investor). They are going to try and find the best housethey can, fall in love with it and, if there is some competition, they'll pay the premium price.

I guess if we all saved for the entire purchase price, the prices would remain lower, but it would mean that the lower income earners may never get to own a house in their lifetime. Do you want that? Who would be rich enough to own one? Imagine how few rental properties there would be; the whole system wouldn't work.

At the end of the day, there simply has to be incentive for people to invest in property, otherwise the Govt would have to provide it - welcome to Communism. We all know how well that works (for a chosen few).

So, you need to accept the situation as it is, and move forward.

Be careful what you wish for, because as a renter, you may end up on the street.

Supply and demand LA.

Increase demand by having more Investors flood into any market, and you raise the bar for price.

What we've seen here is a coincidence of events that made R/E a very attractive method of investment... The number of OO's attracted to R/E did not change much, nor did the number of Properties in the supply chain.

End result... price went up.

Blame at the Investors seems pointless to me.. it's like blaming water for flowing downstream... Gravity did it.
The set of events that are mostly to blame, and some of those were Fed/State Gov. controled.

I'm sure the fallout of any R/E price drop or recession will allow the cycle to come back into some kind of balance.