Potential negative gearing changes

Discussion in 'Property Investment - Other' started by pickle pickle, 23rd Apr, 2015.

  1. pickle pickle

    pickle pickle Member

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    Will be interesting what the ALP proposes in relation to negative gearing changes.

    For property investors that know what they are doing, it will probably be great because it will give them interesting opportunities.

    I can't decide if getting rid of negative gearing will be good or bad for the country overrall. It will probably be a negative overrall but I can see some very postive results in the short term from the changes for certain people.

    Will be interesting if it creates a building boom? Probably not because developments will get hold up by local governments, but if local governments play its part I can see a building boom. This could create inflation in the economy (which could be a good thing compared to the alternative of deflation).

    Interesting times ahead.
     
  2. Peter_Tersteeg

    Peter_Tersteeg Finance broker/strategist

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    Personally it makes little difference to me. Most of my properties are held in trusts, so the proposed changes won't make any difference at all for my circumstances.

    I don't think what they're proposing will really help those who they're trying to help though (it's primarily aimed at appealing to first home buyers and somewhat owner occupiers). Owner occupiers aren't going to sell at a discount because investment tax rules change. Only a very small percentage of investors will sell, and they're the ones who would be likely to bail out anyway.

    Investors who are purchasing will start to be more cautious about their decisions. Given the current price points of the major cities, this really means they're going to be looking more at cash flow properties which tend to be well below the median values. This also tends to be where first home affordability is at its best.

    Restricting negative gearing only to new homes also pushes investors into the new home market, again increasing competition with first home buyers.

    Additionally investors are going to try to increase rents as quickly as possible. I've noticed that before most people become first home buyers, they're renters. If rents go up, it makes it harder to save a deposit.

    I'm having trouble seeing how removing negative gearing will get the desired outcomes for the market that wants it the most. :confused:

    It won't stop foreign investment either. The buyers that are spending the really big bucks aren't borrowing that much to do it. They're not negative gearing. Even if they do borrow money, most get their income overseas so they don't offset losses against local income. The proposed changes won't have any affect on foreign investment.

    Removing negative gearing potentially creates more opportunities for investors. It appeals to the masses because they don't understand how it really works and it buys votes.
     
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  3. Rixter

    Rixter $uper Investor (Retired)

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    Statistical figures provided to the Government pollies show that for every $1 the govt pays out to investors who utilise the negative gearing tax benefits, indirectly puts back an extra $4 into the governments coffers.

    The extra taxes they (the govt) are now getting, as opposed to what they would not be getting if they abolished negative gearing, are being generated from the associated taxes that is involved in the building industry to build, buy & sell IP. ie building material sales taxes, mortgage stamp duties, purchasing stamp duties, capital gains taxes, building companies income taxes, sub contractors taxes, builders employees payg income taxes....these are just a few ways the govt recoup the tax benifits they allow to investors.

    So as you can imagine ..pollies being pollies are all facts & figures people when it comes to making any type of decisions...if its "financially" in their favour to carry on something its always going to be very hard to rule against it...

    Lets face it in anyones books, if you pay out $10,000 to make an extra $40,000 in your pocket, wouldnt you call that a very wise business decision!

    On top off that, the govt know that over time those negatively geared properties are going to become positive geared properties of which they will collect more taxes on.

    For a short time sting in their bum, the bee hive is going to produce plenty more honey for them.
     
  4. pickle pickle

    pickle pickle Member

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    Wouldn't be surprised if they put an income limit on when one can access negative gearing. The government will probably be spending the next 10 years trying to close the loopholes in there legislation. Remeber when they kept increasing the low income offset and were surpised the biggest beneficaries of this were people in trust structures.

    Oh the joys the accountants will have with this.
     
  5. Redom

    Redom Mortgage Broker

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    Accountants would love any change to tax systems - the more complex/uncertain is, the more they're required!

    I personally think it's a fair policy choice in the current environment. They need some structural budget savings somewhere and looking into super/negative gearing appears sensible.

    Negative gearing remaining for new stock only seems like the most likely outcome if it does occur, with any existing arrangements continuing. How would that affect the market? Taking a few guesses:

    1. I suspect you'll see fewer investors operate in very low yielding suburbs and shift their portfolios to higher yielding assets. This may have an effect in the more expensive markets, while supporting growth in cheaper markets. Right now investors see somewhere around 34-47% of their investment losses paid by the taxman in these markets. Surely investor demand will plummet without this.

    2. More investment for new stock. This definitely would be one of the main policy aims. There are very large economic multipliers from housing construction (more jobs, income, etc). Unfortunately most studies into housing affordability point to supply side factors as constraints on housing construction, rather than demand side. So i suspect it will just lead to price growth, rather than VOLUME growth (which is what the policy intent would be).

    Noting those guesses, I'd be investing heavily in high yielding property if I thought this was to actually pass through and get done. I suspect there'll be a surge in demand for these type of properties with investors loving them. And potentially investing in OTP properties too. The government will be strongly incentivising local investors into this market, so that'll likely lead to greater price growth in new stock.

    In terms of its effects on government coffers, it will definitely help the budget bottom line. Treasury model this a few months before every budget. It's a reasonably big tax concession and will likely save multiple billions over the forward estimates.

    Cheers,
    Redom
     
  6. Ausprop

    Ausprop Member

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    the appetite for this seems right, it may actually happen this time
     
  7. WattleIdo

    WattleIdo Member

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    Of course we don't know details yet but having a plan makes it seem more likely than going cold turkey. New housing would surely be the exemption. I also heard Chris Bowen suggest NG on just one property being a possibility. Would be interesting to see how that would work. Could get even more tax back if the one NG property is worked out seperately
     
  8. Rixter

    Rixter $uper Investor (Retired)

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    It seems everyone is forgetting or simply arent aware of what happened when the Treasurer of the day Mr Paul Keeting and Govt abolished it back in the mid 1980's, the implications it created and the measures they had to introduce to bring negative gearing back in 2 years later.
     
  9. natedog

    natedog Member

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    Quoted from ABC news online Mr. Bowen apparently said

    "Our principle would be that people who've invested in good faith with existing rules shouldn't be disadvantaged and anything we do should not take away from new housing stock, which is very important for housing affordability."

    So by the looks existing IP owners it would be business as usual.
     
  10. hugh72

    hugh72 Member

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    It is likely that a grandfathered arrangement is possible in the near future where existing owners can continue to claim losses against other income, I think this is the most likely outcome. There will need to be incentives for new builds as this helps to drive the economy and create employment, this could be in the from of increased capital allowances/ building depreciation.
    Long term any NG changes would sharpen investors assessment of what is a suitable investment even in a low interest rate environment, no more purchases with a 3%yield. Rents will probably increase sharply as they did in the mid 80's, there is some debate as to the causes of this as some believe rents were increasing anyway. I think that unless there is a large jncrease in supply rents most likely will spike as investors look to protect their returns in a similar way to when interest rates increase but who knows that's why economics is a failed science IMO.
     
  11. jerrybee

    jerrybee Member

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    I think there is a loose correlation but ultimately rents are driven by supply / demand fundamentals. I don't think landlords can jack up the rent just to offset declines elsewhere.
     
  12. hugh72

    hugh72 Member

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    I agree that supply and demand is the driving force but if costs increase landlords will increase rents where possible, it might only be $10 per week on lease renewal as tenants generally won't move for small increases. This will have an effect on the market just as increased supply may mean downward pressure on rents.
     
  13. Rixter

    Rixter $uper Investor (Retired)

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    Correct it's supply & demand equation that's the driving force..which was the case when negative gearing was abolished by Keating.

    The supply side drying up as investors were bailing out and this put pressure on the demand side as tenants looking for a place to rent increased.
     
  14. wategos

    wategos Member

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    No this did not actually happen the last time NG was last restricted, investors did not bail out and even if they did who would they sell to ? other investors or former renters or owners, the demand supply equation remains the same and there is no upward pressure or rents. It was reintroduced for political reasons, the government was scared of losing and election.

    Negative gearing is one of Australias biggest policy failures, the party that promises to reform it will get my vote.
     
  15. Rixter

    Rixter $uper Investor (Retired)

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    Well, we'll have to agree to disagree then..I witnessed it happening.
     
  16. GreyGhost

    GreyGhost Member

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    I think this couldn't be further from the truth..
    This implies that accountants don't add value and are just on-charging the smoke and mirrors created by government policy and taxation changes.

    Whether or not it makes them required, taxation compliance is not the future of the industry.
     
  17. redwing

    redwing Progress Not Perfection

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    Will they remove CGT also :D
     
  18. SUNNYBILL

    SUNNYBILL Member

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    A couple of years ago New Zealand no longer allowed depreciation to be claimed on the actual building (capital allowance). This has resulted in reducing rental losses so more tax for the government. It has not affected rents or the market as a whole.

    While on the subject of tax, I could never understand why excess franking credits are refunded in Australia. In the rest of the world any excess franking credits convert to a tax loss which is carried forward to offset future profits.

    My final gripe is why individual tax returns are still required by PAYG employees with little other income. Again this needs an overhaul to catch up with the rest of the world. Get rid of all tax deductions for PAYG earners and simplify the whole process.

    The ATO and Australia tax system are antiquated. A mess of legislation that has been cobbled together based on political agenda's, and not what is actually good for the country.
     
  19. Deltaberry

    Deltaberry Member

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    Pollies all rhetoric no real thought put into anything. No skin in the game that's why
     
  20. Propagate

    Propagate Member

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    So, when they got rid of it last time, how did it work in the sense of carrying forward your losses each year? What I mean is, say your are negative to the tune of $5k per year for 3 years, each year I assume you carry that loss over?

    After 3 years you property is positive, were you able to start offsetting your $15k carried over losses against what is now positive, paying 0 tax until you're 15k runs out then paying tax on positive property income there after? Or did you have to carry it all the way forward until the sale of the property and deduct it from the taxable profit?

    If you can only carry forward the losses through to an eventual sale, it seems unfair that your profits gets taxed from day 1.