Whow a Lobbyist lobbying and badly at that.

Abolishing Negative Gearing WILL NEVER HAPPEN.

Forget it, there are too many Australians on a knifes edge and without property investment we have lost our main source of wealth acceleration in Australia for the subruban Mum and Dad.

oh, and there are too many politicians in Canberra who negatively gear.

No worries for you, no worries for anyone.

The discussion paper released by the Business Coalition for Tax Reform seeks to reopen the debate on possible directions for personal tax reform. However, it does not advocate removal of negative gearing. The paper has proposed three scenarios which canvass options for discussion purposes.

In-principle, suggestions for tax reform have been welcomed by the Real Estate Institute of Australia (REIA).

Negative gearing must stay in its current form for all asset classes, in order to ensure investment which provides for sustainable property rental supply and as a cornerstone of wealth creation for Australians saving for self-funded retirement. Reduced investment will result in fewer properties and higher rents.

In consideration of the Federal budget surpluses, the REIA supports public discussion on personal tax reform to simplify the tax system and a dedicated Government review process. The BCTR advocates a climate conducive to investment, growth, job creation, and private saving. In this context, the REIA unequivocally supports retention of negative gearing for property and other investment classes in its current form, as the Howard Government has stipulated on recent occasions.

There should be no doubt that negative gearing is an essential part of investment in Australia, which must sensibly be retained. For more information on REIA's negative gearing policy, see: http://www.reia.com.au/policy/negativegearing.asp

Negative gearing will never be abolished, but it will be phased out.

The advantage of negative gearing is that while you are on the top marginal tax rate, for every $1 you loses (via making a real loss on property for the year) you reduce you total tax bill by 48.5c. You hope that an eventual capital gain will be higher than your loss.

However, if the tax threshold continues to go up and if the top marginal tax rate goes down, this tax saving will get smaller and smaller. Eventually negative gearing will become an unattractive investment and therefore it will eventually be phased out

These facts are from the Reserve Bank submission to the Productivity Commission on Housing Affordability:-

-proportion of owner occupiers in the 25-29 year age group reduced by 10%

-since 2001 new housing loans to first home buyers almost halved, over the same period new loans to repeat buyers have increased by ~15%

-in 2001 31% of new loans were first home buyers

-in 2003 this percentage was down to 19%

-housing affordability have declined to 1991 levels.

This is a disaster caused by a tax system that subsidises investors/speculators to the detriment of owner occupiers who end up subsidising the costs of asset accumulation by investors/speculators.

What is the solution?

1. only allow 50% of costs of investments to be ddeducted against a person total income for a period of seven years.

2. thereafter 50% of the costs of the investment can be deducted only from the income of the same asset class.

3. savings from this to be directed to allowing first home buyers to reduce their taxable income by 50% of their morgage costs for seven years.

The reason for only allowing 50% of the costs to be offset is linked to the changes to the capital gains tax which reduces the tax paid when the capital gain is realised.

This would remove the distortion and creater a fairer system.

It is more than likely that investors would sell property every seven years thus realising their capital gain earlier and reinvest in other properties. The increased turnover and tax deductibility for first home buyers of their mortgage would increase the chance of ordinary Australians achieving home ownership by removing asset inflation caused by speculative activity.

The only people not compelled by the tax system to supply cheap housing for the general public, are single fathers, the really rich, and the renters. Makes perfect sense.

Abolishing negative gearing could mean soaring rents, and housing industry collapse an industy vital to the economy , that kind of response comes from a greedy landlord,
A ten year study of greed and hatred in our society came up with answers the greedy will not want to hear, collecting rent and interest is a parasitical activity, the majority of people in governments and the systems of permission[justice ] are involved in collecting rent/ interest , so it would be fair to say their gravy train will not be derailed, negative gearing and rental subsidy are indirect payments to landlords by landlords/moneylenders, if they were to get a 100% handout from the government, property prices/costs would quadruple overnight ,along with rents and interest, rents are never based on"the quality of life/comforts one gets from living under someone elses roof, the rent paid more than often pays the morgage[interest to another collector] plus all expences, I have often wondered, what would happen if , collecting rent and interest was banned/outlawed, then I realise we would have to clean out the systems of "government and permission" of collectors. we would have a revolution on our hands because the greedy take from the needy, they can make a new law anytime they like. John Howards grant of $14,000 to boost housing created tens of billions of dollars for the collectors of rent and interest , even the government made tens of billions of dollars, where did all the money come from , it was invented/created out of thin air, because it never existed untill greed took control, there is talk of another $14000 grant, if this happens the Aussie Dollar will pay a high price. lets have no more handouts to the greedy .

Hawke and Keating tried this back in the 80s. Unmitigated disaster, except for the bargain hunting property investors who could bottom feed to their hearts content. Hmmm, sounds like a good way to engineer the property buying opportunity of the century. Bring it on, l'll get the cheque book ready and go see mr other-people's-money bags for a cheap loan.

Slasher – what a political disaster you would make.

Not only do you do half the job (allowing 50% of anything) and thereby complicating the process beyond necessity but you justify doing half the job with reasons which are nonsense.

In the mid 1980s Keating abolished NGI. With the sweep of the same pen he used to write the “Tax cuts into law” (which never happened), he caused the single biggest rental housing crisis and rental cost increase ever seen.

It is all about “cause and effect”. If some piece of bad legislation causes a change to tax payments, it will have an effect across the industry which is taxed.

Keating was beating the same political drum which you are beating now. Change the NGI tax environment and you will cause a significant disruption to the supply of property and the cost of that property for one good reason

If you negatively change the tax system which flows onto change expected return on investment from an enterprise, you will change the attractiveness and risk of the enterprise.

If you change the risk and attractiveness of an enterprise, you can guarantee you will change
1 the numbers of investors who take up opportunity to participate and invest in that enterprise.
2 put existing investors under pressure to seek to restabilise their investment return – increase rental rates.

Changes in 1 and 2 will bring about a significant market adjustment as was seem in the mid 1980s and the damage of which was only stabilised by reversing the legislation 18 months later.

I note you justify this with your statement “This would remove the distortion and create a fairer system.”

Do you have a statistical model which proves that hypothesis?

I doubt it because you are Wrong

All it would do is create a more complicated system (= more cost) and burden rental tenants (the end-of-line consumer) with higher rental costs as they compete for few rental properties (because marginal investors have fled the NGI market to place their investment funds into other opportunities = supply and demand for investment funds)

I believe that the negative gearing rental market effects in 1985 is mostly myth and little fact. I once saw a graph of average Sydney rental prices, so I looked at the 1985 period expecting to see a giant spike and I could see no visible increases in rent at that time.
I believe the rental market problems are a myth propogated by people who benefit from negative gearing and want it to continue.
Can anyone show me evidence that contradicts me?

col rogue,

the policy is designed to change investor behaviour. no apologies.
owner/occupiers are being priced out of the market by speculator/investors subsidised by the public. Under the current system nominal capital gain is reduced by 50%. Full cost of expense is deductible but capital gain tax is not taxed on the full capital gain it is discounted.

Why should any investment that does not generate a positive income be subsidised fully by the tax payer yet the capital gain is only taxed at 50%.

Why should we have a tax system that favours debt based investment not only in property but all forms of investment. It is bad economics. I don't ask single mothers, the unemployed, old age pensioners to subsidise my wealth creation. I am not a bludger. I work, make investments in assets that generate a positive income stream and have a capital gain.

We have tax system that does not favour savings and as such we are lagging behind as a nation. Whilst we continue to support the welfare bludgers who think they have a right to create their wealth assets whilst being subsidised we will continue to be a second rate nation.

Slasher – why not?

Other investments are treated on their return merits (be that positive or negative) and any investment might shift between positive and negative over time.

I would note, most commercial undertakings have an element of debt finance so why should property investment be treated as different to owning shares in a joint stock company when that company conducts itself as a “debt based investment”.
Your suggestion would imply that an company with an overdraft or other commercial loan with a prescribed interest rate would not be allowed to treat that interest as a tax expense (or only half or it).

As I said, you have made a proposal which merely complicates what is already a process heavily burdened by extensive calculation. The last thing anyone needs or wants is an even more complex system.

The contradiction of your comments lies in the fact that many small investors use NGI property as a form of savings and a hedge risk against putting all their savings into just shares and mutual funds etc.

If you have, as you imply, a stream of positive geared investments, maybe you should be out there selling your investing skills, plenty of NGI owners would be happy to substitute the outflow for an inflow from PGI.

As for “bludgers” that is a weak attempt at vilification of people making their own decisions and comes across as a bit of the “green eye of envy”.

Your original post referred to only allowing income to be offset against other income in the same asset class. This is like the UK system (or as it used to be). Such segregated treatment was unnecessarily burdensome and complicated. Cross-aggregated tax accounting is certainly a better and more effective process for assessment.

btw I note you have misspelled “Rouge”, I will assume it was an accident of typing, no one would be so asinine as to think there was even a hint of “wit” or humour in it being deliberate.

Claw – your view was not shared by Keating, Hawke and the Labor party, who did the 180 degree “back-flip”.

col, apologies, the curse of two finger typing.

my whole point is that our whole economy is designed for debt. our tax system skews investment behaviour to debt financing. we have a current account deficit (not to be confused with trade deficit) that is growing and growing.

countries such as Sweden, Austria have arrangements designed to encourage savings and hence have significant current account surpluses. we encourage investment through debt not equity raisings to our detriment.

our official interest rates are almost double those of other OECD nations because of this culture of investing via debt.

country 3month interest rate 10yr govt bond
australia 5.62 5.27
denmark 2.57 3.45
sweden 1.91 3.39

corporate bonds are 6.26%, yet in the Euro area they are 3.97%
in sweden they are 3.34%

australia's all ordinaries has increased by 11.6% in US$ since 31/12/04
Austria (ATX) has increased by 43.3%
Denmark (OMXCB) has increased 29.8%
Sweden (aff gen) has increased by 15.9%

gdp for Australia is 2.6%, Austria 2.1%, Sweden 3.4%, Denmark 4.8%

For those countries not following the Anglo/American liberalisation economic philosophy and who are following a genuine third way are performing better.

Growing stockmarkets, current account surpluses, lower interest rates
we need to discard our economic blinkers before it is too late.

Realist,
The average suburban Mum and Dad have no wealth to accelerate, sadly the average Mum and Dad live on below average pay. The average is proped up by C.E.O's who live on 63 times the average pay, lawyers, doctors and professional people who all recieve much more than average pay. The myth that because the average pay is $53,000 p.a. that the average family recieves at least that much is more to do with making the average family feel inadequate, thusly they work harder to try to achieve the "average" which never happens. Of all the parents in my daughter call at school only one family recieves above the average, or "the average". This is a one income family whose Dad is an underground miner on $100,000 p.a.

What a shock for that family when no choice [Workchoices] legislation is operable next month. Please don't think the average person does not realise what is happening, more and more are coming to understand their own plight.

I don't know Ms Crouch, but I have a healthy respect for the Housing Industry Association, so I don't want these comments to be construed as an attack on either her or the HIA.

That said, I profoundly disagree with her (and the HIA) about the consequences of removing 'negative gearing' from the Australian tax system.

Ms Crouch recycles the myth that the temporary abolition of negative gearing for investment properties by the Hawke Government caused a huge increase in rents. True, rents did rise sharply in Sydney and Perth during this period. But that was because rental vacancy rates in those two cities were below 2% when negative gearing was abolished. Rents would have risen sharply there in any event. In other cities, where vacancy rates were higher, the rise in rents during this period was much more modest and not out of line with movements in earlier or subsequent periods. It is thus simply not true, no matter how often spokespeople for real estate interests repeat it, that the abolition of negative gearing for investment properties caused an 'explosion in rents'.

No other income tax system in the developed world is as generous as Australia's in the benefits it confers on landlords. The scope to deduct interest and other expenses, over and above rental income, against other income for tax purposes, without limit, has no parallel in comparable countries' tax systems. Yet there is no evidence that this has resulted in a larger or cheaper private rental market in Australia than in other countries where the tax system is less generous in its treatment of investment properties.

The cost (in terms of revenue foregone) of negative gearing has been compounded by the totally unwarranted decision in 1999 to halve the rate of capital gains tax - which converted negative gearing from a device allowing people to defer tax, to one allowing people both to defer and reduce permanently the tax they would otherwise be obliged to pay.

... to be continued

... continued from previous post ..

These two loopholes in the tax system - the benefits of which accrue disproportionately to those in upper income groups - are major departures from good tax principles of equity and neutrality in the treatment of different types of income.

The interaction of negative gearing with the halving of the capital gains tax rate has contributed to an explosion in claims for deductions for interest payments in excess of gross rent, from just $174mn in 1999-2000 to $2.6bn in 2003-04 (and probably more since). It exacerbated the 'housing bubble' of the first half of this decade, which priced thousands of first-time buyers out of the owner-occupied housing market, forcing them into the private rental market and contributing to upward pressure on rents which Ms Crouch regards as a 'bad thing' when it (allegedly) results from removing tax concessions enjoyed by landlords.

Indeed, since the overwhelming majority of negatively-geared property investors by existing properties, rather than contracting with HIA members to buy new ones, it's hard to see why the HIA is so enamoured of this particular set of tax breaks from which its members derive so little benefit.

The Australian economy would benefit mightily from tax reforms which abolished negative gearing (for all investments, not just investment properties as occurred in the mid-1980s) and the half-taxing of capital gains, and using the revenue thereby generated to lower marginal tax rates.

Reform along these lines - which would amount to no more than applying to the personal income tax system the same principles of 'lowering rates and broadening the base' which the Howard Government applied to the indirect tax system and the business income tax system in 1999 and 2000 - would improve both the equity and efficiency of the Australian tax system.

In all honesty, I can't understand why the Government is so opposed to reforms of this nature.

It seems to me that the people who advocate the abolition of negative gearing, think that the Government is the principal supplier of rental housing throughout the country. If that were the case, the proposal might make some sense. Either they've done no research or they're pushing a hidden agenda.

I can't speak for other advocates of abolishing negative gearing, but I for one do not think the government either is, or should be, a major supplier of rental housing.

Rather, I argue for the abolition of negative gearing, and the 50% discount on capital gains for personal income tax purposes - loopholes which result in revenue foregone of around $2.5bn and $4.6bn, respectively - on three grounds. First, that doing so would improve the equity of the tax system, since these concessions/loopholes predominantly benefit upper income earners. Second, that it would improve the 'neutrality' of the tax system by removing the favourable treatment of capital gains income relative to income from working or from other forms of investment (and there is no economic rationale for taxing income from speculation at a lower rate than income from working). Removing this arbitrary discrimination in favour of particular types of income or structures of investment would lead to more efficient (in the economists' sense) resource allocation. Third, the gains to revenue from removing these loopholes and concessions would enable an across-the-board lowering of high marginal income tax rates which act as a discincentive to labour force participation, saving and investment.

Moreover, as I noted in an earlier post, the principal argument usually put by advocates of the retention of negative gearing - namely, that when it was 'tried' in the 1980s it resulted in an 'explosion' in rents - is simply not true. And it does not become true simply as a result of being endlessly repeated.

my agenda for suggesting changes to negative gearing (not removing it) is very simple. it has skewed the housing market and speculators/investors are driving up the price of houses for those wanting to buy a house to live in.

the figures i quoted came from the Reserve Bank's submission to the Productivity Commission Inquiry into housing affordability.

Quite simply those figures showed housing affordability has dropped to the 1991 levels when interest rates were high.

New financing for owner/occupiers is dropping.

A decent society allows fair opportunity for people to acquire basic necessities such as housing. Our tax system should not allow speculators to drive house prices up by providing public subsidies for wealth creation at the expense of those wanting to achieve home ownership.

We should have fiscal policies that enable affordable housing, not encouraging asset inflation with the corresponding impending correction that could leave many devasted people in its wake.

Thus the changes I have suggested will remove the extreme heat from the market. It will encourage investors/speculators to turn over their properties every seven years and realise their capital gains, thus providing a mechanism to provide affordable housing.

I propose a law be enacted, to make it illegal to collect rent or interest, before you write me of as a loonie, think about a world without those parasitical activities, it will never happen because governments and the system of permission/justice are chocker block full of rent and interest collectors.
You may say we cant survive without the collectors of rent/interest, that is because you do not know what this world would be like without them.
To start with ,all nations would have money of the same value, that would mean we would not be bringing pineapples from Brazil to sell in a market in Queensland surrounded by pineapple farms, this happens because of the middle men in the money market, if you make 100 times more for a product you sell ,you are said to be a good business person not a thief, thats because those with the power collect rent and interest, negative gearing and rent assistance are indirect payments to greedy collectors, Howard handed out a $14000 first home grant it generated hundreds of billions of dollars out of thin air, where did all this money come from, and who recieved the most the collectors of rent and interest

Here is the rental data from the 80s when negative gearing was abolished ... I don't see the correlation, given what interest rates where doing at the time ...
QUARTERLY MEDIAN RENTS OF THREE BEDROOM HOUSES LET
($ PER WEEK)


QUARTER SYD MEL BRI ADE PER CAN HOB DAR
Mar N/A 94 87 82 74 82
Jun 130 108 90 76 78 84
Sep 115 102 96 92 79 82
Nov 108 96 103 85 75 85
Mar 105 95 95 95 87 90
Jun 116 103 108 100 81 N/A
Sep 109 106 95 107 79 N/A
Nov 125 110 94 99 79 117
Mar 125 108 99 110 88 110
Jun 132 116 97 108 88 130
Sep 128 115 101 118 80 127
Nov 131 117 102 111 102 145
Mar 137 124 101 108 83 142
Jun 160 119 97 114 89 140
Sep 161 125 102 113 86 152
Nov 163 123 109 114 85 144
Mar 157 123 110 118 102 150
Jun 152 129 110 120 136 152
Sep 162 129 106 119 131 160
Nov 181 136 104 119 142 149
Mar 187 133 105 119 130 145
Jun 252 136 128 125 123 153
Sep 230 138 122 122 120 149 129
Nov 215 139 123 125 124 158 125
Mar 205 140 125 120 120 150 130
Jun 223 143 128 123 130 152 120
Sep 210 145 140 120 125 150 120
Nov 220 140 140 125 135 153 120
Mar 220 145 147 131 135 155 123
Jun 200 150 150 130 135 155 120
Sep 200 150 150 140 135 150 130
Nov 200 160 150 140 138 155 135

oops here it is with the years:


QUARTER SYD MEL BRI ADE PER
1982 Mar N/A 94 87 82 74
Jun 130 108 90 76 78
Sep 115 102 96 92 79
Nov 108 96 103 85 75
1983 Mar 105 95 95 95 87
Jun 116 103 108 100 81
Sep 109 106 95 107 79
Nov 125 110 94 99 79
1984 Mar 125 108 99 110 88
Jun 132 116 97 108 88
Sep 128 115 101 118 80
Nov 131 117 102 111 102
1985 Mar 137 124 101 108 83
Jun 160 119 97 114 89
Sep 161 125 102 113 86
Nov 163 123 109 114 85
1986 Mar 157 123 110 118 102
Jun 152 129 110 120 136
Sep 162 129 106 119 131
Nov 181 136 104 119 142
1987 Mar 187 133 105 119 130
Jun 252 136 128 125 123
Sep 230 138 122 122 120
Nov 215 139 123 125 124
1988 Mar 205 140 125 120 120
Jun 223 143 128 123 130
Sep 210 145 140 120 125
Nov 220 140 140 125 135
1989 Mar 220 145 147 131 135
Jun 200 150 150 130 135
Sep 200 150 150 140 135
Nov 200 160 150 140 138

dovif,

could you explain how a rising tax free threashold decreases the attractiveness of negative gearing?

Negative gearing need not bee abolished overnight it could just be an incremental thing so as not to shock people.

To me its a thing that happens with a second property and only happens to avoid tax.

Since the name of the game is to have everyone buy a house of thereown and live in it, and negative gearing raises the price of houses and makes them inaccessable to first home buyers it may be a bad thing.

Lets have negative gearing on only the home you are living in!!

If it is remeoved could not tax rates be lowerred all around?

Abolish it.

So the holding of property (at current prices only) will be very unattractive.

So the prices will fall - by 20%, by 50%, by 90%? They will fall to the TRUE value, where the cost of buying an investment property gives a return which is equivalent to the borrowing interest rate or a bit better.

Young people will be able to afford to buy a home, or finance its construction with loan repayments approximately equal to the weekly rental. Better a long way than the current situation where your greed has put the likelihood of home ownership out of reach of most who don't already own one.

Shame on you who want to keep it that way, like the original author of this topic, a vested interest who is motivated by greed.

If you're worried about the housing numbers not keeping up with immigration -then reduce it.

This Age article from 2003 still holds true today:
http://www.theage.com.au/articles/2003/07/07/1057430135658.html

What could be better (except for all those of you blinded by greed)?