Listening to you comments on ABC's AM today, I was quite taken back by your suggestion that business confidence would be rocked, should the budget measures not be implemented, as a loss in confidence in the business sector could lead to a lack of investment, investment that often, brings with it, among other benefits, tax right offs, in other words, negative gearing.

So, please explain this, as you are a long term critic of negative gearing, please tell me, if you were granted your long pleaded gift, to remove NG, what effect do you think that would have on business confidence?

I'm sorry, but you can't have a foot in both camps, so either you are pro investment, which comes with NG, or you are not.

Which one is it?

As a frequent poster on OLO, I have posted this letter there for others input and opinions.

Thank you for your time.

Perhaps they should remove negative gearing from domestic housing as this will reduce the cost of housing.This will have to be done in stages.

We have to get Govt out of profiteering by limiting the supply to keep land costs high. Apparently a lot of overseas investment and self managed super is driving our prices way too high.

This is how the vast majority of people accumulate funds, by legally robbing other people via exorbitant real estate prices. This makes the already quite well off, even better off. It also makes it near impossible for financially unestablished people to effectively accumulate funds, other than by the highly inefficient and ineffective method of saving one's wages. That's capitalism.

so either you are pro investment, which comes with NG,
rehctub,
This is exactly what will change eventually through sheer necessity. How would you it wouldn't work ? Have you ever gone witha flat tax ? You know the one where everyone pays the same rate no if's no but's ? Don't say it won't work just because you're stuck in that old rip-off system that made so many totally undeserving & incompetent operators wealthy.
You don't need to be a manager when all you need to do is write everything off ? A real manager can do that without write offs. Just look at your average working class family how they manage. They manage multiple times better than our so-called business people because families don't have that license to exploit that system.
As I said, necessity will bring us a flat tax eventually. The real success managers will defintely dwindle rapidly in numbers.

I was wondering why anyone would want to buy an investment property without negative gearing?
If negative gearing was stopped, then many people wouldn't buy houses or units for investment.

Where would people find houses for rent then?
It is extremely hard to find houses for rent as it is, and state housing is only available to very low income earners.

If negative gearing was stopped, then many people wouldn't buy houses or units for investment.
Suseonline,
Well, I think if NG were to stop more people would buy accommodation rather than rent. Would the developers be game enough to try ? Of course not, that's why they're pushing so hard for NG to remain so that they can profit from the taxpayers forking out for them instead.
Why are so many people always harping on about fairness, level playing field & all that warm n'fozzy rhetoric but mention real fairness & level playing fields such as flat tax & no NG & they predict the end of the world. It's not, it's protecting a greed-based system for the greedy by the greedy. It's easy to have a million Dollar boat in the marina when it hardly cost you anything because the working class taxpayer foot the bill. Ah, yes the AWU etc really did a great job protecting the greed mongers who have ruined so many economic success stories.

"Rechtub", what I was saying on the ABC yesterday morning was that there was a risk that if the impasse over the Budget continued, business might come to the view that the present Parliament was no more capable of managing the nation's finances than the previous one, and that that could in turn result in a deterioration in business confidence, with adverse consequences for employment and investment.

I wasn't advocating for the passage of any specific measures in the Budget. It's not the failure to pass specific measures that risks endangering business confidence, it's the inability (so far) of the Parliament to pass a package of measures that puts the budget 'on a credible path back to surplus' (in the Prime Minister's words).

In the interview I recorded for 'AM' I said that one of the options open to the Government was to recast the Budget in order to achieve the same 'bottom line' objectives with a different combination of spending cuts and revenue measures. Although I didn't say it yesterday, I would certainly support the abolition of negative gearing as making a useful contribution to reducing the budget deficit.

I agree that 'negative gearing' DOES encourage investment. Unfortunately, the investment it encourages - which is, overwhelmingly, the purchase of existing housing - does nothing to increase the supply of housing, but serves merely to inflate the price of exisiting housing and thus worsening affordability conditions for would-be home buyers.

To the points made by "suseonline" and "individual", if negatively-geared investors didn't buy dwellings, then those dwellings would be bought by people who are currently unable to compete with negatively-geared investors. The supply of rental housing might drop - but so would the demand for it, and by an equal amount. So what's the problem?

Anyone who believes that expotential growth can go on forever in a
finite world is either a madman or an economist.
Kenneth Boulding

There is a solution to the problems for the younger generation introduced by negative gearing.

Every house or unit could be treated as a separate investment entity. Interest deductibility after the first two years could be limited to the net rental income. There could also be a limit on the number of housing units an investor could participate in.

It is ridiculous that Nick Xenophon can own nine houses or units. Senators are supposed to serve their constituents not be their landlord.

While on the subject of rip offs why not comments on franked dividends.

Shareholders enjoy the benefits of having a company they invested in treated by the law as a separate entity. If it is a separate entity in law why is it not a separate entity for tax purposes.

Neglecting surcharges, an investor deriving all income from franked dividends and receiving $100,000 per year from that source receives a tax refund of over $2,000.

My calculation is as follows;
For an income of $100,000 from franked dividends the franking is $42,857.Taxation has to be calculated on $142857. That calculation is:-
Tax liability = $17547 + 0.37 x (142857 -80,000) = $40,440. Deduct the franking credit and the taxpayer receives a refund of $2053.

What is fair about that compared to someone who earns their income by actually working to produce something worthwhile.

Sorry my calculation contained a subtraction error.
The refund is $2417.

Wow! pretty impressive rehctub.

You write a letter to Saul Eslake. And the man himself drops in to answer it. You have some real sway,eh?

Individual, there are many people who will never be able to afford to buy homes, so rental properties will always be needed.

I doubt the Government would allow negative gearing if not for the need for rental properties ...otherwise they would have to build more state housing.

SPQR,

Saul and Graham have an association I think.

Saul,

Excellent response.

...Suse, did you read it?

The last time negative gearing was removed they had to bring back a year or two later.
Perhaps the number of investment houses that were put on the
market were not cheap enough for those that rented them.

The "real" problem is the very system that allows wildly escallating property prices in the first place. Negative gearing is merely one of many symptoms of that corrupt system.

We have quite strict controls, and rightly so, over what we pay for many things in life. But property is unfortunately exempt. Basically you can name your own over inflated price, and if someone is willing to pay that price, you immediately profit. That's why property prices are a scandal of manipulation and greed, and not just now --- it goes back to infinity. The reason this corruption is so popular "these days" is because the middle class profits (forget about the mega rich millionaires, as they'll make millions elsewhere if necessary). It enables middle class people to build big wealth, that they would otherwise never, ever have. It enables them to have that level of wealth without lifting a finger in actual "work".

It's a corrupt system that advantages the middle classes and wealthy, and throws the less well off who can never, ever get a foot in the door, onto the financial scrapheap. And hardly anyone gives a damn, because they all want to have at least the opportunity to build great wealth without actually working for every dollar gained.

It's a system of wealth building that's based on the very definition of corruption. But society accepts it, approves of it and encourages it.

"Bazz", the reason that 'negative gearing' was brought back a short period after having been abolished in 1986 was in response to please from the NSW Labor Party which was about to lose the 1988 State election. Ever since then, defenders of NG have pointed to what they say happened as a result of its temporary abolition - that it 'caused' a surge in rents, and that the same thing would happen again if NG were to be abolished again.

Rents did rise in Sydney and Perth at this time - but that was because vacancy rates in both cities were less than 2%. In other words, rents would have risen anyway, whether NG had been abolished or not. If abolishing NG had been the 'cause', rents should have escalated in other parts of Australia as well - but they didn't.

So this assertion by proponents of 'negative gearing' is actually an illustration of what Josef Goebbels is supposed to have said, namely that if you repeat a lie often enough, and the lie is big enough, people will come to accept it as the truth.

And yes, as "SPQR" says, I have known Graham since the early 1980s.

Ee gads! Paul, confusing Poirot with me --what a put down.

True, Saul.

I was house hunting for a rental in Perth in early 1986, and it was woeful.

I think the vacancy rate was about 0.7% at that stage.

SPQR,

Being mistaken for Poirot is the best compliment you'll get all day

: )

POIROT RULES.

My apologies to both "SPQR" and "Poirot" for confusing them

No worries Saul, Poirot was confused long before you showed up

And SPQR remains confused.

Saul,

I hope you'll excuse our childish banter here.

SPQR and Poirot are old sparring partners.

Ouch! that hurt Jay123.

And here I was about to write something nice about you on that other thread (Cutting the grass in the theatre of war : Comments)
And would have done so already, if only that dastardly posting limit hadn't scuttled me.

I was going to write your post <<People here's some news for you ...BOTH side are wrong>> was eminently sensible ...now I'll have to review that.

Ouch, that hurt SPQR.

But at least you have the sense to support my marvelous comments on other subjects.

there are many people who will never be able to afford to buy homes, so rental properties will always be needed.
Suseonline,
Only a moron would not agree with that. Give me one reason other than greed why rental properties should be built by taxpayers supporting the owner. Will the owner give that money he wrote off give back to the taxpayers ? Has this happened as yet ? I don't believe I have heard of this if it did.
If someone wants to make money out of providing accommodation they should do it at their own expense, after all they're the ones making the eventual profit.

Only a moron would provide rental accommodation 'at their own expense ' for others without getting anything out of it Individual.

Why else would the Government provide tax relief for people who buy investment properties?
Where else would they come from?

No one answered my question on another thread;
Why should property investment be treated differently to other businesses ?

Firstly, thanks Saul for participating, your input and knowledge is much appreciated and, if I misunderstood your statement to the ABC, I apologize.

This is my take on NG.
If we remove it there is only one potential gain, and that's a drop in house prices, perhaps making housing more affordable for some.

The potential losses on the other hand are huge.

Rents will increase as investors will stop buying.

The building industry will be decimated, along with every support industry right from planning, auditing, supply and training.

The other potential problem could be a tightening of bank lending as bank currently draw comfort in knowing that investors are there to pick up the pieces when owners loose their properties, as banks often factor in a loss when repossessing a property, without investors out there, the potential buyers are far fewer.

My fear is that banks may well demand a 20-30% deposit again, meaning anyone who can't afford a house at 5% deposit will still be out of the market as they won't have the deposit.

Now some say middle class are ripping of the tax payer. Well yes, perhaps they are, but, at the same time they are also securing financial independence which means they will not be a burden to the tax payer come retirement.

Perhaps one should be made to demonstrate that the investment will be profitable within a set time frame, much like a small farm.

A rule was brought in that these small farms (known as queen st farmers in the 90's) had to show a way to a profit within (I think) five years.
This was one loophole that was closed.

Perhaps this could be considered because the abusers of NG are those with ten properties, each with 80% debt.

Saul, I was of the opinion that rents increased sharply in all major cities when NG was abolished.

At the end of the day, the removal of NG will see few winners, but many losers, so careful consideration would have to be given, but tightening the rules may be the way to go.

Why else would the Government provide tax relief for people who buy investment properties?
Susonline,
I see you're not getting it. There should be no tax relief in the first place Tell me one good reason why one should have to pay less tax than the other ?
This crook system is the heart of the problem, the inequality, the rorting, the whole show is nothing short of criminal.
I got a car but I don't ask anyone to subsidise me for the running costs. The whole thing is that taxes should not be so high in the first place that relief is required.

The potential losses on the other hand are huge.

Rents will increase as investors will stop buying.

The building industry will be decimated,
rechtub,
You're just wrong on that but you're not game enough to try it for fear your profits might drop from 45 % to 35 % or so.
Whatever industry slows another will establish, it's called economy. An economy doesn't run on profits it runs on the money going around. What you perceive as economy is making unfair profits by having others foot the bill. That's not an economy, that's ruining an economy or haven't you noticed yet how many businesses have gone to wall because of it ?

Indi, you and I both agree a better, fairer tax system will solve many problems, but not a straight out flat tax, because that will hurt the poor too much, as they rely on 100% of their income, just to survive. Taxing those dollars you refer to is a better option.

As for me being greedy, if that's what you are suggesting, you are wrong, as I don't have any negatively geared property, I did, but my aim was always to hold them until the became cash posetive, which they now are, although one has become a problem due to inner city rental downturn, but I'm working on a solution.

The real problem with NG is those who accumulate dozens of properties, all of which have max debt. If anything needs to be addressed, it this as this is abuse of tax payers funds.

As for housing affordability, one answer lies with super.

If one were allowed to use part of their super for a deposit, that would be a huge relief.

It's quite simple, first, the max they can use is 75% of the deposit, which must be matched with a further 25% of their own cash. The full deposit being 20% of the purchase price, like it used to be.

Let's face it, if they can't save 5% then they can't afford a home.

Second, the property must be their principle place of residence and and rents received would void the arrangement, unless from direct family.

Third, if at any time the property is borrowed against, or sold, the amount provided by super must be repaid, plus interest.

Lastly, mortage insurance must be taken out to protect the super component. Also, super could only ever be used once to buy a home.

This would allow investors to continue investing and more potenisl owners could afford to buy.

Individual; answer my question !
Why should investment property be treated differently to every other business ?

Bazz,
Sorry, but I thought my posts are exceptionally clear that no-one should be treated differently. When I say I want to rid us of this dreadful NG I would have thought it to be clear to anyone that that means no writing off whatsoever. Any business, any investment, any speculation,. Full Stop ! I'm really truly amazed that big business can't see the long-term benefits of that. I suppose they actually do but with no NG they couldn't go into liquidation whilst all their writing off profits are safely tucked away in some obscure accounts in the names of three year olds whilst those families who are owed this money do tough.
I see what it has done to so many countries economies, can 't you ? NG is a good profit maker but it is an economy wrecker.

Indy, youdid not answer my question.
Why should property business be different ?
Any other business could be sold and realise a capital gain.
Borrowings for that business have deductible interest.

Bazz, I would think that the Government wouldn't supply the same tax relief to businesses as they would to investment homes because if there weren't these homes available for rental from the many people who can't afford to buy, then they would have to fork out for more welfare payments and state housing.

The business investment loans may not always benefit the Government in the same obvious way would they?

Individual, you are not understanding me.
Where, exactly, would rental homes come from if there were not these tax incentives to buy them?

Suse,

"individual, you are not understanding me.
Where, exactly, would rental homes come from if there were not these tax incentives to buy them?"

Here's what Saul Eslake posted earlier in the thread.

"To the points made by "suseonline" and "individual", if negatively-geared investors didn't buy dwellings, then those dwellings would be bought by people who are currently unable to compete with negatively-geared investors. The supply of rental housing might drop - but so would the demand for it, and by an equal amount. So what's the problem?"

Poirot quoted;
but so would the demand for it, and by an equal amount. So what's the problem?"

That is an assumption. I do not see that those not able to rent would
be able to raise the deposit. A few might, but the majority displaced
from the rental market, no.

Bazz,
You're confusing me, what is it you don't understand about "all business" ?
Forgive my ignorance in matters of money (I don't have enough) but should business be about one lot getting a better deal than the other or should it be what's commonly referred to a level playing field ?
I fail to comprehend how it would be possible to have both ? Why should investors get a better option than those who rent from them ? You have, I want, I pay & you supply. Isn't that what business should be ? Not you have, I want as much as I can of what you have with the support of NG.
If you're not smart or good enough to offer a fair deal than you should not have the right for other taxpayers to back you. Because backing you they do when you write things off the tax.
Is that what you don't understand or is it because you don't like it ? I dearly would love to get more but I can't get myself to rip taxpayers off as do so many. I pay for the fuel for my boat, my car, my electricity, my whatever AND I provide a service but I don't claim it all back because even if I wanted to I can't whilst I'm on wages. Why should people who provide a service under the guise of a business name be able to do it ? I think it's wrong & it's gradually bringing our society to it's economic knees.

I did miss your bit about all business.
That won't work, any business that wanted to expand its plant by
investing multiple millions of borrowed money into the new plant would
not be able to offset the interest on profit in the whole business
with your suggestion.

That would kill increased business and increased jobs as well.

However it is irrelevant as growth is needed to be able to repay
borrowings and interest and growth is ending.

That would kill increased business and increased jobs as well.
Bazz,
well, this is where we have to agree to disagree. It would slow down growth that is becoming unsustainable anyway but it would not kill jobs, on the contrary as people would have more to spend. Instead of growth we'd have a rolling economy nicely steadying itself. The greedy well, they'd get less & that's a good thing in anyone's book. Frivolous industries would certainly get a wake up call but this too would turn into a positive for society as a whole.
We are now at the doorstep where we're faced with thinking for either just ourselves & only ourselves or do we still have the humanity of looking after ourselves as a society. I know many aren't interested in the latter but that's where a flat tax, no NG & a non-military National Service would come in. Participate & pull your weight or go it alone. Disabled of course are given the special consideration they need. We can see that the system we've had until now is no longer working & is actually to our detriment now.

Indi

The ONLY reason jobss exist is because people, whether they be large or small, take risks.

Now, if you remove the safety net from those risks, they being tax deductions, then the risk takers will stop taking risks. It truly is that simple. Jobs are not a given, they are created. Even government jobs are only ever created from the taxed generated from the risk takers. (note I didn't say paid by)

As for the removal of NG leading to an increase in affordable housing, I just can't see it. For a small few perhaps, but not for the majority, because if someone can't afford a house at 4.5%, and a 5-10% deposit, the balance by way of mortage insurance, then they will never be able to afford one. Not to mention the 1st home owners grant, another stupidly executed policy.

If we remove investors from the market, sure, house prices may fall, let's assume by 20%. Not an unreasonable assumption by any means, especially given there would be far fewer buyers out there to compete.

So, your $400K home in now worth $320K. But, if this were to happen, the banks would get very nervous and, rather than lend to 80%, they would most likely only lend to 70%, which means, the deposit you needed at 80% of $400K ($80K) would now be $96K. Plus, very few mortage insurers would make up the increased gap,( an additional 10%) especially given the sharp decline in property values.

The other importance about investors is that they provide a safety net for the banks, as they are a back stop, as once the buyers are gone, (investors) those investors with money will have a field day and, there would be little doubt banks would be putting marginal owners under plenty of preasure to increase the equity in their devalued property. Otherwise it would be Australia's version of the US sub prime mortage, only here, individuals are liable for the debt.

Be very careful what you wish for, because there would be few winners, but plenty of losers if we remove NG.

, if you remove the safety net from those risks, they being tax deductions,
rehctub,
Our taxes provide that safety net when these "risk takers" get into a jam. Unless you can show me where investors actually got their money back from the companies gone broke but their directors still being multi millionaires. It's us who again & again have to pay more fees left, right & centre. Like my mate who lost his house after an investment company went to the wall. Evenually, after several years one of the major banks gave some investors some moey back but with a loss of a third of what they originally put in. Yes, the investors did get greedy but when Governments encourage people to invest then why should people not feel comfortable to do so ?
But, when things go shonky & the investment company directors start running it should not be the normal mums & dads who have to make up the shortfall whilst the directors are living in luxury.
So you see, the risk takers aren't really taking great risks, they just try & make us believe they do. They'd be too scared to support tax reform.