Potential negative gearing changes

[Francesco]

Not really, it's just restricting your ability to claim any losses against profit in the same asset class.

Know of many mums and dads able to fund purchase of IPs apart from salaries? The money comes in and out from the same funding pool (other than Trust and companies which are likely to be exempt) of mums and dads resources. So, profit coming in from rental properties to mums and dads will be taxed (it is only moral), losses? - you bear it yourselves (the rental properties cannot bear the loss) - use your salaries if you still have it. (If you have lost your job and in financial trouble? Why did you invest in the first place, knowing that the 'government' is actively discouraging you?) The policy is consistent with my moral compass because I am quarantining your loss until you make a profit from that activity. (If you fold up financially along the way, too bad, why try to be self-reliant in the first place with all the disincentives placed in front of you?) By the way this will not apply to any other business in Australia. In other words, conduct any other revenue earning activity and you will not find similar impediment in Australia.

If an investors entire property portfolio is (net) negative cash flow then there is no profit to speak of.

Investors, beware, if you make a loss after putting time and money and providing a worthwhile service for tenants, you will be subsidising the rental market with your salaries and other incomes. If knowing this and you still want to help maintain supply of rental properties then you might need a holiday and consider other activities.

I'll admit that inability to deduct losses from other income may deter some investors from updating their properties (if they are running net negative), but likewise an investor might be less inclined to hold a property empty for a period of time waiting for higher rent (for which they'd be partially reimbursed EOFY or as they go with a tax variation), so negative gearing may also be artificially inflating rents (renters could benefit from the removal of NG).

The financial acumen of such an investor would be weird - making loss right away in order to get higher rent. This may happen in the big populous states, not in the majority of places. Loss of rent may be $500 per week and hoping that you will get a rise of $10 more will require a year to make up for the loss. If I were the landlord I would make up my mind and advertise the rate I want, get the first tenant meeting my criteria and rent it out. Get a life!

Weirder and weirder!

 

[Francesco]

...

However, in more premium markets, where yields currently sit at sub 3-4%, there'll be a decrease in investment demand for existing stock as the government no longer subsidises the losses that investors make on these investments. This will reduce the supply of rental dwellings available and lead to an increase in rental prices in these regions.

...

This is a good analysis, however, I wish you do not use this word as it can mislead people to think that the government is giving investors money to continue investing in rental properties. NG arises from legitimate tax deductions exceeding incomes and is available to everyone conducting a revenue earning activity. The less discerning may actually believe that the federal government is giving money to landlord, rather than landlords are allowed to cover their losses from their more profitable activities during the year.

 

[hobo-jo]

In other words, conduct any other revenue earning activity and you will not find similar impediment in Australia.

Rubbish. Many small businesses (sole trader/partnership) have to carry forward losses.

"You can only offset a loss from a business activity you carry on as an individual (either as a sole trader or in partnership) against assessable income from other sources if at least one of the following conditions apply:"
https://www.ato.gov.au/General/Loss...iness-activities-against-non-business-income/

 

[hugh72]

If there are major changes to ng arrangements some investors may leave the market which may lead to price decreases unless the slack is taken up by O/O and FHB. There is a large percentage of the population who will always rent, cannot or will not ever have the money for a deposit and these people will experience increased rental stress as demand may outstrip supply in some markets.
The private sector is playing a role which the government cannot fill without a massive increase in spending on public housing, this isnt going to happen.

 

[Francesco]

Rubbish. Many small businesses (sole trader/partnership) have to carry forward losses.

"You can only offset a loss from a business activity you carry on as an individual (either as a sole trader or in partnership) against assessable income from other sources if at least one of the following conditions apply:"
https://www.ato.gov.au/General/Loss...iness-activities-against-non-business-income/

Thanks for bringing this up. Losses are carried forward in small business from the cumulative result of all income earning activities of the small business. This also applies to most tax entities (trusts are treated differently). The NG proposal for individuals is to quarantine rental activities from the other income activities. This discriminative treatment is unique and different from how losses are treated in small business.

In your extract:

"For the 2009?10 and later income years, you can only offset a loss from a business activity you carry on as an individual (either as a sole trader or in partnership) against assessable income from other sources if at least one of the following conditions apply:

...
your income for non-commercial loss purposes is less than $250,000 and your business activity passes at least one of four tests ? profits test, assessable income test, other assets test, real property test"


I would think most mums and dads PIs currently qualify to be treated for offset from salary from the above criterion. To appreciate the typical IP situation, hypothetically, an IP loan of $0.5m requires about $25k interest, $10k other expenses, rent $25k resulting in loss $10k. (So, most investors are getting a NG offset in the order of about $3.5k!) And, to reach the upper threshold will require about 25 loss making properties. In other words, the loss threshold allow many other non commercial activities other than out-and-out loss making NG strategies adopted by typical mums and dads.

My point is holding up that the proposed NG treatment on IP appears to be unprecedented in all other classes of investments or other tax entities.

 

[Francesco]

If there are major changes to ng arrangements some investors may leave the market which may lead to price decreases unless the slack is taken up by O/O and FHB. There is a large percentage of the population who will always rent, cannot or will not ever have the money for a deposit and these people will experience increased rental stress as demand may outstrip supply in some markets.
The private sector is playing a role which the government cannot fill without a massive increase in spending on public housing, this isnt going to happen.

The last time NG was abolished, tenants and their advocacy bodies were most vocal and influential on the Labor government to rescind the measure. I believe tenants, notably immigrants will be the principal victims of the proposal to abolish NG. Some gains may accrue to aspiring and covert FHBs and cashed up investors with a long-term investment horizon. Existing PIs may have a range of winners and losers. Long term investors may end up alright as the impact becomes a localised 'bump' in investment performance in an increased risk environment. Short term PIs need to be extra vigilant with enough reserves to ride over the impact, any increased interest and unemployment.

 

[hobo-jo]

My point is there are other revenue earning activities where a loss can't be deducted against regular job income.

But it's my opinion that property could and should be treated differently to other assets, so I wouldn't see an "unprecedented" change as a problem.

So Francesco, I'll ask you this, if investors were attracted by certain tax policies in a strictly government regulated market for basic foods, prices soared as a result and many families were no longer able to afford fruit and vegetables, but instead had to survive on rice... would there be a legitimate reason for government to consider reviewing that policy even if it meant treating food differently to shares or another type of business?

Shelter is one of our basic needs, it should be treated differently to other assets. Sure renting will get us by... so would rice.

 

[Francesco]

My point is there are other revenue earning activities where a loss can't be deducted against regular job income.

But it's my opinion that property could and should be treated differently to other assets, so I wouldn't see an "unprecedented" change as a problem.

So Francesco, I'll ask you this, if investors were attracted by certain tax policies in a strictly government regulated market for basic foods, prices soared as a result and many families were no longer able to afford fruit and vegetables, but instead had to survive on rice... would there be a legitimate reason for government to consider reviewing that policy even if it meant treating food differently to shares or another type of business?

Shelter is one of our basic needs, it should be treated differently to other assets. Sure renting will get us by... so would rice.

LOL. Eat rice and be part of Asia! Don't be non Asian. Increasingly, Australia is Asianised. It is inevitable! Government intervene to prevent the inevitable? It is pointless! Frivolous!

Eating rice is a lifestyle choice, just as renting often is. Don't pretend otherwise. Live and let live!

Shelter is a basic need, so someone with PHD was revealing before in SS as a manifesto of sort of the United Nations. I do not doubt it is somehow basic, just that the frills that go with it in Australia may not be basic!

Let's agree to disagree as by now you know where I am coming from and vice versa.

 

[wategos]

I don't think it is idiotic at all.

It encourages anyone to take control of their future, and hopefully not end up on the pensioner stockpile...and the Gubb has encouraged us all to do it by way of tax relief incentives attached to the investment vehicle.

The disaster of the policy is that over half of properties are now bought by investors (/speculators) at the expense of many first home buyers who have been sacrificed. That pensioner stockpile will be a bit bigger because of negative gearing.

 

[skater]

The disaster of the policy is that over half of properties are now bought by investors (/speculators) at the expense of many first home buyers who have been sacrificed. That pensioner stockpile will be a bit bigger because of negative gearing.

Yet more baloney!

I'm not sure about you, but I don't compete with FHBs. They are willing to pay too much! BTW, I play in the same market as a lot of FHBs too, where you find a lot of lower priced properties. For this reason, I am sitting out of the Sydney market, although may re-enter in a few years when those that paid too much have to sell.

Even in places like Western Sydney, the prices are driven by Owner Occupiers. I sit back in amazement at the prices they are willing to pay. Of course, that's not to say that there's no investor activity, because that would be a lie. The agents are asking at a lot of the opens at the moment if they are an investor or OO, and when I've looked at their paperwork (and spoken to agents) there is a lot more OO than investors, which, in a slump you the numbers the other way around.

 

[hobo-jo]

Of course, that's not to say that there's no investor activity, because that would be a lie. The agents are asking at a lot of the opens at the moment if they are an investor or OO, and when I've looked at their paperwork (and spoken to agents) there is a lot more OO than investors, which, in a slump you the numbers the other way around.

Sorry, but your anecdotal stories don't align with the data which shows investor activity often climaxes with price peaks.

You may think that every investor our there is a smart contrarian who doesn't get caught up in emotion and hype, but that's not the case.

If you are seeing more OO enquires, but investors are making a majority of purchases (which data would suggest is the case in NSW/Sydney), then perhaps that supports the suggestion from Wategos that investors are outbidding FHBs or OOs in general.

Note the major peak in investor finance at the same time prices peaked in Sydney (2003)...

http://petewargent.blogspot.com.au/2015/04/sydney-investor-loans-continue-to-power.html

 

[Rixter]

Sorry, but your anecdotal stories don't align with the data which shows investor activity often climaxes with price peaks.

You may think that every investor our there is a smart contrarian who doesn't get caught up in emotion and hype, but that's not the case.

If you are seeing more OO enquires, but investors are making a majority of purchases (which data would suggest is the case in NSW/Sydney), then perhaps that supports the suggestion from Wategos that investors are outbidding FHBs or OOs in general.

Note the major peak in investor finance at the same time prices peaked in Sydney (2003)...

http://petewargent.blogspot.com.au/2015/04/sydney-investor-loans-continue-to-power.html

I'd be interested to see the other side of coin - being the OO loan figures over the same period for comparison.

As well as a break down of the above chart in relation to level of 'investor' (ie mum & dad type or professional) taking out the loans shown.

Remembering the Mum & Dad type are the masses under the 'Investor' umbrella.

 

[D.T.]

I wonder if Sim can build alcohol & drug detection into the new version of the forums

 

[hobo-jo]

I'd be interested to see the other side of coin - being the OO loan figures over the same period.

As well as a break down of the above chart in relation to level of investor (ie mum & dad type or professional) taking out the loans shown.

Remembering the Mum & Dad type are the masses under the 'Investor' umbrella.

Rixter, this chart may interest you which shows both OOs & investors, but on a national scale (from http://www.theguardian.com/business...fuel-a-housing-bubble-on-the-edge-of-bursting).

You can see both buyer types are exuberant into price peaks at times e.g. 2003/2007. 2010 peak driven mostly by OOs due to increased FHOGs in period prior. This one is clearly being driven primarily be investors with their finance beating OOs for first time in history of the data series. OOs did contribute early in the run, but have flattened out now.

I doubt there is any data separating "professional" investors from others (what measure would you use to separate the two anyway), but just as there are savvy investors there are savvy OOs.

 

[Rixter]

Rixter, this chart may interest you which shows both OOs & investors, but on a national scale (from http://www.theguardian.com/business...fuel-a-housing-bubble-on-the-edge-of-bursting).

You can see both buyer types are exuberant into price peaks at times e.g. 2003/2007. 2010 peak driven mostly by OOs due to increased FHOGs in period prior. This one is clearly being driven primarily be investors with their finance beating OOs for first time in history of the data series. OOs did contribute early in the run, but have flattened out now.

I doubt there is any data separating "professional" investors from others (what measure would you use to separate the two anyway), but just as there are savvy investors there are savvy OOs.

Thanks for the chart. The measure I would like to see is those investors with 1, 3-5, then 6 and above.

There were stats on ABS for the above.

Savvy investors to me would be Investors with 6 or more IP. How could savvy OO be qualified - maybe there the ones with 6 or more IP as well?

 

[BayView]

The disaster of the policy is that over half of properties are now bought by investors (/speculators) at the expense of many first home buyers who have been sacrificed. That pensioner stockpile will be a bit bigger because of negative gearing.

I can't really speak for other investors, but I'm sure I'm just yer average person (like most of them) trying to get ahead and doing it through property -

I have never paid full whack for any property I've bought.

I would wager than most investors are the same - it's human nature to try and buy stuff for less than the retail, less than the asking price, etc.

How often have you talked to someone in your lifetime, who was crowing about their recent purchase of XYZ doodad, and how much they got it for under asking price/retail price?

Loads and loads of times.

I still see it now with all the folks I talk to; crowing about their recent "steal" from XYZ doodad supply company.

Here's 2 examples of properties I've bought where a FHB wasn't inconvenienced at all -

1. Brand new townhouse in Mentone in a complex of 4 - asking price $425k.
I watched it for 6 months; no sale, and offered $395k - sold. (builder needed to clear his stock)
2. Older 2x1 villa unit needing reno, in complex of 12; in Highett - asking price $225k. On the market for about 5 weeks. I offered $206k with a 30 day settlement and no finance clause - sold. (old Nanna going into retirement home and found short settlement a real incentive).

Both of these properties were well located, close to all transport, shops schools etc.

I would wager that every investor is trying to do exactly what I have done.

Yes; there are examples of investors paying over the asking price - but this is always going to happen in a boom market, and it definitely happens with O/O's as well.

We had a house near us recently that was asking $1.8m...sat on the market for a few months with no sale. Then, all of a sudden, two buyers became interested and it ended in a silent auction and sold for $2.2m.

No investor would have bought that house - single dwelling, views, no subdivision, a sought after section of our area.

FHB's have the choice to wait until the boom has ended, and/or select a lesser demand area and pay much less.

Again; I come back to our own lives as an indicator - how many folks on this forum know a significant amount of active and multiple IP owners within their circle of friends and relatives?

I personally know noone. I know a couple of folks who have ONE IP only.

I know a decent number who have a holiday house.

 

[hobo-jo]

Thanks for the chart. The measure I would like to see is those investors with 1, 3-5, then 6 and above.

There were stats on ABS for the above.

Savvy investors to me would be Investors with 6 or more IP. How could savvy OO be qualified?

I have seen stories about those working at the mines on a good wicket, earning $200k driving a truck or shovelling dirt and buying a bunch of negatively geared properties... I wouldn't call that professional or savvy investing without qualifying their situation further. I don't think the number of properties really dictates whether someone is a savvy buyer or not.

I would be wanting a survey that looks more at their reasons for buying, timing in the cycle, money management, structure of ownership, performance of their properties versus the markets, etc (for measuring savvy buyers whether they be investor or OO).

 

[chilliblue]

The disaster of the policy is that over half of properties are now bought by investors (/speculators) at the expense of many first home buyers who have been sacrificed. That pensioner stockpile will be a bit bigger because of negative gearing.

Many FHB's that I know have investment properties and just have not purchased their own PPOR as yet.

As to emotional OO's, several new properties have been sold in my suburb where the same house could have been built brand new on an existing block of land as a knockdown for $500 - 800K less.

Factor in stamp duty for a property over $2 million and that is serious money being blown.

 

[Rixter]

I have seen stories about those working at the mines on a good wicket, earning $200k driving a truck or shovelling dirt and buying a bunch of negatively geared properties... I wouldn't call that professional or savvy investing without qualifying their situation further. I don't think the number of properties really dictates whether someone is a savvy buyer or not.

I would be wanting a survey that looks more at their reasons for buying, timing in the cycle, money management, structure of ownership, performance of their properties versus the markets, etc (for measuring savvy buyers whether they be investor or OO).

I would qualify some one doing all the above on the average wage or less as a minimum.

 

[D.T.]

I have seen stories about those working at the mines on a good wicket, earning $200k driving a truck or shovelling dirt and buying a bunch of negatively geared properties... I wouldn't call that professional or savvy investing without qualifying their situation further. I don't think the number of properties really dictates whether someone is a savvy buyer or not.

I would be wanting a survey that looks more at their reasons for buying, timing in the cycle, money management, structure of ownership, performance of their properties versus the markets, etc (for measuring savvy buyers whether they be investor or OO).

People working in the mines are buying pos geared property too. What does this mean?