Removing Negative Gearing Laws

From: Robert Forward


Hi All

As you've probably seen, I've made a few comments about the removing of the Negative Gearing Laws.

I would love to hear everyone else's comments on this, so lets get a debate going.

Hands up for Negatively Gearing

Hands up for the removal of Negative Gearing Laws.

Let me say, Yes, I understand that there would be lots of people out there in the investing world that would HURT BIG TIME if this was done.

But what do you think would be the outcome in 3-5 years time after the removal of the Negative Gearing Laws?

Will the pain be worth it in the short term?

Will the pain be worth it in the long term?

If you don't want these laws removed, why not?

Does everyone realise that if you run a loss on a property (and don't negative gear) that this loss is deductible from the Capital Growth of the property when it's sold.

I look forward to reading everyone's thoughts on this.

Cheers
Robert

The Sydney "Freestylers" Group Leader.
 
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Reply: 1
From: Duncan M


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I feel we need 3-4 yrs of certainty in tax law in order to backfill, repair,
define, resolve some of the crappily drafted legislation that has recently
passed into law:

Personal Services Alienation,
CGT Discount and its effect on on non-individual entities,
GST
etc..

Calling for more change now given that we are so far out on a limb with
unclear interpretations and pending Test Cases is not what we need.

You seem to be advocating the quarantining of the loss to the eventual sale
of the property.. but I fail to see the difference between the ability to
deduct lossses TODAY from other sources of income or deducting it from CGT
due on the (possible) eventual sale of the asset. The net effect is
identical (aside from the Time Value of Money arguments).

Given the worthless squandering of our Tax Dollars on unworthy social
security recipients, and various other equally poorly worthy causes (The
Canberra Gravy Train, etc) advocating change that would result in MORE tax
dollars being collected in order to get squandered when they could be
contributing to the overvall increase in personal wealth of ordinary
Ausralians seems somewhat Marxist in its thinking :)

Duncan.





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<TITLE>RE: Removing Negative Gearing Laws</TITLE>



I feel we need 3-4 yrs of certainty in tax law in =order to backfill, repair, define, resolve some of the crappily drafted =legislation that has recently passed into law:

Personal Services Alienation,
CGT Discount and its effect on on non-individual =entities,
GST
etc..


Calling for more change now given that we are so far =out on a limb with unclear interpretations and pending Test Cases is =not what we need.

You seem to be advocating the quarantining of the =loss to the eventual sale of the property.. but I fail to see the =difference between the ability to deduct lossses TODAY from other =sources of income or deducting it from CGT due on the (possible) =eventual sale of the asset. The net effect is identical (aside from the =Time Value of Money arguments).

Given the worthless squandering of our Tax Dollars on =unworthy social security recipients, and various other equally poorly =worthy causes (The Canberra Gravy Train, etc) advocating change that =would result in MORE tax dollars being collected in order to get =squandered when they could be contributing to the overvall increase in =personal wealth of ordinary Ausralians seems somewhat Marxist in its =thinking :)

Duncan.







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Reply: 2
From: Dale Gatherum-Goss


Hi Robert!

I have mixed thoughts on this subject . . .

I do not believe that the Government will abolish the tax advantage of negative gearing because it is a cheap alternative to them providing public housing.

And, I would much rather someone buy property for the wrong reasons (tax advantage) than not to buy property at all.

However, if the Government were to remove the tax advantages of negative gearing, it would mean that a lot of unsophisticated people would sell up their IP's and I believe that property values would drop because of the extra supply of housing and lower demand.

This bit, I like.

Have fun

Dale
 
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Reply: 2.1
From: Simon and Julie M


Hi Guys

If investors were to sell up and dump IPs onto the market, prices may fall but this would also create a short supply of rental properties. Hence a rise in rents.

I'm so glad that we stumbled across positively geared property. The government can do what they like. Whatever the laws are, clever investors will find a way to make money.

Julie M
 
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Reply: 2.1.1
From: Dirk Diggler


Good post Julie. Abolish em and get the rents up to US levels. 3-5% returns are crap!
 
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Reply: 2.1.1.1
From: Kevin Forster



Personally I think the government's a little bit smarter than to abolish negative gearing outright.

The option they would go for is to not allow properties that make a loss to be offset against earned income. The loss would then be carried forward to offset future profit from the property.

So if you owned a property and it was -$1000 per year for 3 years your loss carried forward would be -$3000. Then in the 4th year, you make $1000 your loss would only be -$2000 and you wouldn't get taxed until you make a profit.

This is currently being done with primary industry investments.

The advantage of that would be that negative gearing wouldn't erode the earned income tax base. People would restructure finance to ensure neutral geared or slightly positive geared properties. There would not be a fire sale of properties and a substantial decrease in property values or supply of rental properties. Some of the two tiered marketing companies would disappear as they couldn't make a profit.

Just my thoughts

Kevin
 
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Reply: 3.1
From: Robert Forward


Hi Alan

Myself, I like Kevin Forsters posting on how losses are offset against future income on the property. As in, offset against when the property is positively geared or at sale the sale of the property.

My personal thoughts are that if any government decided to make the changes it will be a slow process of phasing negative gearing out. The government can't afford to have a collapse in the property market.

I would like to see something like this:

Year one: allow 100% deduction on property losses
Year Two: allow 80% deduction on property losses
Year Three: allow 60% deduction on property losses
Year Four: allow 40% deduction on property losses
Year Five: allow 20% deduction on property losses
Year Six: no deduction allowance for property losses.

The government could do this for in a number of ways. They could just say ALL properties will have negative gearing abolished over this period. Or they could put it that when you purchase a property the negative gearing will be abolished over this time frame.

Cheers
Robert

The Sydney "Freestylers" Group Leader.
 
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Reply: 3.1.1
From: Michael Croft


I'm glad your not my accountant Robert; I think you meant deductions, not reductions. I meant what you knew though ;^)

Michael Croft
 
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Reply: 3.1.1.1
From: Robert Forward


Ahh yeah. That is what I meant. Doh.

I did however go back in and edit the post though. hehe.

Cheers
Robert

The Sydney "Freestylers" Group Leader.
 
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Reply: 3.1.1.1.1
From: Mike .


Hi Rob,

Sorry for coming in late on this. Just recently came across this thread and thought it was a very interesting question. I had been thinking of posting something similar after reading a couple of posts from the Archive.

I'll resume my comments after you read the following two posts:

From Mark Fisher - Post 1

Re: Rent vrs Prop - Get out of Aust!!!!!

Spread your wings and see the cash come rooooling in....

Property purchases in London

1 - East end of London. Australian Dollar purchase price plus costs of 212,000. Renting at 475 (Australian Dollars). Overall yield therefore 11.6 %.

Add to this the fact that in the UK the tenants pay ALL associated tax, rates etc etc.

After ALL my outgoings (including a full time agent, and a maintenance allowance of 4% pa) I clear - positive gearing - between 625 and 700 Australian Dollars per month. I have two of these and the numbers are pretty similar.

Why does it work? Because whilst London Property prices are high, the rental yields are enormous. There are no boundaries to International Investment here.

Downside - large currency risk if the dollar/pound rate shifts plus I live in Switzerland and so have the hassel of not being in the country to control the day to day bits and pieces.

A final little kicker....many will be asking...what about the tax on the extra per month cashflow......well all I can say is that the Swiss Banking system combined with an offshore account in the Cayman Islands all makes for pretty much zero tax liability!!

Welcome to the HUGE benefits if heading offshore!! Out of the rate race here I come!

All questions welcome I am happy, pleased to help anyone who wants some more info, contact names in the UK etc etc.....

Mark

Darren - Post 2 (in reply)

Re: Rent vrs Prop - Get out of Aust!!!!!

I just returned from a holiday in the USA and in regards to property investing, I'm born in the wrong country. Loans fixed for 7.00% for thirty years, assumable loans, owner financing and no negative gearing mumbo jumbo laws, that keep rental returns at 5 or 7% (Australia). I know this is an extreme example, but I saw a 28 unit property for sale in LA for $1,200.000, with a rental return of $14,000 per month! This was a dime a dozen property advertised in the LA times.

Why is Australia so behind? Negative gearing. The first politician who says he will abolish negative gearing - he gets my vote.

.........................................................................................

Mike: Firstly, from my short time here, I agree with Mark's assessment of the London property market. I also asked some Aussie expats at work for their view. Manufactured goods and the cost of other things like public transport, healthcare, electricity, petrol all seem to be similarly priced relative to wages as in Australia (but, cars are noticably cheaper relative to wages). However, the noticeable anomoly is property prices and rents which appear to be on the high side, as Mark suggested.

An article in a local property magazine described two ways of calculating mortgage affordability:
1. Average Income Multiples.
2. Average repayments as a percentage of take-home pay.

1. Over the last 7 years income multiples rose from 2.04 times income to 2.25 times income in 2001. This shows that people needed to borrow more money in relation to what they earned than they did 7 years previously. (Mike: This is just another way of saying that property price rises have outpaced wage rises over the period. The article doesn't state it but I assume an income multiple is the ratio of the average mortgage to the average wage. This figure cannot be based on London prices alone where property prices are virtually unaffordable by most people in non-proffessional occupations. I'll come back to that in a minute.)

2. The second method, rather than looking at how much people need to borrow to buy a home, it focuses on how much people have to spend to repay that debt. And the latest index shows that mortgages are much cheaper to repay than they were 10 years ago. In 1990 the average single income homebuyer in Great Britain had to pay a whopping £71.30 per £100 of their take-home pay on their mortgage. This figure has dropped massively over the last decade. In 2001 it cost just £35.80 per £100 of take-home pay. (Mike: Again, this is just another way of saying interest rates have fallen through the floor. I vaguely recollect reading that interest rates here were at about a 30 year low.)

Mike: So overall affordability is okay right now IF you can put a deposit together. This factor is the main barrier to home ownership. Why is it difficult to save a deposit? HIGH RENTS.

Two ways to illustrate this is comparing the rent as a percentage of gross wages and, secondly, the rent per metre of floor space.

In my current situation which is a one bedder 30 mins by tube from Central London, the monthly rent is £850. The rent includes Council Tax but electricity is extra. Apart from a month's rent for bond, I paid a month's rent in advance. I also paid the RE agent 1 week's rent for creating the lease. My base yearly salary is £30,000. In Sydney, my gross salary including overnight, weekend and public holiday penalties was $60,000. (BSkyB doesn't pay penalties full stop. If I choose to work overtime shifts on my rostered days off it will be at the normal rate.) In Sydney, I could rent a one bedder for $680 per month. Based on that scenario, I'm paying TWICE as much rent here relative to wages.

The second scenario looks even sicker. Total floor space of this one bedder is 34 sq metres. £850/34 = £25 per sqm per month.
My 3 br Townhouse in Brisbane which is currently renting at $880 per month equates to $6.60 per sqm. Am I being screwed? Although we're not comparing apples with apples, ie large city v small city; 1 bedder v 3 bedder; partly furnished v unfurnished - the difference is still too great to ignore.

That's enough preamble and I thank you for your patience, thus far. What has high rents got to do with abolishing Negative Gearing? SOCIAL CONSEQUENCES - What are they? Who cares as long as my property is Positive Geared. (Should we think like that?)

Neither Mark or Darren mentioned in their posts the social consequences of high rents which is certain to happen if Negative Gearing is abolished as previously occurred in a failed attempt. A recent article in the Evening Standard had this to say:

The fast-rising prices in what were London's least popular areas will cheer the residents of Newham, Redbridge and Barking but are further bad news for homeless teachers, health workers, firefighters, transport staff and police officers.

High prices in London have always rippled out from the centre. The heart of London has been unaffordable since the late 1980s. With average prices twice what they were in 1996, some outer suburbs are already out of reach, and the rest soon will be.

The ripple effect can be seen in the move from Kensington to Fulham, then Battersea, Balham and Tooting. As we reported earlier this week, London's outer limits are priced out of reach, for renting as well as buying. Many of them are also unpleasant and even dangerous places to live.

Young key workers face choices which will soon effect us all: live even further out, at the mercy of increasingly unreliable public transport - or abandon London altogether for regions further north where salaries are similar, but house prices are less than half London levels.

They may conclude they cannot afford to stay. The question is, can the rest of us afford for them to go?

Mike: Reminds me of a story I saw awhile back on the telly regarding non-professional occupations in Silicon Valley, California. Rents and property prices were so high schoolteachers, cleaners etc couldn't afford to live there and so community services were disappearing. Those that stayed had to travel long distances to work.

In London, there are fast trains that enable people to live outside London and commute to work but is privatised and unreliable.

So folks, thanks for staying awake thru that and I'll be interested to get some views.

Regards, Mike

PS: Anyone have Mark Fisher's current e-mail address?
 
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Sim

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Reply: 3.1.1.1.1.1
From: Sim' Hampel


Brilliant post Mike... some real food for thought there.

 
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Reply: 3.1.1.1.1.1.1
From: Sergey Golovin


Mike,
In regards to public transport
Was it Margaret Thatcher who privatised all London public transport?

Even Tony Blare government admitted (first time in history) that public transport is staffed and they probably have to buy it back with massive capital injection, simply because private companies run it all down to the ground (they did not do any repairs and minimum maintenance).

In regards to negative gearing - in America rent must be high as well (in order to sustain rental enterprise). It makes very difficult to save for the deposit and also half of the workforce now is casual. As we now know, if person has casual employment or unreliable income in case of small business it makes much harder to borrow money to purchase property.

Looks like it would be more people renting in near future.
Is it good or bad? I do not know.

Serge.
 
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Reply: 3.1.1.1.1.1.1.1
From: Mike .


Thanks Serge and Sim for your replies. Obviously, no easy answers to a very complex issue.

Regards, Mike
 
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