Will Negative Gearing rules be changed

[Piston Broke]

I posted in another thread "You can't change economic factors for long" without paying a price for it.
A cornerstone of our economic system is:
An expense incurred in making income is tax deductable.
If you remove this for a select group of people or situation, then our system will become unstable.

Now to be precise NG was'nt actually abolished, just "quarantined against other income". Very big difference.
The ATO though has pretty much used this for a lot of other income sources since achieving a similar effect ie more revenue other the last decade.

Will it go back to that? Well maybe, as this applies for many "on the side" activities already.
Will they make it offset against CGT? Also a possibility.

The net effect is that people are paying to own IPs (not really investing).
The problem for the gov is that from their POV they will never see revenue on the gains of property never sold unless they tax ownership, which seems a little harsh.
So if you have a situation where people are stuck paying a house for 20yrs and it's too expensive for them to sell (as they realise their losses), and house prices don't increase relatively much, then gov revenue declines.

So out they come with a million reports on how to squeeze a few extra dollars out of those who may have some.


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Just read geoffw's post below:
Though the effect it would have nowadays is much less than it had then, and would only affect fairly high income earners out there.
And this is what may make it a good case of "tax those rich SOB landlords" for the communist good that may appeal to some.

 

[geoffw]

There's a discussion of negative gearing in Wikipedia, which includes a paragraph on when changes were made. (Yes, I know Wikipedia is not authoritative, but there's not a lot of material our there). Note that, according to this article, it was not abolished, merely quarantined. That means that expenses could only be claimed against rental income, not against other income. Foreign investments were also treated like this for many years afterwards- foreign expenses could only be claimed against foreign income.

For me, the question is not if negative gearing was abolished, but what would happen if circumstances chaged?

For instance, we've seen the top tax bracket drop over a period of time, and some of the higher tax coming down. This may well have affected some of us.

In switching from a salaried job to a business, my personal income has dropped substantially, as we've expanded and put money back into the business. That has meant the negative gearing just does not apply. I don't earn enough taxable income for the expenses to reduce my tax.

So the question must be asked- what would happen to my investments if circumstances changed? A change of government policy is only one of many scenarios. We would like to think that it's not likely, but it is a possibility. Ideally, we should have had some idea of how we would cope with those scenario changes.

Edit- crossposted with PB- he covered a couple of my points.

 

[alexlee]

When they quarantined property losses as its own income type, how was negative gearing for shares treated? Was property income/losses segregated separately, and ng for shares continued to be calculated as ordinary income?

 

[Sunfish]

With some commentators believing that negative gearing is the main reason for higher property prices and the fact that the government is in defict, will Rudd make the call and abolish or alter negative gearing on properties?

Abolishing it would be a blunt instrument with even worse consequences now than when they last tried it.

A little more subtle change would be to mandate lower LVRs. If they mandated 80% max the pressure on prices from investors would lessen (why is that bad for investors) and the leakage of tax revenue would reduce more than the 10%. That is a guess, I'll admit, but I'm not Mr Henry. Just an example of what is possible.

 

[willair]

When they quarantined property losses as its own income type, how was negative gearing for shares treated? Was property income/losses segregated separately, and ng for shares continued to be calculated as ordinary income?

The 1985 legislation did not extend to non-property situations such as negatively geared share portfolios..willair..

 

[Sunfish]

When they quarantined property losses as its own income type, how was negative gearing for shares treated?

Neg gearing shares is widely considered speculative and the max you can borrow on BHP is 75% (approx) anyway, so the tax leakage from that source would be minimal.

 

[alexlee]

The 1985 legislation did not extend to non-property situations such as negatively geared share portfolios..willair..

So negatively gearing shares still went under ordinary income. Were there specific rules where, say, someone refinanced property and used the proceeds to buy shares?

 

[willair]

So negatively gearing shares still went under ordinary income. Were there specific rules where, say, someone refinanced property and used the proceeds to buy shares?

Alexlee,i'm not 100% sure how that worked back then as i only started around 1989 in the equities markets,but you also had capital gains tax kick in also on 19 th september 1985 just after Paul Keating abolished the tax deductibilty for neg geared property and from experience that affected everyone not only property investors,all that plan by Mr Keating did was push up property prices and rents..imho..willair..

 

[WinstonWolfe]

There's various tinkering options being discussed in the media currently.

- like Super contribution caps, put a cap on how much ng an individual can do. Interestingly some are blaming Labor's capping of Super contributions, in addition to post gfc share market shy investors, for directing more capital towards PI ng.

- only allow ng for new property.

Personally, I think govt will tinker soon.....Labor will keep the focus on hospitals and migration until after the election though, and after they win, then I expect them to make a very quick decision to cap ng. I obviously don't think Tony Abbott has the popularity to win the election.

There's no doubt ng has blown out into something govt never intended. ng tax deds have grown at an annualized rate of 40%pa.

Some argue it is a myth that rents will skyrocket if ng is removed because PIers will withdraw from new construction. They argue instead that rates were at an all time high and oo's and pi'ers cut new construction to the same degree.

Tim Colebatch made other good points here recently.

 

[Piston Broke]

All this needs to be placed in context.
If rising rates, rising inflation, rising RE prices was happening only in Australia then you can isolate events and lay blame.
My recollection is it was'nt. It was global ie the whole oecd.
Australia has never lead the way in hardly anything on a global scale.

 

[JamesGG]

If Henry argues for a change of the negative gearing rules, there is a more likely chance that Rudd and Co will follow that advice as it gives them some economic argument and thus politcal capital to go through with it.

The Labor Government already voted, before they received the Henry Report, to completely ignore some of the likely recommendations. So, particularly given that this is an election year, I don't expect that a recommendation from Henry will count for much if the Government advisors believe that it will hurt them in the polls.

 

[Graemsay]

Henry himself has made comments about the tax system as having different rates depending on the form of savings in a speech last year, and Ross Gittins commented on here.

Henry calculates that, at present, for a middle-income earner on a nominal marginal tax rate of 31.5 per cent, the real effective marginal rate of tax is minus 40 per cent for saving through superannuation, zero for saving through paying off owner-occupied housing and plus 54 per cent for saving through bank accounts.

The tax rate on saving through ownership of rental property is plus 24 per cent if the property is owned outright, but minus 22 per cent if negatively geared. The tax rate on saving through listed Australian shares is plus 10 per cent if the shares are owned outright, but minus 35 per cent if negatively geared.

And here's a handy graphic from the original speech.

I suspect that Gittins is on the money with his conclusion.

I doubt if Henry would be pointing to these hugely anomalous results if he wasn't intending to propose that something be done about them.

KeithJ's comment about hurting the retirement provisions of the Boomers missed the point in some ways. It'll be Generations X and Y who ultimately pay for it either through higher house prices or taxes.

Given that senior politicians are Boomers, I can't see them being keen on being less wealthy. But unless they want some serious inter-generational problems, I think that there's going to have to be some redistribution. (See this article and this review from the UK.)

 

[Ms Jade]

Well they've started tinkering with super despite the unpopularity of it so I can't see that as an impediment. The thing that concerns me is I can't remember hearing ng get so much press during the last boom. That "nasty negative gearer next door" sentiment is rife. Of course, you can't tinker with one part of the investment landscape without affecting the rest. The super contributions decision was one way of making gearing into property more attractive but so too is the ability of super funds to gear into property. I'd be interested to know how many boomers with considerable super balances have started doing this. Dunno what they thought the result would be.

I doubt it would be that unpopular to target ng if it's only 10% of taxpayers. The other 90% are hysterical about their children not being able to buy a house. Now that the guv'nah has hitched himself to that wagon, and availed us of his religious beliefs, I'm thinking that he's started seeing himself as a moral crusader (Not exactly part of the job description). When people like Stevens & Henry seem to be singing from the same hymnbook as the tabloid press it should be cause for concern. I would be quite surprised if there were not changes coming. For my own sake I hope they don't wipe out ng altogether but i guess time will tell.

 

[jingo]

The thing that concerns me is I can't remember hearing ng get so much press during the last boom. That "nasty negative gearer next door" sentiment is rife..

Have to agree. It is hysterical at the moment!! I remember reading lots about the affordability problem during the mini boom in 2007, but investors seem to be being targeted this time round.

People get emotional when they see a FHB not being able to enter the market (well the inner city market anyway). I read an article yesterday that mentioned the extra $ real estate agents were earning from the current boom. In the next sentence, the journalist compared the extra $ to the average earnings of a FHB - making out that agents were very greedy and out to take advantage of the average wage earner. Emotive writing!

Of course, you can't tinker with one part of the investment landscape without affecting the rest...

Yes, this is true. Will be interesting to see how the market is affected if there are changes to -ve gearing. I guess we will have to wait and see!



Regards Jason.

 

[HiEquity]

Removing NG would be fantastic! Rents would rise a heap, greatly increasing our income. With fully drawn LOCs (and those funds sitting in other banks), the opportunity to go shopping for bargain IPs that actually make money would be "once in a lifetime" as most just give up this investing idea as a dud and dump their stock.

Such changes don't actually change the overall situation - they just involve a wealth transfer. The real question is how do you, as an investor, get yourself on the side of where the wealth is transferred to rather than from?

For me, the ability to hold your breath (and your nerve) while you wait for rents to rise and bargains to eventuate is critical. If you're heavily NG'ed that will be difficult but if you have strong cashflow already then you'd be laughing at all the good buying out there.

Yet another advantage to having strong cashflow and large buffers in place to be ready to pounce...

 

[jingo]

What I think this will come down to is the fact I feel the government will need more money to fund the debt that they put us in. The government won't raise income taxes (rather not move the rates for years), it'll be nearly impossible to increase the GST rate. Yes they will probably give us new taxes (ETS), but I feel this government will need every dollar they can get. Due to ideolagy, it's not too far fetched to see negative gearing abolished (though it probably won't be raised until after the election).

.

I have read that the government doesn't loose as much money from -ve gearing as is commonly thought. There was a book that I read (I think by Renton) that explained that the government recoups some money by taxing the income that the banks receive as interest from the bank loans used to fund -ve geared investment properties. I have never read this point in the media articles on -ve gearing.

Does anyone have any thoughts on this?

Regards Jason.

 

[Piston Broke]

I did'nt think of it would happen, but looking back the last few yrs and the more I think about it, and as I look at it from the POV of "why should it happen" I'm starting to see a possibility.
"Other" income is already compartmentalised so why should'nt rent be also?
The hysteria is in those saying it was "abolished", when it really was'nt.

Removing NG would be fantastic! Rents would rise a heap, greatly increasing our income. With fully drawn LOCs (and those funds sitting in other banks), the opportunity to go shopping for bargain IPs that actually make money would be "once in a lifetime" as most just give up this investing idea as a dud and dump their stock.

What would happen is all those on high LVRs paying to own property will suddenly have no cashflow and be forced to sell up in a 2-3 yr timeframe.
Their investments become liabilities, with expenses only deductable at sale.

If the RBA was to implement a plan to make most of those property buyers (who he thinks made more than their fair share of CG) work like slaves to pay them interest, this would be ideal as opposition will be much less these days.
The majority of those who bought in the last few years for CG on negative cashflow will be squeezed into financial submission and paying their dues for any "easy" gains they may have had.
And of course, just to make sure nobody gets it easy... interest rates must go up for whateva reason they deem.
And given my other posts on that matter, it just makes sense for them to do so imo.

I'm of the opinion that they are there as a cartel with the big 4 to make money. Nothing else.
All the decisions they take are for one reason only, make more money and avoid losses.
Glen Stevens stated that home owners can afford to pay more, so rates are going up. All these gains they cannot expect to keep, the big boys want their cut, and they're coming to take it.
For anyone else it would be a racket, for the RBA banks it's standard business. Most high LVR investors will be squeezed, just not hard enough for to many to go broke, until prices rise and the banks can cover their loans when they sell.
So as much as I despise them, I have no choice as an investor but to follow what they do.
And work on the assumption that they are out to screw me into spending my whole life working to pay interest to them.
It does'nt matter who's in gov they come up with whateva excuse they need to persue their agenda.
"Interest rates to most borrowers nonetheless remain lower than average. The Board judges.... it is appropriate for interest rates to be closer to average. "

Sure agree with HE on this.

For me, the ability to hold your breath (and your nerve) while you wait for rents to rise and bargains to eventuate is critical. If you're heavily NG'ed that will be difficult but if you have strong cashflow already then you'd be laughing at all the good buying out there.

Yet another advantage to having strong cashflow and large buffers in place to be ready to pounce...

Yes it's a great thing when market interest rates go to 9-10% in the space of a couple years and all the LMIers get foreclosed. Those who have real wealth ie equity will be back in the drivers seat. It's just a matter of time.

Now back to work...

 

[WinstonWolfe]

another solution being bandied around focuses on a lack of supply being the reason for higher prices. a successful solution will entail stimulating supply.

this could be :

- as I mentioned above, applying full ng to new construction only, and scale ng down for existing.

- remove gst on construction for a few years.

 

[joeExpat]

Rental prices increased immediately and there was a massive shortage of investment properties and a rental crisis.

The government had no choice but to re-introduce negative gearing again

urban myth... never happened.

apart from new builds for which ng could possible remain.. removing the distortions that negative gearing creates would be a positive step for Australia.

 

[alexlee]

urban myth... never happened.

Possibly, but perception is often more important than truth. If the opposition can spin it well enough, people will believe it. Even more imporantly, if Rudd and co think that the masses believe in it, and/or that the opposition can convince voters of it, then they won't take the risk.

Regardless of whether segregating ng resulted in higher rents and a shortage of IPs, the fact is that ng was reinstated. I would think because there was a ton of political backlash. Whether that was because of real effects of segregating ng or because of hype, the political backlash was real.