Negative gearing to go?

[Francesco]

I´ve always found it laughable that property speculators (those heavily dependent on NG) think they are providing some kind of public service. Unless they´ve built new housing (less than 5%) then the net effect on demand/supply of a speculator buying/selling a property is zero. In fact subsiding speculators through NG does a massive disservice to the public by robbing many tens of thousands of the chance to own their own home.

SS has moments of amusements for me and this just about tops it in terms of economic prognosis.

Some kind of 'public service' - unless you are a hermit or an active miscreant in society by being a arsonist wouldn't you be supporting by participating in the capitalist economic system - evident of Adam Smith's 'invisible hand'?

Unless 'they've built new housing' to increase the stocks available. What about renovation, rehabiliation and enhancements (eg sub-division, strata titling, increase rooms) or to a standard that discerning tenants will accept or to meet market demands for innovative accommodation?

'Robbing' - in many Australian States/Territories, governments 'milk' the landlords with high stamp duties and specifically targetted land tax to use the funds to subsidise public housing (cheap rental at great locations), owner occupier (no CG tax) and FHB (especially the FHOB grant). Who is robbing whom? NG is not a right it is an accounting logic before deriving the taxable amount for any revenue generating activity. It applies to all legal entities but when the IP is owned by the individual, it is considered 'robbing' by those who do not own IPs.

Who do you work for?

 

[coastymike]

They could conceivably tie any restrictions into the non commercial loss provisions. At present negative gearing does not tie into these provisions but this would be the simplest way to implement this strategy.

 

[Belbo]

They could conceivably tie any restrictions into the non commercial loss provisions. At present negative gearing does not tie into these provisions but this would be the simplest way to implement this strategy.

Sorry, Coastmike, I'm not following you here. Could you elaborate? I am genuinely interested, I assure you. Informed debate around negative gearing is very important to me.

 

[Francesco]

They could conceivably tie any restrictions into the non commercial loss provisions. At present negative gearing does not tie into these provisions but this would be the simplest way to implement this strategy.

This is plausible. If government limits NG on a property to within a few years, it will also limit the use of refinance on the property to avoid breaching the proposed term. It may limit the sale of heavily NG property which are likely to be new. It will be a push for investments in CF+ type of IPs.

 

[coastymike]

Belbo,

The non commercial loss provisions applies to net losses from business activities. At present losses from investments are excluded from the non commercial loss provisions.

The provisions have a number of tests which unless satisfied do not allow you to offset your losses against other taxable income. These losses must be carried forward and offset at a later time once the tests are met.

Now these tests would need to be modified for investments but they could be modified such that losses from investments can only be offset against income from similar classes. So let's say you have losses from your property portfolio of say $50k and gains from your shares of $30k then you could offset the $50k against the $30k and carry forward the remaining $20k to be offset against future investment income. The provisions, if modified, could mean you cannot offset the $20k against other income such as salaries and wages.

 

[Belbo]

Thanks for the explanation, CM.

So, if I understand you, what you are suggesting in essence is that salary / wages income should be quarantined from access to negative gearing?

If so, can I ask, why would you support doing so? ('Support' here meaning for argument's sake only.)

I ask because a lot of my hypothetical salary goes into covering the operating losses on my portfolio, and I only get a proportion (say 30% for argument's sake) back in tax relief. There's a nexus.

 

[coastymike]

Belbo,

Effectively yes. It means that you are only entitled to deduct the loss against similar classes of income. The problem with negative gearing against salary and wages is that it compensates those who have made poor investment choices. If treated similar to the non commercial loss provisions then you get the deduction but only when it turns profitable.

I guess you need to consider the policy reasons for negative gearing. Historically it had good grounds. Governments needed for people to provide for their retirement. Superannuation contributions were terribly low. A good way of allowing people to build investment assets and provide for their retirement was to allow gearing and offset losses against other taxable income. With 9% compulsory super contributions is this still necessary ? Possibly yes. The real question is what are the policy objectives for negative gearing and are they being achieved.

Then we have the question why do we allow you to gear against your property portfolio yet if you have a start-up business we don't allow you to offset the losses against your other income unless you meet the tests ? The later could lead to new employment opportunities for others, additional GST contributions to the revenue base, etc. Why is this not allowed in comparison to investment gearing ?

 

[Belbo]

Okay, I think I'm getting where you're coming from, CM.

Putting aside the valid question of start-up business losses (if I may), compensating poor investment choices seems like a valid rationale for the quarantining you suggest.

But surely then you are proposing that any accumulated operating losses could be offset against any subsequent capital gain, for reason that only on sale could the quality of the original investment choice be established?

 

[joeExpat]

Really, joeExpat?
Can I ask you one or two personal questions?

Do you actually own any property?

I still own property in NSW, sold 1 last year though. I've made some good capital gains, and have benefited from negative gearing in the past. Although I've always thought I was an incredibly bad public policy, who's going to say no when money is thrown at you.

Please don't tell me you work in Swiss bank. I couldn't survive the mirth.

I do, but that's not why I know what I'm talking about. I've been to many auctions in Sydney, investors often outbid home buyers, no doubt some of them current renters and perhaps FHBs. Of course negative gearing, by encouraging and favouring speculators and pushing up prices, has pushed many of these people out of the market. I have beaten a FHB to a purchase myself.

Unless 'they've built new housing' to increase the stocks available. What about renovation, rehabilitation and enhancements (eg sub-division, strata titling, increase rooms) or to a standard that discerning tenants will accept or to meet market demands for innovative accommodation?

Like I said, less than 5% of investors/speculators add significantly to the housing pool in this way, and yes they should receive tax benefits for doing so. But most speculators just buy, hold & rent out with the minimal amount of renovation & repairs required. Owners improve a property more.

Saying housing speculators are good for the general public is like claiming Oil speculators are also good for the public by pushing up petrol prices.

 

[Francesco]

...
Like I said, less than 5% of investors/speculators add significantly to the housing pool in this way, and yes they should receive tax benefits for doing so. But most speculators just buy, hold & rent out with the minimal amount of renovation & repairs required. Owners improve a property more.

Saying housing speculators are good for the general public is like claiming Oil speculators are also good for the public by pushing up petrol prices.

I would be happy to consider your reference that only 5% of investors/speculators value-add and most only buy, hold and rent out? Did you derive the percentage on $ average or effort spent per year?

Is it possible that you have formed an incorrect conclusion? For example, I owe a property for more than 20 years and did a bit of repair every year. The repair/enhancement over those years included painting, hot water tank, insulation, stove (twice), oven, range hood, toilet suite, tap fittings, door fittings, repainting, carpet, curtains, vanity, light fittings, security fittings and kitchen renovations (with dishwasher, caestone stone countertop and undermount sink). This does not include outside work on roof, courtyard, fencing and landscape. Compared to a new house, aside from external structural design mine is updated and just as new (even superior and supported gentrification in the neighborhood).

Statistically on average basis I did (let's say) 5% of value-add per year but over 20 years it is equivalent to 100% new. In all those years, I have much better vested interest (commercial) to keep the property fully utilised (rented) than even for an owner occupied property.

To be fair to you, neighbours do show a bit of anxiety at a few of my property locations when I mentioned to them that the property will be rented out. However, they never have reason to be unhappy subsequently with the upkeep of the property but only with unreasonable behaviour of some tenants and their standard of housekeeping.

 

[Ms Jade]

^ITA. Until we finally moved into the PPOR last year our tenants enjoyed a far better standard of housing than we did. I can't get my head around how ripping an old place down & building 'new' would be preferable to our constant renovations. The latter helps to maintain the neighbourhood character that's so desirable in the inner 'burbs; not to mention the sheer wastefulness of building new for the sake of it.

 

[Belbo]

I do [work in a bank], but that's not why I know what I'm talking about.

You actually scored a cleaner's job in a Swiss bank? Good on you, Aussie!

(Just make sure you don't leave any copies of your junior high matriculation results lying around. I hear the Swiss don't take kindly to fraudulent job applications!)

 

[rastus2]

This is effectively like being able to claim accelerated depreciation.

The risk here is that this would encourage cheap shoddy buildings with limited life spans.

Yes it is a similar concept... just rewards construction higher than speculation of old stock...

good point on the shoddy building with limited life spans (aka Gold Coast )... building standards and inspections would need to be adhered to.

Would any Investors be interested in this kind of proposal ?