Indeed, it is so unfair and sad that in Australia, true and reasonable work expenses for ordinary people are not recognised as tax deductions - first and foremost travel-expenses to and from work.

It could be argued: "but what if an employee takes a limousine or a helicopter to work?", so there should indeed be a test for reasonableness - is a helicopter reasonably necessary for the purpose of getting to work in the morning? Ordinary Australians, however, do not get a cent of a deduction for their car/bus/train commuting expenses.

Similarly, is it reasonable to borrow money which isn't yours in order to invest? This is bad behaviour! One should only invest what they have honestly earned, rather than try to become rich through financial manipulations of other people's money.

While bad behaviour should never be made illegal, it should not be rewarded and encouraged either!

Borrowing other people's money is not a reasonable "expense" and the resulting interest-payments should not be recognised as a tax deduction.

Negative gearing and everything the Author compares it with is an impost on the budget bottom line, no matter how cleverly he defends it; or repaints or quite cleverly camouflages it.
Certainly, he can't genuinely defend the housing bubble and the sheer unaffordibilty it also creates!
We need to replace all that, with a single stand alone unavoidable expenditure tax! [Started at 18%, an effective rate of 11%, given the inherent savings!]
Which is the only way we'll ever get some of the biggest tax avoiders, to actually pay a fair share, and then only on profit earned right here!
Fair all around, and would likely add another 100 billion to the annual budget bottom line and forever end the structural deficit/destiny of demography!
Moreover, the tax rate alone can be varied microscopically, to alone control all inflation or stagnation, and indeed, far more rapidly, than interest rate changes; which could then be adjusted downwards and then left at historic lows, to virtually turbo boost the non mining economy.
The other side of this coin, is publicly supplied, very low cost energy,[like say cheaper than coal thorium] which rolled out with accompanying micro grids, would more than halve the current cost of industrial energy, and indeed, cheaper than hydro!
Ultra cheap energy, which together with the world's lowest real tax rate, would have the high tech industries, and many self funded/health insured retirees, queuing to relocate here.
And if one wanted to boost the housing market with real, population neutral, regional/rural demand, that's exactly the way to go!
Those that can't survive and pay their fair share, need to be split up, down sized; or, wound up and replaced with those who can!
Namely, numerous new co-ops.
Which is still private enterprise, bereft of the usual cost adding parasites; and indeed, the only PRIVATE ENTERPRISE model, so inherently efficient, as to survive the Great Depression, virtually intact!
And indeed, the only business model, that just can't ever get to big to fail.
The owners are never ever that silly or stupidly led!
Rhrosty.

It is difficult to take this attempt to justify negative gearing seriously.

To borrow in order to invest in something productive is worthwhile, and should be encouraged.

But to borrow where the costs exceed the benefits is neither productive nor worthwhile. It does not benefit society and should be discouraged.

At present, the latter approach is being promoted simply by offering the investor the opportunity through negative gearing to transfer the loss to the taxpayer. Taxpayers who would otherwise pay tax on their high incomes are allowed to lower their income and tax by making an investment which may not be rational. Saving tax, and avoiding one’s responsibility to society, is the rationale for the investment; not the inherent merits of the project.

The better approach is to quarantine the allowable deductions from an investment in any income year to a maximum of the investment income in that year, with the rest being able to be carried forward as a cost of capital, against which any future capital gains could be offset. That way, people are forced to risk their own capital in the investment, not the Government’s (through the taxpayer's contribution to tax revenue).

Banning negative gearing in housing is not a knee jerk response but a long overdue removal of yet another lurk for the rich.

Heard a story once. Don't know if it's true.

Two mates were each going to buy a house. They decided that each would buy his mates block & build his mates house. They then lived in the houses for a year. then swopped houses. Each going to the place & home they wanted in the first place. They charged each other rent & claimed expenses as you do in Negative Gearing. They paid off their houses & got all the benefits of NG.

Now there's a bloody good idea.

Why does negative gearing get a bad rap?

Because it's bad & only caters for the greed mongers. It does nothing of any benefit for decent people. After so many years of proof that it is simply just a rort, people still need to ask if its bad ? Gawd !

Rental housing is a business like any other. There is a tradition of negative stereotyping owners. It is a variant of the leftist class war stuff.

'White Shoe' entrepreneurs who spruik windfall profits attract undeserved criticism to the thousands of small business owners (rental housing) as well.

Rental housing is not a lucrative, desirable business to be in. It is high risk. When asked, there are very few tenants who would invest in rentals themselves if they had the money. Maybe the tenants know better than those aspirational mums and dads who are hoping to provide for children's education or for their retirement.

Honestly now, what sort of business is it if your only hope of realising a gain one day - a lifetime into the future - is to sell the business?

Up to then every flea upon flea is making a meal out of the owners, all levels of government who regard rental housing as their own milch cow (all revenue and owners carry the risks) and especially real estate agents who have a monopoly on paid property management.

onthebeach,
In my area in the deep North hosing is out of control. When the Goss crowd took over they sold off most of the the departmental accommodation. Then, only a couple of years later they were forced to rent from those whom they sold the accommodation to for peanuts. Because bureaucrats have no conscience they began paying whatever was asked because , after all, Government can afford it. We now have a situation where Government employee housing ist $865./week for one side of a duplex. Private rentals are as high as $1800/week. Needless to say that ordinary workers can not afford to rent so they're simply leaving. That makes way for contractor mates of our conscience devoid bureau rats to fly in-out at massive cost to you, the taxpayers. My gut feeling is that this situation will explode soon as it it too much out of hand. The only real winners are the bureaucrats & Qantas. Platinum frequent flyer points are like confetti here, all at your expense. When will you wake up ?

Jayb, those guys will liable to pay CGT should they sell and the rent they nominally pay each other is taxable income.

Your home is not subject to CGT, only investments.

individual,

A high price might be possible once for a house for instance where some new industry such as a mine is established, but inevitably its value will track behind inflation. No 'ifs' or 'buts' to that.

Of course there are many instances where the bottom rapidly falls out of the market when developers move in quickly to take advantage, or the world prices for ore plateau or recede and rental houses are vacant.

Those 'in the know' are the speculators who chance high returns from re-zonings. They are by definition very few in number and are far from representative of the thousands of aspirational mums and dads who 'invest' in rental housing. There are thousands who make squat and not because they don't put their hard work and scrimping and saving into it.

Go to a meeting of the local property investors, or simply drive by to see the very modest means obvious in the people there, their ten year old faded Hyundais and sombre dials. Or maybe slope into one of those 'investment' property sites, where the real estate agents and investment seminar spruikers promote false belief of 'doubling in value' every X years, but never mention such minor details as the costs of holding and maintaining the property.

'Greedy landlords making a killing out of flea pits' are like 'sexed-up drunken students' and other stereotypes peddled by lazy shock jocks and tabloids to sell an audience, one wonders where the myths ever started.

Aw come on, ordinary mums and dads, can buy positively geared property, to pay for the tin lid's education!
And if buying a positively geared house, with no deposit, that the tenants pay off, is not good enough for that (often misrepresented) purpose.
Then, we really can say, you're not just a greedy bar steward, but incredibly dumb as well!
Or alternatively, believe everyone else out there in mugsville is!
Simply put, those whose income is so great as to need protection in some sort of ONSHORE TAX HAVEN, negative gearing, family trusts etc, JUST JUST DON'T NEED ANY HELP FROM THE TAXPAYER, to pay for anything, least of all, the tin lid's education, or gold plated super!
They probably already enjoy many of the privileges of incorporation and are able to write off the Lear jets and the limousines!
Moreover, I have yet to met the self made man, you know the one born in the log cabin, hewed from the wilderness, with his on two bare hands!
Everyone else got the right breaks, inherited wealth, and were in the right place at the right time, when serendipity was bestowing favors.
An uncle, who was one of the original coco cola shareholders, married into wealth.
The fact that she had a face only a mother could love, (looked like the south end of a north bound camel) didn't trouble him.
Rich people just don't get rich by themselves, and often are able to employ people to do their critical thinking for them, so they grow richer. That doesn't bother me one iota!
Good luck to them!
But when they ask ordinary mums and dads to pitch in and pay part of a fair tax liability, that's when I get as mad as hell, and want to tell them, I'm just not going to take it anymore.
Pay your own fair share R Soul!
Come on, many entities, with annual budgets bigger than many sovereign nations; pay no company tax to anyone?
Rhrosty.

Luciferase: those guys will liable to pay CGT should they sell and the rent they nominally pay each other is taxable income.

Thanks. Another Internet myth bites the dust.

When I moved in with my present wife I rented my house out. I went to the Tax office & asked the Question. (Back in the 80's.) The Tax bloke said, "If I earned under $12500 & didn't claim expenses, it was deemed a hobby & they weren't interested."

Later I did claim because I had a run of bad Tenants & it cost me a fortune to fix the house up again. The Negative Gearing was definitely worthwhile claiming in that case.

Rhosty, "And if buying a positively geared house, with no deposit, that the tenants pay off, is not good enough for that (often misrepresented) purpose. Then, we really can say, you're not just a greedy bar steward, but incredibly dumb as well!"

The government itself with all of its resources and access to free (from other departments) legal and economic advice dumped its housing tenants onto the private market because it could not manage them itself.

In the private market there is a constant churn of small mums and dads 'investors' and not because they are making a profit.

The mums and dads rental property 'investors' were forced there by federal governments intent on returning the costs of old age, the age pension in particular, to the aged themselves.

After a lifetime of poor returns from their rental house, those aged will be surprised to find that the federal government has won on the swings and on the roundabout too. Any profit on the house is taxed and reduces their pension as well, and they are still up for the crippling regular large repairs and maintenance expenses. To top it off with a large dollop of double cream, government hasn't had to manage the impossible, namely demanding welfare housing tenants, either.

Enough of that though, with your glowing assessment of the certainty of golden windfall returns from rental housing and the ease of investing in it, you must own squillions of it, Rhosty. So what about some details on that portfolio of yours for the instruction of all of the lesser mortals? Or are you in real estate sales, where myths are spruiked by oily white shoe REAs who live on the edge, and some unfortunate rental house 'investor' learns his error through decades of sad experience?

There has been an interesting study done, the link should be on the abc somewhere. I heard the discussion yesterday on Drive (Perth) Apparently over sixty percent of the people who negative gear have a taxable income of less than 80,000 a year. A significant proportion of them have an income below zero for tax purposes. Doesn't that suggest there is something wrong with the system? Zero income, and you have an investment property!

In olden times the heaviest users of negative gearing were government employee who worked outside the metro areas. Living in subsidised housing, there were able to rent out their city homes and pay off their mortgage. True, many of them still pretended to the bank they were living in the house to get the rate reduction, but that was in the days before data sharing.

Rhrosty you obviously have not done the math mate.

In SE Queensland you would be very lucky to net $12,000 on a rented $400,000 house. The interest bill on such a house will be $24,000. Now even with negative gearing many investors will be putting in some thousands a year, for the life of the investment.

If they are lucky they may pick the bottom of the market & actually get some capital gain, but only if they bought wisely.

Many of these people buy into large estates, which go on for years. These keep the piece of new homes pretty static, meaning no or small capital gain.

Very often, when the cost of buying & selling is included, a simple interest bearing deposit would have been much more profitable.

The only ones I know who have made any money, rather than paper profits, are ones who buy commercial property, not residential. This rarely has the bad tenant problem, & is a business proposition, not a get rich quick scheme.

$12,000 on a rented $400,000 house.
Hasbeen,
Up here in very far NQ the average rent is at $650/wk because the Govt bureau rats do not question any prices asked. It's in fact the State Govt which sets those insane prices.
I'm at a loss how the Newman Govt has allowed this Labor trend to continue. I was led to believe they were going to stamp out rorting but it looks like there are still way too many Labor cronies in our Departments.

Yuyutsu, are you aware that a business owner is not allowed to claim his/her travel from home to work either? Unless they have an office at home, or, they use their home as a portion of their business as well, which then has CGT implications. It's a rule that is only really challenged when audited.

To the author, yes, bring on a transaction/expenditure tax I say, and we could even have different rates. Say 2% on most every day transactions, down to as low as 0.2% for the likes of trades etc where the volumes are huge with very small margins. It would even tax all monies sent off shore and, the best part is it would eliminate income tax putting billions each week into the economy as additional spendings.

I have often thought it should be trialed in situations like disaster relief on a very small amount. At least then we could test the water, have every one contribute and won't break anyone's bank.

As for NG, I'm a fan myself but if we do need to change, then perhaps we should look at a time frame, or a dollar value whereby an asset must be self supporting within say ten years. This would put a stop to the main cause of housing unafordabillity, that being those who continually use gained equity to prop up further purchases whereby some own dozens of properties, all leveraged at the maximum 80%. They then often rent their place of residence, claiming a portion for business.

Continued.

Continued
I have even challenged Mr Eastlake on the subject, asking where renters will live if investors stop investing in homes. Nobody will answer that question.

The fact is I don't believe we have a housing affordability issue in that I think we have more of a spending cricis, as most young ones today earn a grand a week, or more, yet can't afford a house at 4%.

A simple drive by through any eat street will tell you why so many can't afford a house, yet happily shell out $45 per lite for milk in the form of a late, or $120 per kilo for a slice of steak. If we ever fimd a way to spend money more than once, then they will be able to have their cake, and eat it, but for now, that's just not possible, so choices have to be made, and all too often it's the wrong choices.

Of cause the other issue is that while many say the can't afford 'the house' they can afford 'A' house, and there in lies a problem.

Yes rehctub, not many of todays kids would live in my first house, a one & a half bedroom ex farm laborers cottage, with a chip bath heater in the laundry/bathroom to serve both.

It wasn't much, but cost only 2 years net income, & it was mine at 21.

Today all my kids live/own/are paying off better houses than the one they were raised in. Still it does me OK. When I am at the computer, or in the shed playing with my toys, I don't give a damn whether my kitchen has the latest stainless steel appliances or bench tops.

I guess we all have to develop our own priorities.

Sorry individual I meant to respond.

I did say net. By the time owners have paid all the costs involved, there is not all that much left of the rent on domestic dwellings.

One advantage of commercial property, the renter pays council charges.

On that, I was looking at some old council rate notices, as I cleaned the rubbish out of the filing cabinet the other day. 27 years ago my rates were $123.00 PA. Now they are 3250.00 PA.

Yes I know there has been a bit of inflation in the last half a century, but two thousand five hundred & forty percent is ridiculous.

Is it surprising we have to wonder just what all these bureaucrats do today, that did not have to be done a few years back.

As with a lot of policy that is driven by ideology and idealism, the removal of negative gearing will produce unexpected negative consequences.

The removal of negative gearing would see a quickening in the slide towards the lion's share of rental property falling into the hands of large institutional investors, not the small entrepreneurial mums and dads investors as has been the tradition in Australia.

Just thinking about those small investors, the mums and dads who are sacrificing their best years to provide for children's education and possible old age one day The disincentive, make that the incapacity to invest in rental property if they cannot claim losses like any other investment, could cause them to question sending their children to private schools (eg Catholic). That would put more pressure on public schools and cost government more.

Likewise they might wake up to the folly of sacrificing their own and their family's lifestyle to provide for 'superannuation' in later life that will only reduce the age pension available to them anyhow. That is if they survive to old age after all of the work and worry of rental property.

When Labor gets back in and particularly if Labor ever partnerships with the toxic Greens again, the pressure will be on to extend capital gains tax to the private residence. The usual wedge politics of intergenerational jealousy and the old favourite, class politics will apply.

Another risk of removing NG is that the banks may see their risk elevated resulting in them lending less, leading to increased deposits. So in essense the while the first home buyer may have cheaper houses to choose from, they may require a much larger deposit making affordability no better. And of cause if they do get themselves into trouble, there will be fewer buyers out there willing to bail them out.

It's my tip that should NG be removed, it will decimate our building industry, our real estate industry and many others that feed off, or supply to these vital industries, because let's face it, while many younger ones can train to become a tradesman, many would fail if they needed to train in an industry that requires much higher levels of education. No offense intended because I'm not the sharpest tool in the shed myself, although I do have pretty good life skills now that I'm on the wrong side of 50. Another set of skills that's being killed off through over compliance.

Dear Rehctub,

<<Yuyutsu, are you aware that a business owner is not allowed to claim his/her travel from home to work either? Unless they have an office at home, or, they use their home as a portion of their business as well, which then has CGT implications. It's a rule that is only really challenged when audited.>>

Well, most self-employed people would do their administrative work (orders, accounting) at home, so that wouldn't be an issue. I am not aware of the CGT implications, but I suppose it won't matter if you sell your home over a year after you retire or become an employee.

In any case, travel to/from work is the most obvious example of a work expense, so it's absurd not to be able to claim it as a deduction. Also, because employers would incur a "fringe benefit tax" if they cared to bring their employees to/from work as they do in other countries, they don't.

Yuyutsu, I fully agree with you that any work related expense should be deductible, because after all, getting yourself to and from work is the only way you can earn an income and pay tax. So any public transport, strictly on direct rout, parking costs, at a set level and travel costs per km should be a tax deduction. In fact, having to pay all these expenses, along with the likes of child care are one reason why some choose not to work, because at the end of the day it is often deemed as not worth it.

As for business travel, to and from home, I used to argue that I had to take the keys in to open the shop as it was not safe (for obvious resins) to leave the shop unlocked.

I never got the chance to test my theory as in my 23 odd years of owning butcher shops, i was never audited, although I always made certain my margins were within the perimeters as set by the ATO.

I did have a GST audit, which was a crack up.

When questioned as to why my GST payable was always the same amount, my answer was that the only thing I sold that attracted GST was hot chooks. So, as I said to the auditor, if I sold them uncooked, there was no GST, if I sold them cooked (hot) there was GST, but, if I sold them cooked, cold, there was no GST. So it's a guess. She accepted that the tax was messy.

The other funny one was when I claimed half the GST on a Harley I bought. The auditor said surely you can't deliver meat on a Harley. I said no, you're right. But, I can buy meat using a taxi and claim all fares, so what's the difference. She said, as she turned the page, boys and their toys.

But, as for negative gearing, imperiously hope governments don't go there.

Dear Rehctub,

It feels nice to be agreed with, but no, I don't think that any work-related expense should be deductible, only such expenses that are reasonably necessary for the production of goods and services.

Otherwise, I could say that buying my wife a diamond necklace is a work-expense because keeping my wife at peace is necessary for me being able to spend long hours at work. This way, practically any expense that contributes to my well-being could be claimed on the grounds that it improves my work-quality.

I also do not think that advertising expenses should be deductible as they do not contribute to the actual products/services, while in fact they cause harm to the public.

Also, borrowing expenses should not be deductible because it is wrong to borrow and live off debt. If you and your family do not have the capital, then you should do it straight and first work to gather that capital, even if it takes a few generations, then invest your own money as you like. While government has no right to preach morality and order you to refrain from doing things that are wrong, it should not give you a prize for that either, in the form of a tax deduction. Negative gearing would be thus resolved as a private case of not encouraging borrowing and speculation.

I still did not understand how your Harley was contributing to your production, if you care to explain.