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The Forum > General Discussion > Negative Gearing and the myth about the poor subsidizing the rich.

Negative Gearing and the myth about the poor subsidizing the rich.

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I find it rather amusing how the opponents to negative gearing often use the statement 'why should the poor subsidize the rich', well guess what, they don't, it's all a myth and here's why.

You see the top 10% of individual PAYG earners, 'the rich' as they are known, are the only ones who actually pay more in taxes than they draw in support (welfare) as the remaining 90% draw more out than they put in.

So if anything the only ones who are subsidizing the rich are those from the top 10% who don't negative gear. So it's all a big myth.
Posted by rehctub, Monday, 27 June 2016 6:03:36 AM
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Quite right. But there is still no justification for negative gearing. Nobody buying up property for profit should be receiving taxpayer help to do so. If the so-called 'mums and dads' (ridiculous term) feel that thay can buy property other than their own dwelling, good luck to them. But they do not need our help to enrich themselves.
Posted by ttbn, Monday, 27 June 2016 11:56:15 AM
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I am confused about what "negative gearing" means:

One version has it that it's about being able to deduct losses from rental business against profits from work. That doesn't seem wrong: one should indeed pay their honest tax on their net earnings, not on their turnover.

But there's another side to the story: when a rental asset is sold, one is not required to pay tax over the full amount they gained, unlike those who earn their money from work, who are. This is wrong.

What is also wrong is that people are allowed tax deductions for the interest they pay to the banks as they invest moneys that are not theirs, money they never earned. It is unwholesome, like gambling, to use money that is not yours and while the practice should not be forbidden, it should also not be encouraged.

In summary:
1. Interest on loans should not be recognised as a tax deduction.
2. CGT should be paid over the full amount one gained, after deducting non-real nominal gains due to inflation.
3. Losses from a rental business that are not due to interest-repayment, should be allowed to balance one's earning from work in one's tax-return.
Posted by Yuyutsu, Monday, 27 June 2016 12:48:46 PM
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Negative gearing is a scam.

Why should anybody subsidise your loss making investments?
If you are too stupid to run a profitable business then you deserve to lose it.
If the rent doesnt cover the costs of your investment property then you are a fool and should lose money.
The top 10% are rich enough already without being given tax breaks for idiotic business decisions
Posted by mikk, Monday, 27 June 2016 3:30:51 PM
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So, if rents are not enough, just increase them, so thousands cant afford a place to live. What a bad idea.

The bottom line , negative gearing allows rents to be reasonable, tenants benefit by rents being approx. 30% of their income, landlords benefit as the tax deductions allow them to at least make a reasonable return on the risk they make, the government loves it by getting, council rates, land tax, GST, income tax etc.

Stop neg gearing and rents go up to compensate the landlord, or simply not invest at all in residential property.

Read what happened in 1985 to 1987 when Paul Keating stopped neg gearing. The waiting list for public housing rose by 40% (ABS stats) and rents went through the roof (29% increase from 1985 to 1987)

One in 6 people are employed in the building industry, stop neg gearing and thousands of plumbers, sparkies, brick layers etc will be out of work.
Posted by kirby483, Monday, 27 June 2016 4:18:49 PM
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Yuyutsu every business can deduct the interest on borrowings used to fiancé that business from profits.

Interest is a very large part of the cost of many businesses. Without borrowings few retailers would be in business. Many of them have mortgaged the family home to fund the business.

Virtually no mining would have been possible, without borrowings, & they are a legitimate cost. Huge investments over years are required to develop a modern mine, which can include rail & port infrastructure, long before a single cent is earned.

Why should rental housing be different to every other business. The thing you & Mikk are probably really wanting is to quarantine those losses to the rental business. Again this is purely driven by envy of those who won't take the chance of losing the family home to buy a rental property.

As for capital gains, this is a tax office driven thing. Profits from gains when the property was sold used to be corrected for inflation, & gains taxed after correction. This was onerous for all, as inflation varied over years or location. It was to minimise public servant labour involved that the change to taxing the full inflated profit at a percentage less than 100% was made the system.

This advantages some investors & disadvantages others, but advantages the taxpayer as the most cost effective system. Changing it to suit the envious would be like cutting off the taxpayers nose to spite his face. A typical dog in the manger attitude. Surely this is not your chosen attitude.

PS. I would never own a domestic rental property, lousy investment. Industrial can be OK, but is still too risky for me.
Posted by Hasbeen, Monday, 27 June 2016 5:21:24 PM
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The stupidity of this policy is that for about $1500.00 on can form a trust and claim all expenses, and you guessed it, the costs are also deductable.

The other fact that flies under the radar is that of the taxes paid by the banks, on the profits they make from charging interest. And considering most properties become positively geared in time, through income growth, that tax paid is dome so without the claims of NG.

For anyone who wants to see negative gearing gone, all I can say is two things.
One, I hope you have your own home and don't rely on rentals, and Two, I hope you own it, or at least almost own it because nobody will know its true value, meaning you may get a margin call from the bank one day. And selling wont be an option, because who in their right mind is going to buy it.

But, the myth being exposed is, if you don't pay more tax than you claim in welfare, you are not subsidizing anything.
Posted by rehctub, Monday, 27 June 2016 5:40:23 PM
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Dear rehctub,

Sigh.

We back on negative gearing again?

This was your argument;

“You see the top 10% of individual PAYG earners, 'the rich' as they are known, are the only ones who actually pay more in taxes than they draw in support (welfare) as the remaining 90% draw more out than they put in. So if anything the only ones who are subsidizing the rich are those from the top 10% who don't negative gear. So it's all a big myth.”

Firstly your figures are bunkum. Tell us where you plucked them from and we can have a discussion. Nor can you take it as a blanket rule. 3 out of 5 of my sibling group have not had children nor are they big users of the health system, two of the biggest draws on the taxation system. They are paying a net tax amount and they are certainly not in the top 10%.

But your main complaint seems to be with out progressive taxation system. Look, as a society we rightly decided that the amount of money people earn should be taxed at an inclining rate. It is part of a very worthwhile ethic which says those who earn more should contribute more. Leaving aside the Medicare levy a person on $150,000 pays tax on the first $50,000 at exactly the same rate as a person on $50,000. They are taxed under the same rules.

In Denmark the rates are notably higher but there is a sense of pride in paying them because of the society is delivers; one of the happiest in the world.
http://www.usnews.com/news/best-countries/articles/2016-01-20/why-danes-happily-pay-high-rates-of-taxes

The amount a person pays is the expense of living within a society. That proportion becomes the government's not the person's. The less of that allocated proportion that is paid comes at a cost to our society and impacts the services it provides. Negative gearing diminishes that contribution and especially on existing home provides very little benefit in return.
Posted by SteeleRedux, Monday, 27 June 2016 11:53:44 PM
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Dear Hasbeen,

<<Interest is a very large part of the cost of many businesses.>>

Yes, and it is crooked. Borrowing allows people to live beyond their means and bring more children to this world which they cannot afford. It should not be encouraged and rewarded.

<<Virtually no mining would have been possible, without borrowings>>

Because society is addicted and spoiled. If you want to mine, all you should need to start is a $50 shovel.

<<Why should rental housing be different to every other business.>>

It should not. No one should receive a gift (in the form of tax deductions) for borrowing monies that are not theirs while the rest of us who either do not invest or invest our own rightly-earned money, pay our full taxes. This encourages a bad habit, so it should be stopped.

<<The thing you & Mikk are probably really wanting is to quarantine those losses to the rental business. Again this is purely driven by envy of those who won't take the chance of losing the family home to buy a rental property.>>

I cannot speak for Mikk. Let me assure you that I have nothing for or against the rental housing business. As for quarantining, I in fact wrote the opposite. Also, I do not envy for their low morals those who take the chance of losing their family home to buy a rental property: I think they are irresponsible for doing this to their families and also for willing to live on tax-payer money if they in fact end up losing their homes.

Regarding CGT, what's so onerous in a simple table-lookup and multiplication? Even easier with an online calculator. You bought an asset in 19xx for $XXXXXX, sold it in 20yy for $YYYYYY, inflation during that period was zz%, so your earning of (YYYYYY-(XXXXXX*(1+zz/100))) should be taxed like any other income. What asset it happened to be should not matter. I have no idea what envy you are talking about, I only look at the ethical/moral aspects and investigate what needs to be changed in order to make things morally right.
Posted by Yuyutsu, Tuesday, 28 June 2016 12:22:02 AM
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Steel and Yuyutsu, if you take away incentives to invest, people will stop investing, its as simple as night turning into day.

Y, your explanation with regards to calculating CCT is right, however the missing link is the public service, as they are incapable of doing such simple math.

The reason behind the discounted CGT was to encourage the investor to sell the asset, so another could be built, this is the reason you have to reinvest in a similar sector within 12 months to retain the discount.as it was aimed at the housing shortage problem, the problem still exists and this change will be a backward step.

Steel
Visit pretty much any suburb in any city or regional town and you will find a large reduction in rents from older homes to new ones, so if the older ones are no longer available, the cheaper accommodation will dry up. The problem with this policy is that once lived in, the new home will become old and taboo for investors.

The other effected area will be that of whats known as 'upgrades' where the first home becomes a rental when the owners upgrade. That will have a two fold effect, as the first wont be a much needed rental, and the second wont get built.

If you wiah to make changes to NG, limit the number of houses one can gear, or the amount one can gear because that will have a much lesser impact.

Either way I think Shorten is dead in the water so it wont really matter come next week.
Posted by rehctub, Tuesday, 28 June 2016 8:05:26 AM
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rehctub,

".... if you take away incentives to invest, people will stop investing, its as simple as night turning into day."

We've been through all this before...negative gearing is primarily a strategy employed for making a loss so as to minimise one's tax bill.

The End.
Posted by Poirot, Tuesday, 28 June 2016 8:58:05 AM
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ttbn is right. Tax payers should not be subsidising the attempts of others to enrich themselves, nor lock future generations out of the housing market for that matter. I too want to puke when I hear this phrase, “mum and dad investors”.

My brother’s wife’s parents bought their house for them and have just recently bought another house for the child that my brother and his wife haven’t even conceived yet. Let that sink in: someone who does not yet exist owns a house that was purchased by outbidding hard working young couples who just want to own their own home. It’s wrong.

This says more about the state of things than it does about negative gearing being a good thing.
Posted by AJ Philips, Tuesday, 28 June 2016 10:07:11 AM
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neg gearing is available to anyone, not just the rich. You can own a home if you try.

Our first home was a two bedroom unit in an industrial area, from there by careful budgeting we paid it off and moved houses and now own several properties. And no I don't work for the government, I am self employed working 80-100 hours a week, taking a risk every day, so I can become a self -funded retiree and not be a burden on society.

This "fairy tale" of a rich person buying their unborn grandchild a house, well good on them, they probably paid in GST, rates and income tax millions over the years.

As said many time over, if there is no incentive to buy residential housing (by tax deductions) very few homes would be built. The low rent charged now, is not enough incentive to have an investment property. So, rents would go up and more tradies would be unemployed.

The ones complaining about neg gearing, are just jealous that someone else has worked hard to get ahead in life. They would prefer the government pay for everything.

If the argument is about the "rich" not paying enough tax, then why don't commonwealth public servants pay tax? Think about what I just said, on paper you do, but the reality is you don't pay income tax as it doesn't increase tax revenue.

Tax churches and Mosques, if you really want to help Australia
Posted by kirby483, Tuesday, 28 June 2016 11:37:50 AM
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Kirby483,

Negative gearing was all good and well once upon a time, but when it starts to create a permanent underclass with a sharp divide between the 'haves' and 'have nots', then everyone will pay to some degree or another, and not just financially. We all started out with two-bedroom fibro houses an hour and a half from the city. The problem now is that not even those are affordable to those looking to get a foot into the market.

It is a myth that the younger generations are all wanting to buy mansions ten minutes from the city.
Posted by AJ Philips, Tuesday, 28 June 2016 11:52:45 AM
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Poirot, we will see the true end either way if labor wins and they get their policy across the line. My tip is they wont win, but hey stranger things have happened.

AJ, if we do take the PAYG investors out of the market, how do you think rents will be effected, especially given there will be fewer older homes to rent, taking into account they are usually cheaper to rent than new homes.
Posted by rehctub, Tuesday, 28 June 2016 12:02:30 PM
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rehctub,

I'm certainly no economist, but those more qualified in this area don't seem to agree that winding negative gearing back a bit will push up rental prices.

http://www.abc.net.au/news/2015-05-06/hockey-negative-gearing/6431100
Posted by AJ Philips, Tuesday, 28 June 2016 12:11:15 PM
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Dear Rehctub,

<<if you take away incentives to invest, people will stop investing>>

Then let them not invest, especially if as you say, they are there for tax-payer handouts rather than for making a good and honest living.

<<The reason behind the discounted CGT was to encourage the investor to sell the asset, so another could be built, this is the reason you have to reinvest in a similar sector within 12 months to retain the discount.>>

I didn't know it - that's terrible!

It's a good practice to keep your investment over the years, then pass it on to your children and grandchildren. Doing so you will care for it, plant trees and create a pleasant atmosphere around it.

Yet another reason to rid of this CGT discount.

<<as it was aimed at the housing shortage problem, the problem still exists and this change will be a backward step.>>

Hmmm. Along those lines, here's an even better solution: kill people, then the remaining ones will have ample housing.
Posted by Yuyutsu, Tuesday, 28 June 2016 12:23:11 PM
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AJ, when NG was introduced, interest rates were about mid to late teens, so Ng was a great tax break. Nowadays, rates are in the late 4's to early 5's, and given the interest is the only deductable part of the loan, as well as fees, lower rates mean lower subsidies from the tax payers.

Besides, most people can afford a home, they simply make lifestyle choices that take away that opportunity and of cause if you are talking about a $650K first home in Sydney, they need I say any more.

There are plenty of places areas around with housing from as little as $250K, even up to $450 K which is still affordable, but not along with maxed credit card repayments, plasmas and multiple internet gadgets. Not to mention $5 late's.

If a person can afford to rent, they can afford to buy. However, if they choose not to buy at 4%, they never will so whats the worry.
Posted by rehctub, Tuesday, 28 June 2016 2:14:28 PM
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Kirby, seems like you and I come from the same model, having been there myself for many years.

The bit that annoys me the most is to have some twerp public servant say "your kids get zero because you earn too much" Of cause they contradict themselves because in a separation situation, the more one earns, the more the kids are paid.

But, from one risk taker to another, I say bravo to you for defying the odds and having a go. As I have said to many, the reality of entering into small business today, is that one stands a better chance of failure than success and that's just sad.
Posted by rehctub, Tuesday, 28 June 2016 2:19:43 PM
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Dear rehctub,

You wrote;

“if you take away incentives to invest, people will stop investing”

We have been through this before. These are not incentives but subsidies to make loss making investments viable.

If there is a greater good, ie the construction of new homes then you perhaps have an argument but to be foregoing billions of tax dollars to pay for subsidies on existing homes is just silly. The realestate agents and the banks love it of course just as the love the resultant inflated housing market. But affording a new home is now a real struggle. It shouldn't be the legacy we leave our children. Labour's NG policy is probably the best we can hope for at the moment but leaving the situation as it is would be wrong.
Posted by SteeleRedux, Tuesday, 28 June 2016 3:34:06 PM
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SteeleRedux,

using your "definition" of subsides . So if the tax payer gets no subsidies to provide rental accommodation. There is no incentive to invest in residential housing, so less supply of rentals means rents go up. Less building being built means higher unemployment (carpenters, sparkies, bricklayers etc).

So, lets remove all subsides, no private health rebate (means millions drop out of the private system and more strain on the public system) or Union fees , lets stop subsiding them and that is a tax deduction or subsidy as you call it.

Lets stop any subsidy to people or businesses, so there is no investment in capital or R&D. Meaning nothing gets invented and millions are unemployed.

Not having subsidies to encourage investment was tried (and badly failed) in many countries, USSR, China, North Korea come to mind
Posted by kirby483, Tuesday, 28 June 2016 4:33:07 PM
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Opps! sorry I just realised I spelt subsidies wrong
Posted by kirby483, Tuesday, 28 June 2016 4:35:11 PM
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Housing is a people management business. The regulatory risks alone should advise caution.

Hats off to anyone who is prepared to take up massive loans and run the considerable risks to provide shelter for other Aussies.

Where some and in modern times probably many tenants imagine that they are 'model tenants' if they might one day get around to paying the rent. Discretionary expenditure always comes first.

In the last week I inspected five houses for friends returning from an overseas posting. All were in good residential suburbs.

The first two were 20+ years old and immaculate, having been lived in by owners and their families (now empty nesters downsizing). I recorded as comments, that carpets, walls, fittings, curtains and so on, were original and all in very good serviceable condition. My only criticism was the outdated colours eg apricot/beige formica.

The other two were in the same suburb and both substantially renovated (not cheaply either) between three and five years previously. The agent said it was before they were bought by investors. However both showed the obvious 'wear and tear' of tenancies. It was a long list of repairs for both, with such summing up as, 'with the hard wear to the benches, damaged cupboard door fittings and so on, kitchen + bathroom replacement, replace carpets and repaint all interiors'. Use a plasterer and carpenter first on advice of painters.

The rented homes had been professionally managed. I met one of the property managers who said simply that it was all 'wear and tear' as accepted by the rental tribunal and that light fittings, whiteware, an oven and dishwasher as examples, had also been replaced through wear and tear.

Those are not special examples.
tbc..
Posted by onthebeach, Tuesday, 28 June 2016 4:38:08 PM
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continued..

I suggest that the only way ahead for rental housing is to let bare bones' Where the incoming tenant is responsible for the floor coverings, curtains and interior decorating. That may be the only way to lessen the costs for the now smaller number of responsible tenants who must inevitably pay higher rents to support the others who are hard on properties. It would allow for cheaper rent and encourage longer rental terms.

I cannot see government stepping in to make up for any shortfall in housing for low and fixed incomes.

The big private investors, eg insurance and super funds, are NOT interested in rental housing and for good reasons - management intensive, to real way to add value and be adequately recompensed for it, high risks and poor returns.
Posted by onthebeach, Tuesday, 28 June 2016 4:39:57 PM
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In the example above I omitted one house of the five because it wasn't suitable and no assessment was made.
Posted by onthebeach, Tuesday, 28 June 2016 5:10:12 PM
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Negative gearing provides some tax relief for investors in property who rent out their property, effectively subsidizing rents. Removing negative gearing removes investors from the market and pushes up rents. So the people that suffer the most is the 30% who rent.

It is basic economics, happened before and will happen again.
Posted by Shadow Minister, Tuesday, 28 June 2016 7:13:26 PM
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Dear Kirby483,

Look if I had incurred losses after the first couple of years of any of my small businesses I would rightly have had a please explain from the tax office. Yet people who 'invest' in housing will often claim a subsidy for 25 years. It is just insane.

As stated my main beef is against providing subsidies for existing houses. I recognise the argument that providing subsidies for new housing does have a social good in that it increases the housing stock and provides employment for the tradesmen and suppliers.

You made this point yourself; “There is no incentive to invest in residential housing, so less supply of rentals means rents go up. Less building being built means higher unemployment (carpenters, sparkies, bricklayers etc).”

But what Labour proposed was to wind up negative gearing for future purchases of existing homes. It seems quite a sensible policy. If you would like to explain why it isn't then I am all ears.
Posted by SteeleRedux, Tuesday, 28 June 2016 7:38:40 PM
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" If you would like to explain why it isn't then I am all ears."

Really? Let me have the umpteenth crack at it.

Initially, with the used house market nobbled by an absence of investors, new house investors will not know the resale value of their prospective asset. The business case therefore will fail to stack up.

As used houses sell, the market will find its level, confirming the decision of new house investors not to buy in.

Housing supply will fall. Rents will rise. At some point the rise will appeal to investors of used houses. At some higher point it will appeal to new house investors.

My question to Steele's glee club is why haven't house prices gone crackers in Hobart, or Perth? NG is the pimple on the CGT bum. Leave it alone and focus on fixing the CGT by taxing real gains fully, i.e. indexation of cost base and no concession.

As for all the money that abolishing of NG will provide for public expenditure, it's make-believe:
https://www.poets.org/poetsorg/poem/antigonish-i-met-man-who-wasnt-there
Posted by Luciferase, Tuesday, 28 June 2016 9:18:16 PM
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I said "Housing supply will fall". No, demand will outstrip supply.
Posted by Luciferase, Tuesday, 28 June 2016 9:41:23 PM
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Old or new, providing shelter is providing a public good.

That more shelter is required and prices go up, is down to the government's enthusiasm for immigration and of course to the myriad of taxes, direct and indirect, that government takes from the milch cow of housing, investment and owner-occupied.

The leftists don't want those dreadful owners, the despised 'landlords' making a loss out of their investment, but they particularly don't like them making a profit either. So, both positive and negative gearing are out, as is ownership of property anyhow they'd say. They'd say that the State should own it all. That way they hope to get something for nothing. Fat chance.

Perhaps Shorten and others can explain how government will be making up for the housing shortfall when private investors take a step back from abysmally low returns and high risks and find better, easier returns elsewhere. Or money is moved abroad, probably with the exasperated investor and family.
Posted by onthebeach, Tuesday, 28 June 2016 9:49:19 PM
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Dear Lucifrase,

More than happy to see adjustments to CGT.

However you seem to be confusing investors and speculators. The former go and find an investment that can stand on its own just as two of my relatives did recently when they brought new homes in an area where the rent will surpass the expenses right from the go without any negative gearing subsidies. The latter dive into a loss making venture in the hope that the increase in price will make it worth it in the long run.

The first pay tax on the income earned, the second require subsidies of foregone taxes for decades to make their venture viable.

It is the speculators that have driven house prices to hardly affordable levels. The sooner they are eased out of the housing sector the better.

Unless of course you are going to make the case that the property sector is not overinflated, then I would invite you to reflect on the tale of the dry dromeidary.
http://www.poetrylibrary.edu.au/poets/paterson-a-b-banjo/shouting-for-a-camel-0026018
Posted by SteeleRedux, Tuesday, 28 June 2016 10:15:22 PM
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If you want limits on NG, argue for that, not its abolition, and apply it to all asset classes.

What comes with that is limits to mobility of average punters who want to back themselves in through leverage.

We live in a capitalist society that has provided a far better life for more of its members than any hessian-clad, sad-sack socialist nation. I'm for erring on the side of encouraging risk-taking, growing the pie, and taxing and distributing wealth. CGT is a part of this, as are death duties. NG does not rate in comparison to these for attention, IMO
Posted by Luciferase, Tuesday, 28 June 2016 10:45:51 PM
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Dear Luciferase,

You wrote;

“If you want limits on NG, argue for that, not its abolition, and apply it to all asset classes.”

Isn't that exactly what I have done? I have said I want it reserved for new dwellings as there are recognisable social benefits realised through supporting building sector jobs and increases in housing stock.

You then opined;

“We live in a capitalist society that has provided a far better life for more of its members than any hessian-clad, sad-sack socialist nation.”

Permit me to reflect on some of your wording. I'm not sure that subsidising loss making investments really aligns with any true notion of a 'capitalist society'. The capitalist uses money to produce commodities which earns them more dollars. Any true capitalist would decry the distortion of a market through government interference. I hope you accept at least that Australia's housing market is suffering just such a distortion.

As someone who has owned and operated small businesses and thoroughly enjoyed the opportunities a capitalist system can bring I recognise the role of government in a such a society as controlling the excesses that inevitably follow unfettered capitalism.

Those controls can appear to some as socialism. The Nordic countries regularly figure in the top rankings in any happiness survey despite being heavily taxed and heavy spenders on social services. Social democracies with market economies supporting welfare states seem to provide the greatest value to the population as a whole.

Finally you said;

“I'm for erring on the side of encouraging risk-taking, growing the pie, and taxing and distributing wealth. CGT is a part of this, as are death duties. NG does not rate in comparison to these for attention, IMO”

More than happy to acknowledge our respective opinions have us, if not on the same page, then at least in the same ballpark, if you would excuse the mixed metaphor.
Posted by SteeleRedux, Tuesday, 28 June 2016 11:48:29 PM
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" I'm not sure that subsidising loss making investments really aligns with any true notion of a 'capitalist society'."

There is no more intent to lose money in investing for capital growth than in carrying on any other profitable activity. NG simply time-shifts losses and the CGT treatment is an incentive.

You do, presumably, support loss write-downs in business, if not against income from paid employment
Posted by Luciferase, Wednesday, 29 June 2016 1:00:19 AM
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Luciferase,

"There is no more intent to lose money in investing for capital growth than in carrying on any other profitable activity...."

Property investment advisers would beg to differ...

"How is losing money considered a wise investment strategy?

Buying an investment property is an important financial decision that is part of an overall strategy designed to meet both your shortand long-term goals. This strategy should be based on your current financial position and personal circumstances.

With this in mind, the main reason investors use negative gearing as a strategy is to reduce taxable income, while building wealth through potential capital growth. Put simply, if you make a loss on an investment property, you can claim a tax reduction on your income (known as a tax offset). You can then use the tax offset to lower your tax bracket, meaning you pay less tax.

Negative gearing is a particularly popular strategy with high-income earners who are looking for ways to build wealth and have the tax department help fund the investment...."

http://www.whichproperty.com.au/News-Articles/Negative_gearing_explained
Posted by Poirot, Wednesday, 29 June 2016 7:07:55 AM
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Thanks for that handy, informative quotation from unbiased investment experts.

If you're flogging Gold Coast units, of course you'll spruik NG to punters as the path to riches. Well, it's just not, as many have found, but don't let me stop you believing.

If Labor wins, the massive reduction in investment in rental housing will raise rents and gov't will need to build more public housing, but with what? OTB makes fair points.

Also, it is still not clear to me whether Labor is initially proposing to remove NG from all asset classes other than used housing. It would only be a matter of time before it did, I suppose.

I'd be happy with a limit on NG that continues to give M&D's some investment leverage. I also believe that death duties/inheritance taxes need looking at so CGT liability is not carried to the grave.

I'm not mad keen on any major party but, on balance over a range of issues, LNP has my vote this time. Labor can't lie straight in bed over LNP's welfare and super changes, pretending everybody wins under its governance when we all know it will carry through the necessary changes if elected. Also, Labor is too tinged Green on a range of issues for my vote this time.
Posted by Luciferase, Wednesday, 29 June 2016 10:22:04 AM
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"It is the speculators that have driven house prices to hardly affordable levels"

Wild claims such as that defy commonsense. They also challenge fact. Honestly now, any type of investment has its cowboys. But taking huge risks like that they don't last long.

That is gambling not speculation. The bigger fool, as where new units are being bought off the plan to be sold later and before the final payments are due. How will Shorten's 'initiative' prevent that?

Then there are the 'windfalls' the tabloids like to stir the serially jealous with. The odd house that has stood and been owned for many decades and has apparently boomed in 'profit'. But no-one has factored in the costs of holding, the opportunity costs and the comparative/relative buying power if that house is sold for another.

The elder's home that might be worth a large sum on the market if sold, but is worth nothing because it will not be sold. She needs somewhere to live and the familiar surroundings where the family was raised and dad died save the taxpayer big money while she continues to live an independent life.

The one-sided debate about negative gearing is actually about Labor raising higher and new taxes. But it is known that Labor's policies do not include necessary review of existing expenditure that is poorly directed and is NOT producing the outcomes originally claimed. For example, how many billions need to be wasted on indigenous before anyone takes notice of the government's own auditor, the ANAO?

All government programs need to be reviewed often and straight questions asked whether the original goals, if stated! :( continue to exist and what measures of achievement and performance, value for money, have been set.
Posted by onthebeach, Wednesday, 29 June 2016 11:07:07 AM
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steelredux,

you quoted "But what Labour proposed was to wind up negative gearing for future purchases of existing homes. It seems quite a sensible policy. If you would like to explain why it isn't then I am all ears."

If we follow Labors policy of neg gearing for new homes only, What is a new home? 12 months, 5 years old, ten years old or when you sell it, it is no longer a new home?

So, let's say, the house becomes an old home when you sell it. So, you advertise to sell it, but no investor will want to buy it (as he can't get any neg gearing advantage) so the only people who might buy it are 10% of the population (first home buyers) which means you cant sell it for a profit (or very little).
Your next door neighbour is unhappy as his property also decreases in value. The banks are unhappy as their debt exposure increases and therefore they have to restrict borrowings more (eg you need a 40% deposit saved rather than 20%)This means first home buyers have to save more just to buy the same house.

Investors will think, why should I buy a new home, when I have no guarantee I will get my money back when I sell it?

So, what happens, no investor in their right mind would buy an investment property with no capital growth, so demand exceeds supply and rents go up. Less buildings are being constructed meaning more unemployment, banks are forced to restrict borrowings as house prices drop and potentially more foreclosures.

Higher rents, more unemployed, more homeless = recession, welcome to America 2007
Posted by kirby483, Wednesday, 29 June 2016 11:11:57 AM
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contd..

The debate about NG is one such skewed politically motivated debate, where the focus should be on population first, then the provision of housing (as a subset of broader considerations) and flowing down to the examination of risks and treatments for a sustainable, profitable rental housing sector that can stand on its own feet as a business without NG if that is to be removed for all investment classes.

Is all population growth good, for instance in a few big capitals? Maybe not. Outside of the big cities there is plenty of housing going for a song. However Whitlam and many others have proposed all manner of initiatives, spending more taxpayer money of course, to encourage migrants to settle in the country, but to precious little success. That is because the 'diversity' tail is forever swinging the immigration policy dog and preference is stupidly being given to migrants who are known to lob in cities and are forming no-go 'burbs for others. Nothing learned from the European experience apparently.

I will leave it at that, except to repeat that the NG debate is at best a distraction. The familiar class war from the Labor leaders who espouse International Socialism, but are careful not to make that the rightful subject and focus of their electoral promises. Then there are 'Big Australia' and 'Growth Forever', that are not being subjected to due scrutiny either.

Above all, it is spendthrift Labor saying they have no intention whatsoever of being accountable for government expenditure and an open chequebook please.

Meanwhile the lies continue. In this case the big lie being the refusal by political parties to admit the obvious, which is that they all rely on large scale population growth through escalating immigration because there are some very serious problems they are avoiding and they stink at planning.
Posted by onthebeach, Wednesday, 29 June 2016 11:24:09 AM
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Steel, if I as an investor, or better my wife, as she does not invest through a trust, buys a new home assuming the rules change, can anyone guarantee the value of that new home once it is ready to be sold again, a day, week, month or years later. Of cause the answer is no. There in lies the problem as the only ones who can take such a gamble are governments providing public housing, but they're broke.

This is why this is a stupid policy and this is why it will hurt so many, yet effect so few because if you want the NG benefits on older homes, you simply pay $1500 and form a trust.

Rents will go up simply because new homes will not be built in the numbers they are today, because no one will guarantee the value of the used asset.

It is so simple its almost stupid to belie otherwise and I ought to know because I have bought and sold almost twenty properties and still hold quite a few. Only one is not paying its own way and that's because of time.

As for businesses loosing money, its quite common because some businesses don't return a profit for years, orchids are one example.
Posted by rehctub, Wednesday, 29 June 2016 12:33:06 PM
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"...if you want the NG benefits on older homes, you simply pay $1500 and form a trust."

Huh? NG is against income from paid employment. Trusts can't NG, only carry losses forward to write down against future profits.

If NG is abolished, surely individuals would be allowed to carry losses forward without having to resort to company/trust arrangements.
Posted by Luciferase, Wednesday, 29 June 2016 1:13:04 PM
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"Government told months ago negative gearing benefits high-income earners"

"SCOTT MORRISON: I think it goes against fairness of people, ordinary mum-and-dad investors, who are just trying to get ahead. And if you want to do something for families, you don't go and hit mum-and-dad investors with a housing tax.

DAN CONIFER: But a Treasury document, prepared for Federal Government ministers and obtained under Freedom of Information laws, shows most of the windfall from the tax breaks goes to high-income earners.

Treasury put forward modelling from the Australian National University that found more than half the negative gearing tax benefits go to the top 20 per cent of earners, with the bottom 20 per cent getting just over five per cent of benefits.

And it says the top 10 per cent of income earners account for nearly three quarters of the capital gains tax savings."

"CHRIS BOWEN: These documents confirm what sensible people already knew: that negative gearing and capital gains tax both benefit high income earners particularly and especially.

But what they also confirm is that the Treasurer was told this by the Treasury, but has continued to lie about it, has continued to hide these documents."

http://www.abc.net.au/news/2016-06-18/government-told-months-ago-negative-gearing/7522662

Ho hum...now you can all have a go at the ABC for reporting Treasury's advice.

Notwithstanding that rehctub, Luciferase et al obviously have far more expertise....
Posted by Poirot, Wednesday, 29 June 2016 1:23:53 PM
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Yes, of course the top 10% get the most from neg gearing because they are on the highest tax bracket.

As an example, your Union fees, lets assume you pay $1000 a year to be a member if you pay 30% tax rate you get $300 tax refund on your Union dues, if you are a union boss earning $180k or more he is paying 47% tax. So he gets $470 tax refund. Is that fair in your eyes?

He earns more but he gets a greater benefit.

So, obviously high earners paying high tax get a greater benefit from tax deductions. What these reports don't tell you is how many people own residential investment properties. Over 80% are owned by Mums and Dads, not multi-nationals.

Change neg gearing laws and you hurt 4 out of 5 investors.
Posted by kirby483, Wednesday, 29 June 2016 2:10:57 PM
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kirby483,

" Over 80% are owned by Mums and Dads..."

By that you mean the little folks?

Not true....

"When I crunched the numbers, over 60,000 people with investment properties whose taxable income was $80,000 or less had total incomes above that $80,000 threshold."

"Almost 74,000 people who declare rental income or losses have a total income of less than $0 - that's right, they either live on nothing or have other means of paying the bills that don't have to be declared to the ATO."

"That's because the ATO's measure of "total income" includes net, not gross, rent - that is, rental earnings or losses after deductions such as interest payments have already been removed.

The very reason that many housing investors fall below the $80,000 threshold is because they have used negative gearing to slash their tax bill.

The net result of all these calculations could be boiled down to a 'fact check' of the HIA's statement, and the outcome would be 'massively overstated'."

http://www.abc.net.au/news/2014-09-24/janda-the-myth-of-mum-and-dad-negative-gearers/5766724

Just another con...
Posted by Poirot, Wednesday, 29 June 2016 2:21:30 PM
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kirby483,

Spot on again.

As are other posters who are trying to explain to the unwilling who need an excuse for not doing what government from both sides of the House have exhorted and are forcing them to do, to provide for themselves and for their own retirement.

I don't imagine that there would be many who would agree that the government's tax arrangements should be discriminating against the smaller investors, those mums and dads and aspirational others, that government itself is very strongly encouraging to sacrifice present lifestyle to provide for their own, their spouse's and their children's present and future needs. In fact, government has the expectation that workers should be extending their support to aged relatives too.

Without negative gearing the individual investor who does not have high earnings nor the advantages of incorporation is very limited in his/her investment opportunities, and is also denied personal input while being eaten alive by management and trading fees.

There is no valid reason why the individual who only has access to his/her pay from a boss, or is otherwise restricted eg by low in come, should not be considered a sole trader and be able to deduct losses from all of his/her other income streams, eg his wages. He/she is after all the one entity when ATO comes to compulsorily take its share in taxes.

What Shorten and others are doing with their Class Wars is hurting the wage earners and disadvantaging them compared with those investors who can play the field.

Women are a very good example of a class of investors who would be excluded form investing in property when Shorten hits them with his new taxes. It is simply not good enough to claim they can always invest in one sector of the market, new developments, where the entrepreneur has already squeezed out all profit than can be made and the rapacious federal, State and local governments have taken their large cookie cutter bites too. Why should they be effectively excluded from used property where they can make improvements to their, the renters and community's benefit?
Posted by onthebeach, Wednesday, 29 June 2016 2:41:42 PM
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not true Poirot,

The reason is why many pay zero income tax is only partly due to neg gearing, the biggest tax benefit of owning an investment property is depreciation.

Many of my friends earn good money, but through depreciation they can reduce their income tax and in some cases to zero. Even positive geared properties still claim depreciation.

So, your Union boss earning $200k a year claims 2% depreciation on his million dollar investment property, so he claims $20000 and gets back $9400 in his tax return. You and all of the workers earning less get back $6000. If your Union boss has enough properties he will end up paying no income tax.
Posted by kirby483, Wednesday, 29 June 2016 3:40:01 PM
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Sorry to correct you poirot, but gross rental income is added to your PAGY income, then you deduct your expenses, which include interest, then if your net income becomes smaller than what you have already paid tax on, you receive a refund. Plus, the banks get taxed on their profits (interest on your loans) so the tax man on the one hand gives a deduction, NG, while on the other charges tax. Income from interest charged.

As for trusts, trusts own the property and collect the rent, then they distribute the profit/loss to the beneficiaries. The huge difference is they (the trust) distributes the P or L then pays tax post distribution, well the beneficiaries do. Whereas the PAGY investor pays their tax each pay period, then claim back any losses. Furthermore, as trusts are a far more effective tax minimizer, so steering investors towards them is counter productive from a tax collection point of view.

Now if this this go ahead, and second hand properties fall in value, first home buyers wont be able to buy them with the grant, along with PAYG investors. This means those with trust arrangements may secure a few bargains.

Tax reform is a very sensitive area and any action will be met with a reaction, so caution is very much needed, and anything that has the potential to damage our building industries is not well advised in times of uncertainty like we have right now.

BTW, Wayne Swann listened to treasury, and look where that got him. So yes, in some circumstances, general people are smarter than the likes of treasury.

Treasury works off old data, business works of future predictions, and that is the main deference in the two.
Posted by rehctub, Wednesday, 29 June 2016 8:33:25 PM
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My goodness this is why they regulate financial advice.

Dear kirby483,

You write;

“The reason is why many pay zero income tax is only partly due to neg gearing, the biggest tax benefit of owning an investment property is depreciation.”

Depreciation is not separate to negative gearing rather it is just one of the expenses that make the final figure. Others are things like rates, interest, and insurance. Providing they outstrip the income derived, the property is deemed to be negatively geared.

It must be remembered that depreciation on the building claimed each year is not unencumbered. There is a reckoning when the property sells as it adds to the amount of CGT payable. That being said while the 50% deduction for properties held for over 12 months remains it is still better in most circumstances, although not all, to claim depreciation.

I hope this clears things up a little.
Posted by SteeleRedux, Wednesday, 29 June 2016 9:27:00 PM
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Dear rehctub,

I understand now where an obvious misconception has warped your thinking.

You have been banging on about only 10% of the buyers will want houses that can't be negatively geared. Kirby483 has been at it to;

“So, let's say, the house becomes an old home when you sell it. So, you advertise to sell it, but no investor will want to buy it (as he can't get any neg gearing advantage) so the only people who might buy it are 10% of the population (first home buyers) which means you cant sell it for a profit (or very little).”

You both need to realise that first-home buyers and other owner occupiers still make up the majority of residential house purchasers for whom negative gearing is not a consideration. The proportion of investors has been steadily increasing but is still in the minority. There will not be the calamitous crash of the market you two are chattering on about, more a slight softening which if it improves affordability will be a plus.

Just a note, the highest rental returns are at the top and bottom price range. This has held true for more than a decade. We don't negatively gear any of the rental properties but we have quite a few friends who have bought in the middle and are having to do so. I am convinced it is almost a status thing. Even when they are shown that two cheaper properties, instead of the single one they are purchasing, will give them 50% greater return they still opt for the more expensive option. That is their call but I do get cranky with the thought the rest of us are having to subsidise their decision.
Posted by SteeleRedux, Wednesday, 29 June 2016 9:28:25 PM
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"You both need to realise that first-home buyers and other owner occupiers still make up the majority of residential house purchasers for whom negative gearing is not a consideration. The proportion of investors has been steadily increasing but is still in the minority."

So why all the excitement about investors? Owner occupiers predict price rises based on supply and demand and enter the market for the same reason as investors, to come out ahead. So who is responsible for the "affordability crisis" in Sydney and Melbourne?

It's always been about supply and demand. You still duck the question why Perth, or Hobart haven't followed Sydney and Melbourne markets despite those markets having investors and owner occupiers vying for stock and NG and CGT applying just the same. Why? Because it doesn't fit the electioneering narrative.

What started out as an "affordability crisis" turned into a class war and a refusal to see the zero sum game that NG is in relation to the total tax take ultimately reaped by gov't. As I said, NG is just the time-shifting of losses. The rich could otherwise form trusts or companies and pay tax at lower than their marginal rates, carrying losses forward against future profits.

It is CGT concession Labor should target as well as inheritance/death taxes. The whole NG thing is just a confection of the left. It it had any leftist balls at all Labor would champion these generational causes instead of trying to slip into gov't as the "nice" version of the Liberal Party.

What a pack of soft-cocks.
Posted by Luciferase, Wednesday, 29 June 2016 11:41:47 PM
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Luc, in my previous post that you replied to, I clearly said forming a trust gets the benefits of negative gearing, I did not say it was negative gearing. There is a difference.

As for inheritance tax, i'm kind of with you on that one as I feel a direct family member should be able to inherit say $500,000 tax free, then the balance be taxed.

However, if the asset in the estate is held in some form of tax minimisation engine, eg trust, then the entire amount should be taxed as the tax subsidies have already been taken up so its only fair that this be returned.

Very few like this idea but hey, very few tax ideas are popular.
Posted by rehctub, Thursday, 30 June 2016 6:40:56 AM
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Negative gearing means that the taxpayer is effectively subsidising the cost of interest payments on a personal investment loan without gaining any subsequent financial advantage.

It's almost like somebody buying lottery tickets with somebody else's money but not sharing any winnings.

It costs a certain amount to run a country. If somebody pays less tax then somebody else has to pay more to make up for it elsewhere.

It was introduced long ago to create more new housing stock but has turned into nothing but a tax rort and almost every other country seems to manage quite well without it.
Posted by rache, Thursday, 30 June 2016 8:32:43 PM
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rache, I hope neither your self, your family members, or your friends are renters, because if they are, chances are negative gearing has helped make those rents more affordable.

By all means put a cap on NG, or even a ruling that means the asset must return to profit after say ten years, but to simply remove it will hurt those can least afford it, the renters of older, generally cheaper, housing.
Posted by rehctub, Friday, 1 July 2016 7:35:51 AM
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"....but to simply remove it will hurt those can least afford it, the renters of older, generally cheaper, housing."

Pull the other one, rehctub.

I've never seen you give a toss about "those that can least afford it".

You're normally putting the boot into them on this forum.

Why don't you fess up and admit you're all in favour of the tax payer subsidising the investment decisions of some people - but not for providing a healthy social democracy in general?
Posted by Poirot, Friday, 1 July 2016 9:53:24 AM
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rache,
you said "It's almost like somebody buying lottery tickets with somebody else's money but not sharing any winnings"

Well cant the same be said with Union fees?, why are they a tax deduction? Us tax payers who are not members of a Union are subsiding you.

Why are the rich union bosses getting 47% tax deduction on their union fees and the workers who earn less, are only getting 30%, and the 82% of Australians who don't belong to a union are subsidising those who do?

Also, you said "It was introduced long ago to create more new housing stock but has turned into nothing but a tax rort and almost every other country seems to manage quite well without it"

Please tell me which Western country does not have neg gearing? Every western democracy allows losses to offset gains in the form of tax deductions.
Posted by kirby483, Friday, 1 July 2016 10:14:12 AM
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NG is writing down a business loss against income from paid employment.
Most countries allow losses only to be carried forward for write-down against future profits, i.e. they do not allow mixing of income streams.

https://en.wikipedia.org/wiki/Negative_gearing

Life will go on without NG, but the facilitation of economic advancement it offers Ms&Ds to aid in achieving economic independence from gov't, will go with it. I see no problem with simply capping NG to maintain this positive aspect.

Leftist ideologues want the principle of NG sacked, but are too timid to go to the people with reasoned arguments for abolishing CGT concessions, introducing of inheritance/death taxes, and including the value of the family home in determining welfare payments.

These are the hard things to do, not confecting Mediscares and promising all things to all people.
Posted by Luciferase, Friday, 1 July 2016 10:57:57 AM
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This from the Australian sums it up nicely:

"It is difficult to find a government policy that has been less successful at meeting its objectives than negative gearing on residential property. But unfortunately that is the nature of housing policy in Australia, where sound policies are ignored in favour of policies that encourage speculation, reduce home ownership and redistribute wealth towards the already affluent.

Of all the short-sighted housing policies plaguing Australia, negative gearing receives the greatest criticism. Its original purpose was to boost the housing supply by encouraging greater investment into housing construction. By that metric, it has been an unmitigated disaster.

Based on the latest data, new construction accounted for just 7.1 per cent of the total value of investor loan approvals. The trend has ticked up modestly recently but the long-term trend could not be clearer: Australian investors have little interest in newly constructed properties.

Rather than supporting the housing supply and boosting construction-related employment, negative gearing has effectively encouraged speculation and boosted house prices. Statistics from the Australian Tax Office paint a clear picture: property investment is popular in Australia but few of those investments generate sufficient rental returns to cover their costs.

According to the ATO, Australia had 1.9 million property investors in the 2011-12 financial year. Most of those investors failed to cover their costs, suffering a collective $6.8 billion net rental loss. Losses of this magnitude have become exceedingly common in Australia over the past decade.

The only reasonable conclusion is that most Australian property investors don’t really care about rental yields. They are in it for the capital gains, which is the very definition of speculative activity."

"By comparison, most countries only allow losses made on assets, such as property, to be offset against profits generated by the same asset class.

The difference might appear minor but Australian property investors face very different incentives compared to investors in other countries. These incentives encourage speculation, elevated housing prices and increasing indebtedness."

http://www.theaustralian.com.au/business/business-spectator/why-negative-gearing-is-australias-biggest-policy-failure/news-story/41abb3daec3e46697ce52e8295912f2d
Posted by Poirot, Friday, 1 July 2016 11:03:56 AM
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"The only reasonable conclusion is that most Australian property investors don’t really care about rental yields. They are in it for the capital gains, which is the very definition of speculative activity."

Ostriches asserting the rental market won't be affected will get their wish to find out if Labor wins tomorrow.

Implicit in the article seems the notion that NG and CGT treatment cause price rises, not supply and demand. Where is the evidence for that? Where was it even when there was no CGT in Australia?
Posted by Luciferase, Friday, 1 July 2016 12:22:06 PM
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Ok Poirot, you state that 6.8 billion was the losses and, given not all interest charged on all loans is fully deducted, I say this because once the income is taken in, its only he shortfall that is geared. So, taking this into account, if we want to find the real cost of Ng, we must put all on the table, therefore the tax paid by lenders on profits (interest collected) must also be credited.

We must also remember that many loans today are interest only, and many properties become positively geared, while the loan remains in place. This means the loss does not occur, but the tax is still paid on the profits made.

Its not a simple case of 1 + 1 = 2, it is far more complex than that.

Of cause the other side of the equation is how many jobs are created with those bank profits and, will they remain if we change Ng.

The whole point is our economy is very fragile and anything that risks hurting the building industry can not be taken lightly.

BTW, I allow people to live in one of my houses for Free. I do my bit.
Posted by rehctub, Friday, 1 July 2016 7:04:58 PM
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