SMH article on Saturday about negative gearing

[Tibor]

Yesterday a friend of mine showed the latest 'abolosh negative gearing' article from Saturday's SMH.

I have done some search on SMH archive and recently the following articles appeared on the subject

"Relevance Title
Negative gearing needs positive hearing
A growing lobby sees tax breaks for investors as generational perks that put property out of the reach of young buyers. Peter Weekes and Malcolm Maiden report.
Sydney Morning Herald 26/07/2003 Cost - $1.65 1420 words

A forward solution to the negative gearing imbroglio
The problems associated with negative gearing of property by individual taxpayers can be easily solved by the federal government. The government can quarantine the income and expenses related to the negative geared property business, with any losses being carried forward to offset future income
Australian Financial Review 24/07/2003 Cost - $2.20 140 words

Negative gearing just part of picture
The Australian Financial Review says in an editorial that negative gearing for property should be abolished on the basis that the housing market ``is distorting interest rate policy and forcing businesses and consumers to pay higher rates than might otherwise be appropriate" (AFR, June 23). <
Australian Financial Review 22/07/2003 Cost - $2.20 223 words

Positive side to negative gearing
I am stunned that negative gearing on property is perceived by some as a subsidy. Debt used to purchase an investment or run any business to derive profits is tax deductible. Property should be treated no differently. Property investors pay a raft of taxes and charges not paid by owner-buye
Australian Financial Review 18/07/2003 Cost - $2.20 146 words

The negatives of negative gearing
When a large proportion of those with rental properties are using their tenant's income to buy property, to say that landlords are investors is bending the truth. In all other markets, investors use their own money, or pay market price to use other savings, when acquiring assets. To claim the pro
Australian Financial Review 17/07/2003 Cost - $2.20 227 words

Negative gearing
Your editorial agrees with the Australian Council of Social Services that the negative gearing tax rort should go, but criticises the uses to which we would put the revenue savings (``Negative side of jumping the gun", AFR, July 10). For more than a decade, ACOSS has publicly advocated the a
Australian Financial Review 15/07/2003 Cost - $2.20 159 words

Positive alternatives to negative gearing
In today's housing market, it's the capital gains tax concessions that make investing in property attractive, a study has found.
Sun Herald 13/07/2003 Cost - $1.65 763 words

Putting a block on negative gearing - would it pay off?
The tax break that favours property investors is disadvantaging people looking to buy their first homes. Peter Weekes reports.
The Age 12/07/2003 Cost - $1.65 1393 words

Forever blowing bubbles
Alan Kohler examines whether negative gearing is distorting the property market and leading to a bubble in investment property.
The Australian Financial Review 12/07/2003 Cost - $2.20 1570 words

We all pay for negative gearing
Simon Crean's instant dismissal of Mark Latham's eminently sensible position on reviewing negative gearing condemns Australia's miners, manufacturers and farmers to a further period of noncompetitive export prices. So long as the Reserve Bank maintains its high interest rate regime compared to
Australian Financial Review 11/07/2003 Cost - $2.20 202 words "

It is interesting to see just in the past fortnight how many articles are about the 'negative aspects' of negative gearing.

A possible solution for the dilemma of the Reserve's problem regarding to the artificially high intesret rate here and the effect of it on the dollar and exporters, should be a restriction of negative gearing. It would put an end of the current boom.

The point I am making is not the wrongs or rights of having / not having negative gearing, but the recent seemingly strong push of changing the rules and potential implications for RE investors.

Just to think of something.


Tibor

 

[Pete]

Tibor,

Food for thought, indeed. Thank you for posting those items.

The big picture needs to be considered.

Large changes to negative gearing would be very far reaching. Even "small" changes could be big!

On a particular detail, those who pre-pay substantial amounts of interest might be in an advantageous position in the event that legislation changes? For one year anyway.

I'm farily aggressive with my gearing and investments, but still maintain some prudent reserve and capacity at all times. As changes occur (legislation, the market cycle, interest rates, the economy, whatever), many others will be less well prepared.

It is always interesting.

Regards,

 

[brains]

I see negative gearing as the same as claiming business losses or expenses. If they tamper with the current neg. gearing setup the results will be devastating to the property market with so much of it owned by investors. I reckon most investors will rush for the exit with dire consequences.

 

[Fester]

Before I got into property investing I was a share trader. I had margin loans, the interest was tax deductible. The broker fee was tax deductible. I traded over the Internet so a proportion of my ISP fee was tax deductible. If I made a profit when I sold my shares or received dividend income I paid capital gains tax.
It ran as a business. Property investing .. no different! Bashing negative gearing just seems to be the flavour of the month at the moment! And the financial journos love it!

 

[MarkB]

Negative Gearing....

Fester has a point.

It is a cycle and at the moment the spotlight shines brightly, for better or for worse, on NG.

If I had one semi-informed observation it would be this.

As I understand it, a review of NG is not on the government's agenda

(quite the opposite, there is desire to cut income taxes - and we aren't talking pissant little bracket changes like in the last budget).

So why don't they just do it? you ask....

Because of politics. Simple as that.

Cutting the income tax rate for "high earners" would be politically very difficult... the senate (greens / dems) would chuck a fit.

Plus, the ALP would have a field day in any election campaign (though they'd probably still stuff it up).

This despite the fact that to be in the top marginal bracket (47 cents in the dollar, plus the medical levy) you only have to have a taxable income of $62,500 - hardly the stuff of high-flyers. In fact, it is about 1.5 times Average Weekly Earnings (AWE).

Another problem for the Govt - they'd have to work out who else they can tax to pay for the fall in revenues.

However, NG is a tax-break vehicle. It works for all income levels, but more so for those in the top income tax bracket.

A true story..... A generation ago to be taxed at the highest marginal rate you needed to earn an amount roughly equivalent to $250,000 pa (in today's dollars).

FYI - In the US, the top marginal rate kicks in at over $250k (US) and the top personal income tax rate is 38.5 cents in the dollar.

Mind you, the IRS website is a bit hard to navigate.

MB

 

[Aceyducey]

I agree it's a cyclic thing....

Hopefully they'll get back onto bashing the criminal holes in GST (such as on feminine hygiene products) where a change would be to the community's benefits.

I have to say though, if negative gearing gets abolished this will mean that a LOT of people will have to sell up because they cannot afford the repayments - even with historically low interest rates....

What would this lead to?
- Massive downwards pressure on property prices
- Massive upward pressure on rents
- Increased pressure on the government to support low income earners through rental assistance
- Reduction in household discretional income
- Loss of consumer confidence

Enough to send the country into a major recessions I would think, if not a technical depression.

Perhaps they could cut the concession for negative gearing rather than abolishing them....adding tax complexities, still driving many people to sell, downward price pressure, upward rental pressure, etc, etc & causing a recession.....

And what actually would the removal or reduction of negative gearing tax concessions achieve? I don't see much upside really

Which pollie would dare to do this once they've fully grasped the implications? Not one seeking re-election!

Cheers,

Aceyducey

 

[brains]

Mark Latham started the whole thing a few weeks ago (i think it was his first day as shadow treasurer ).

His reason for wanting to abolish NG is that he says investors are largely to blame for the property price boom and making it almost impossible for young couples to afford housing in Sydney by creating such demand.

Investors have done this because of the attractiveness of NG, so the benefit (to him) of aboloshing NG is that it will kill demand for property and stop the rise in prices in its tracks, therefore allowing those people to afford property that previously never could.

Personally i think demand is waning anyway as rental yields are getting terrible everywhere and most investors realise that a 2.5%-3% return is not on regardless of future cap. growth which will be pretty lame anyway in the next 5 years.

Besides that i think the CGT discount makes property more attractive to a lot of investors than NG.

 

[see_change]

Acey

What it would achieve is some bargain buys for those who are cashed up or who have bought cash flow positive poperties ( so they can afford to hold them ) and take advantage of the increase in rents, which will occure for all of those who are not in a position to buy their own house.

When Labor Voters start complaining about the increase in rents , negative gearing will come back , and those with the foesight to buy ( many on this forum ) will make a motsa.

Well that's what happened last time, or so I've heard.

see change

 

[Aceyducey]

See_Change,

shhhh

Don't tell the whole forum or EVERYONE will start using common sense investment strategies

Yup - it would occur very similarly to 85-87.....

Cheers,

Aceyducey

 

[multi]

It seems like somebody is desperate to scare people off property investment.

Last year journos were scaremongering us with expected interest rate rise. Turned out to be a hoax.

Then was infamous RBA warning (amasingly I do not remember any RBA warnings on overheated share market).

Now neg gearing abolisment ghost is revived. (It is interesting nobody wants to analyse past experiences of such idiotic moves).

It is clear that interest rates will go down and we are not going to see any "high" interest rates in our lifetimes. Quote from NAB chief economist Alan Oster (today AFR, S8):

"The sort of calculation we have worked out is that by the time you get to a cash rate of 6.5% you are taking as much money out of household sector as 18% used to".

Same with neg gearing abolition - touch it and the whole economy will collapse in a heap.

I feel really sorry for naive people who would defer their entry in PI because of those media hoaxes.

Having said this, I fully support the view that unit market is heading for a spectacular crash - oversupply is toooo evident. On the other hand we have severe land scarcity in SYD and MEL. Just a quote from SYD local real estate agency newsletter:

"It is now common practice with land being so scarce that people are buying old run down cottages, demolishing and building. Average cost of purchase $480-520K, building cost $250-350K, total cost over $800K. And believe me, there is no shortage of buyers..."

 

[Aceyducey]

BTW, though I do not believe that an Australian government would be politically prepared to abolish negative gearing in the current climate (more people exposed than ever before), this doesn't mean I'm a fan of negative gearing.

Give me a good positively geared property any day!

It puts dollars in your pocket, doesn't cut into your serviceability AND you are insulated against any alteration in provisions for negative gearing as a bonus!

Cheers,

Aceyducey

 

[geoffw]

While I am ideologically a labor party supporter, my contacts from within the ALP indicate that there is dissatisfaction with negative gearing, which is seen to be a tax concession for the rich, and a way for them to build their wealth at the expense of the ordinary wage earner.

Though I guess many withion this forum are ordinary wage earners.

It is acknowledged that the last attempted abolition of negative gearing was not well implemented- but the powers that be are looking at the possibilities.

I guess, for those positive gearing advocates- "negative gearing" does not merely mean that you just declare a loss an pick up half of the loss back in tax benefits. Even in a positively geared property, many investors would be getting back a lot of benefits in depreciation tax benefits.

 

[Tibor]

Geoffw,

I am not trying be personal or form a party lines based opinion, but the point you made shows to me the very short sightedness of our politicians who support the abolishment / severe restriction of negative gearing, as it is for the rich.

It might worth to consider that there are several average blue collar workers (I know at least a dozen) who have properties as a long term security (their superannuation guarantee savings hardly worth anything and going down after being 'managed' by fund managers) and getting scared what is going to happen when they retire or loosing their jobs.

Their wages is enough for them to live on struggle street and several cases permanent overnight shifts, working as many extra hours (overtime) as they can, that allows them to go a bit ahead. Their take home pay is not so much, as the living daylight is taxed out of them by various levels of goverments.

What the goverment is 'loosing' today will gain tomorrow, by having more people to support themselves when the boomer train wreck reaches the retirement station en masse.

By taking away / reducing effectiveness of another 'loophole for the rich' will achieve;

- smart investors will become rich / richer, as the not so smart ones will not be able afford to loose real money every week
- even less incentive for people to save with its own very serious problems for the economy, especially in longer term
- more people will require more goverment support in retirement
which is already very seriously underfunded

Maybe some of this people should read RK's Rich Dad's Prophecy
in which RK pretty well describes what can happen if nothing changes.

Sorry, but I could not resist. As I said, it is not personal or anything similar, but I happen to have a very strong view on it.

As an investor of positively geared properties (and also knowing that the world did not collapse in the US when negative gearing was restricted), the greedy part of me would love to see severe restrictions being brought in, as this would make me (and my guess that lots of other Forumites as well) very wealthy people, albeit I know, it would also cause lots of pain and suffering.

The social animal in me would rather be happier to see that a wider range of people would succeed in RE and rely less on government handouts in future.

Tibor

 

[MarkB]

While I think it is very wise to keep abreast of what the ALP has to say on this matter - it is all conjecture.

The ALP can look at the possibilities all they want - they may even form some concrete policy (that alone would be a significant achievement for them, communicating that to the voting public is another significant challenge).

But, at the end of the day, the ALP is still at least a term and a half (5 years) away from being in power.

Who knows what could occur during that time? The property market could be completely different (no doubt it will).

fyi:

The next Federal election (full HoR, 1/2 Senate) could be called as early as Saturday 7 August 2004

and no later than:

Saturday 16 April 2005 (not quite 3 years and 3 months since the first sitting of this current Parliament).

Personally, while Johnnie H is in the Lodge I wouldn't give them a snowballs chance in hell.

MB

btw - I'm not a member of any political party.

 

[Les]

G'day MB,

A true story..... A generation ago to be taxed at the highest marginal rate you needed to earn an amount roughly equivalent to $250,000 pa (in today's dollars).

And that's about 6 times average wage - near enough??


I read that in the 50's a person had to earn EIGHTEEN times average wage before they were taxed at the highest Marginal rate !!!! (about 60% then, if I remember correctly).

Things have changed SIGNIFICANTLY in the last 50 years - I think it's called "user pays" (again, and again, and AGAIN, and ...) Oh, for the "good old days".......

Back then, a single working parent could support a family of 6 - 8 kids... Things have certainly changed (Never did hear the Tax scales from the 20's - my Dad was one of 13 children - had to be GOOD!!!)

Regards,

 

[Kevmeister]

Let's not forget that it is possible to also "negatively gear" shares if you are buying growth shares with poor dividends, and whilst I don't know the likelihood of neg gearing being abolished or reduced, I find it highly unlikely they would ever allow it for one form of investment and not the other.

Abolishing negative gearing would do one positive thing for me: it would make it far easier for me to decide that my [future] investments should be held in a trust since they don't "lose out" on the negative gearing benefits