Not another question about abolishing negative gearing!!!

Hi all

We're all familiar with the qualitative arguments why the government won't abolish negative gearing - how it would lead to rents increasing dramatically, lower the values of houses, yada yada, yada.

However, I'm curious, purely out of personal academic interest, whether anybody has done any proper empirical research into the true direct cost to the government of negative gearing.

I know the ATO periodically publish the amount of property deductions claimed against income along with the level of property capital gains declared, and of course the deductions always greatly outweigh the gains.

But, I haven't seen anyone factor what to me are the two main offsetting items:
1) the stamp duty and land tax paid to the states on the purchase and holding of investment property - without such duties, they'd require more federal funding; and
2) the tax paid by the banks on the interest income they receive from investors, although as they borrow a lot on overseas markets it's probably more accurate to look at the tax on their margins.

Have you seen any research on these items, or any other direct items which reduce the net cost to the government? (Or dare I say it, increase the net tax take to the combined governments!)

Cheers
Jonathon
 
well the populice wants to stick it to the rich greedy landlord and the journos provide that... or as the headline screamed last year somehtign like "landlords pocket multibillion dollar tax bonanza" ha ha!
 
Jonathon,

Two more offsets I can think of, perhaps there are many more?

1) -ve geared property doesn't always remain that way, it transitions into +ve cashflow over time.
2) Rental subsidy to tenants (Look at what happened when Paul Keating briefly removed -ve gearing in reality)

Regards,
Andrew
 
Hi Jonathon,

The topic interests me as well.




However, I'm curious, purely out of personal academic interest, whether anybody has done any proper empirical research into the true direct cost to the government of negative gearing.

One of the interesting things I have read regarding how the government recoups some of the costs which arise from -ve gearing is from the tax paid by the banks on mortgage interest payments. I haven't seen this point raised in the media.

Regards Jason.
 
The revenue authorities do not lose out from negative gearing on investment properties for the following reasons:

1. The interest on the loan is assessable in the hands of the lender. Any lost revenue to the authorities through negative gearing (resulting from high LVRs, high interest rates, low yields) is made up by the excess of interest payments which although deductible to the investor, are assessable to the lender.

Further,

2. The revenue through tax on capital gains exceeds the revenue loss on holding costs (negative gearing). Investors would according to fundamental investment theories not engage in negative gearing as it does not maximise after-tax income. The fact that many investors prefer to be negatively geared on their investment properties must be due to the assumption that the capital gain on the property will exceed any outgoings incurred over some period of time.
 
The revenue authorities do not lose out from negative gearing on investment properties for the following reasons:

1. The interest on the loan is assessable in the hands of the lender. Any lost revenue to the authorities through negative gearing (resulting from high LVRs, high interest rates, low yields) is made up by the excess of interest payments which although deductible to the investor, are assessable to the lender.

Yeah, but if you can't deduct interest, then the ATO gets tax on banks' interest revenue AND doesn't 'lose' anything to the deductions. Besides, banks only pay a max of 30% tax. Individuals can have higher rates.

2. The revenue through tax on capital gains exceeds the revenue loss on holding costs (negative gearing). Investors would according to fundamental investment theories not engage in negative gearing as it does not maximise after-tax income. The fact that many investors prefer to be negatively geared on their investment properties must be due to the assumption that the capital gain on the property will exceed any outgoings incurred over some period of time.

'Most' and 'many' investors have one IP, usually not by choice. What makes you think they're rational, as 'fundamental investment theories' usually assume? Besides, you get the deductions this year, at your current marginal rate of tax, and in 30 years when you sell, you pay at 50% of what is probably a lower marginal rate because you're retired. You really think 'investors' consider 'gee, let's do a 30 year projection?'
 
Yeah, but if you can't deduct interest, then the ATO gets tax on banks' interest revenue AND doesn't 'lose' anything to the deductions. Besides, banks only pay a max of 30% tax. Individuals can have higher rates.

If you can't deduct interest, what happens? Lower LVRs, less investor preference for property, lower prices, lower interest payments to the banks. Sure individuals can have higher tax rates, but they may have lower than 30% too. Negative gearing allows property (or any asset class) investors to pay higher interest, this in turn is higher profits for banks, these higher profits are paid out as dividends, top-up tax is paid on the divi (thus negating the difference in tax rates).

'Most' and 'many' investors have one IP, usually not by choice. What makes you think they're rational, as 'fundamental investment theories' usually assume? Besides, you get the deductions this year, at your current marginal rate of tax, and in 30 years when you sell, you pay at 50% of what is probably a lower marginal rate because you're retired. You really think 'investors' consider 'gee, let's do a 30 year projection?'

That is missing the point. Most investors are in resi property for the growth not the cashflow, the growth is taxed when sold and negative gearing allows holding the property to obtain that growth. The ATO get their tax in the end. Further, negative gearing is also likely to drive up property prices, thus leading to increased capital gains tax revenues for the ATO. The net effect is negligible.

As stated earlier, if it was anymore that a negligible cost to the ATO, they would have addressed the issue. The ATO may not get their direct tax revenue as a result of negative gearing, but eventually, indirectly they do receive it.
 
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Sounds like we're all arguing for the same issue here. However, two minor points to make about Bene's arguments:

1) The big 4 banks borrow much of their money overseas, so for every $1 of interest we pay nab, for example, perhaps only 30-40c of that is taxable in Australia.

2) The ATO regularly releases data on capital gains tax paid and it's usually dwarfed by the deductions claimed on investment properties. Could be due to any number of reasons, but pricipally because deductiona are claimed at 100% of marginal rates, whereas capital gains are taxed at 50% of marginal rates, so some investors will be able to schedule the timing of disposals to suit them.

I wasn't around in 85-87 when Keating briefly abolished negative gearing. The popular opinion seems to be that he reintroduced it due to higher rents, lower rental supply, etc as most renters are not Liberal voters, but I wonder if he really introduced it because the government quickly realised that their overall tax take would reduce?
 
Jonathon,

Two more offsets I can think of, perhaps there are many more?

1) -ve geared property doesn't always remain that way, it transitions into +ve cashflow over time.
2) Rental subsidy to tenants (Look at what happened when Paul Keating briefly removed -ve gearing in reality)

Regards,
Andrew

I believe the rental subsidy is a major reason for maintaining the negative gearing apart from the revenue streams to State governments through land tax, stamp duty, etc from property developments for investors.

Investors contribute about 30% of housing. Housing is expensive and governments have competing priorities for their budgets and would rather not budget on using taxes to buy more public housing. Even as it is currently with the investors providing accommodations through IPs, the federal government has to subsidise tenants with Rental Assistance while the state governments have to provide subsidised housing.
 
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