With the so called rotten negative gearing once again in the spotlight, being blamed for housing un affordability, the truth is the figures are manipulated.

I say this because bar Sydney and to a lesser extent Melbourne, where prices are off the scale, most other cities and regions have affordable housing.

The real problem is the critics are trying to blame the entire nation for isolated issues and that's clearly misleading.

Home ownership is a sacred cow in Australia. Mothers assign their children to strangers 5 days a week to achieve it. Australians need to get over themselves. The 'good' times are gone for ever, thanks largely to their own gimme, gimme greed and sense of entitlement. There is no right to home ownership.

Immigration is the sacred cow that cannot be criticised.

Anything to disguise the downsides of the continually ramped up immigration numbers that descend on the larger capital cities.

Premiers, particularly Labor, have over the years been highly critical of federal governments for those, 'Ridiculous immigration spikes that cause high property prices' and other problems,

http://www.huffingtonpost.com.au/2016/02/15/bob-carr-population_n_9240330.html

You wouldn't mind so much if it was all seriously deficient skills. But bringing in for example mobs of immigrant workers, lesser-skilled, to de-skill and knock down labour costs in aged care delivery is political cynicism from both sides of politics. It prevents our own trained nurses - who by the way have debts to ATO for their education - from getting employment and maintaining their nursing registration.

http://www.smh.com.au/business/workplace-relations/nurse-graduates-locked-out-of-workforce-as-migrants-get-jobs-20150606-ghi9c8.html

Amazingly, there are OLO posters who have on previous occasions cited the very obvious displacement of Australian trained nurses from aged care and other general nursing as evidence of attainment of their first priority, the multicultural imperative of diversity in action and diluting the socialist lefts' despised 'White' population and the inherited democratic traditions and freedoms.

Over-population from the increased migrant targets has been used by cynical federal governments from all sides of politics to cover for poor planning, to force down wages and to buy ethnic votes in marginal seats. Regarding the last-mentioned, the socialists who claim to represent workers would have to be the worst in that respect.

Imported NEEDED skills, examples being skilled trade, NOT more IT and government majors and their relatives from the dispora from the Indian subcontinent and Asia generally.

So let's assume we remove negative gearing.

At present, your average 'mum and dad' rental returns around 5% to the owner, while an average 'high end' property (not the Mc-mansion) returns around 3%.

So let's assume those returns go to 8% and 5%, which they would need to for investors to keep investing.

At $400 per week, capatalised at 5%, your mum and dad house is worth about $416,000 and the other at $800 per week is worth $1.4 million. To not increase rents the value of the MD would drop to $260,000 and $832,000.

To allow values to drop by even 20%, rents would have to increase to $510/wk and $1,076/wk.

Now tell me, who can afford that?

Here Here Rehctub,

exactly why people don't understand for every action there is a reaction.

Only the people who don't have negative gearing properties (or shares or businesses) think that stopping NG will solve all the problems.

Rents are cheap (except Sydney and Melbourne)if you penalise the investor you will penalise the tenant (either no more housing being built and/or increase rents)

If you want affordable housing, stop the local councils, state governments from charges huge fees (council rates, application fees, stamp duty, ESL, save the murray levy etc)

It is all the politics of jealousy, the Class War and those who swallow the bait on 'negative' gearing would be even more self-righteously opposed to positive gearing. 'How dare a wealthy landlord make money out of needed shelter', they would shout.

However their preferred socialist 'Progressive' (a misnomer) governments have said quite openly that government:

- will continue to duck-shove its responsibility for public housing onto the private sector;

- is NOT going to supply needed welfare housing, let along low cost, rent-fixed housing for all comers; and

- cannot efficiently manage and nor can government AFFORD, its own public housing.

Governments have said that the management overheads are completely off the scale.

Because the public tenants refuse to care for the properties or even do minor landscaping and fixing. Tenants are notoriously very hard on properties, are demanding and difficult to manage. There is an expanding number of 'professional', litigious tenants and being serviced by the growing number of tenancy lawyers.

If and when Labor get back in the guvvy jets and limos in Canberra, much of the negative gearing talk will dwindle away.

Yes, it will be interesting to see if anyone can expalin any benefits of fremoving negative gearing, as in my post it clearly shows there are only potential loosers and no winners.

The banks would become very very nervous to say the least, as we have a localised economy that runs on credit and much of that credit is secured by mums and dad housing. If they (the banks) start making margin calls all hell will break lose.

Why is it that people stop debating when there are facts involved that disprove their theories.

It would appear that most on this site would prefer to talk about garbage than real issues, with real facts. I think it's becoming a bit of a waste of time to be honest.

I'm going to invite Mr Saul Eslake to comment as he, being a highly respected economist, is also very anti negative gearing.

Let's see if he will contribute and hopefully see what he has to say.

Hi Saul, i have a theory aboutaffordable housing, more so that it's a bit of a myth  in that it's more related to the likes of Sydney, rather than the nation and would invite you for your coment on the following link.
http://forum.onlineopinion.com.au/thread.asp?discussion=7721

Let's see if I get a response.

Ask Saul?

Why would you doubt your own experience?

Where you ask an economist to count your money you will get a range of replies. But first, the question, 'What do you want the result to be? Because I have to factor in the limitations'.

You know yourself and what motivates you. That is enough.

Any objection for affordable housing comes from the far right Abbott brigade. If they oppose anything Turnbull must comply.
We need an election to reset the political scene.

Ok Doog, so do you think a couple, on modest incomes, should be able to afford a first home in the likes of Sydney?

No I do not, and I have never sead anything about Sydney or anywhere else.
I says Turnbull can not make legislation because the far right faction will not support any change. It,s hopeless when his own party can not make consensus.

An earlier post by that Jeol bloke said jets and limo,s in Canberra when the alp win govt. he has got the wrong party all together.

Negative gearing has to go, the alp says on new housing. That is a good start and see where it goes from there.
What is do nothing going to solve.

The Bendigo bank became a bank on bricks and mortar. But that was a different era all together.
This bull about interest payments is only going to up the interest rates.
We need property devaluation, fast.

So Doog, what effects do you think the removal of Ng will have on;
Values?
Rents?
The building supply chain?
The building industry?
The market it's self?

You can't just make a broad statement like you have about the need to remove NG without having some rationality as to the effects, either pos or neg.

As a long term investor myself, none of my properties are negatively geared, however, if not for negative gearing, i would not have bulit my portfolio.

In my opionon a far better option would be to wind back negative gearing and introduce an inheritance tax of sorts.

NG should be limmited to say three properties and a max of say 10% of the value of the asset. It should slso see that the NG property returns a proffit within say ten years.

Inheritance tax should be brought in in such a way that if the asset is owned by a trust, then tax applies to every cent, whether the asset is sold or not, and if family owned, and sold, that each sibling gets a max of half a million tax free then the rest is taxed.

This will not be taking a slege hammer to the market and lets face it, if a half a million tax free is not enough, then tough!

doog: "We need property devaluation, fast."

Tell that to property owners in Perth and Darwin.

It's a supply and demand issue obviously. Clearly NG has the effect of accelerating the market, both upwards and downwards, but not determining its direction.

Removing NG will force house investment into company structures, where tax rates are to be reduced and losses are carried forward, or dissuade private investment. NG gives Joe average a way to invest without such complication.

What might bring down rents in Sydney and Melbourne, hence yield on investment, hence house prices, is a house vacancy tax in states where there is an accommodation shortage like NSW and Victoria, because it would bring on supply/reduce demand. It would not make sense in NT and WA where rentals have already fallen sharply and there is a large oversupply of houses for sale.

It is a state by state issue, not federal, IMO.

Dear Butch,

You banging on about this again?

Mate, you continue to have a cockeyed view of the negative gearing world.

Why on earth do you think rents have to keep up with housing prices? If they did then these properties would be positively geared not negative. The only thing that makes most of there investment properties attractive is losses can be offset as a tax reduction plus the owners are living in a self fulfilling bubble where demand falsely driven by this tax dodge are driving capital gains.

We have come hard up against this bubble as Melbourne investors have driven up prices nearly 20% in the quarter in the town one of my kids is looking to buy a home. That is even with some owners, ones who have lived in the house for over 30 years, really wanting to sell to a young couple rather than an investor. Houses that are advertised within a price range are fetching 10 to 20% higher. They recently lost out to an investor despite offering $10,000 over the top asking price.

It really is time to take you head out of the sand mate. It is starting to become embarrassing.

Steely, My heart bleeds. Get past whining for people all over Oz to take a hit for your kids.

Sell up and buy two houses in Perth or Darwin or Dubbo, or wherever, if you believe in the right to stay together.

If you want lower prices in Sydney/Melbourne,convince the state gov'ts to introduce a vacancy tax, as it appears much housing capacity is being warehoused in those states. There is a real vacancy rate and a perceived one in those markets, apparently. Work with that, and stop blaming NG/CGT arrangements which are not driving property prices up other than in the markets you care about. Next thing you'll want BHP shares lowered so you can buy more.

Sook, whine, gimme, gimme, gimme, whine! Stop bitching, identify the problem correctly, and do your best to influence state politics, which is where the matter resides. The rest of Australia owes your family nothing.

I incorrectly said, "NG/CGT arrangements which are not driving property prices up other than in the markets you care about"
Not quite, taxation is not influencing prices, only the rate of their rise/fall, as I asserted a couple of posts ago.

Steely, for once rise to the challenge of explaining price falls in cities other than where where you and beloved expect the market killed for you.

Devaluation across the board. The proportion of land prices, and building costs. Is out of control. 50 percent reduction locked in for fifty years.

It's an atmosphere of profiteering, which goes against everything au values. It's a dog eat dog atmosphere. Which will only aid the filthy rich at the expense of the majority of Australians.

Ok Steel, so perhaps you explain just how the removal of NG will make houses more affordable?
.
Remembering of cause, the less buyers out there the more vervous the banks will become. A hugely important fact to factor in to your equation Steel.

As for your family, if there are on $150K per year each then they can afford their first home in Melbourne. If they're not, then they have to move.

Why damage all home values just to please the seleted few who think owning a home in the highest markets is an entitlement.

Dear Lucifrase,

You wrote;

“The rest of Australia owes your family nothing.”

What pretentious posturing.

Australian millennials (part of your so-called 'rest of Australia') are the second least likely in the countries surveyed to be able to afford their own home.
http://www.abc.net.au/news/2017-04-07/australian-millennials-rank-low-in-home-ownership:-survey/8424422

Much of the reason why is directly attributable to government policy whether it is NG or CGT or high immigration rates.

You seem to be arguing the rights of Baby Boomers in a very skewed market to investment properties over the very reasonable wishes of millennials to own their own home.

We have two rental properties (down from 4) and my other child has one at 20. These are all positively geared. I have no problems with people investing in property but we shouldn't be highly subsidising them to do so. Why do you think they should? It is them who are saying 'gimme, gimme, gimme” not me.

As to a vacancy tax the Andrew's government here in Victoria is doing just that;
http://www.afr.com/real-estate/victorias-vacant-housing-tax-1-per-cent-seen-as-thin-edge-of-the-wedge-20170307-gus821

But what is 1% per annum against returns of 5-10% per quarter being realised in our local market at the moment?

Negative gearing on housing is the only reason most investors are able to secure loans on properties. If it were any other investment type the banks would laugh them out the door. These same investors are turning up to auctions and outbidding first home buyers and driving house prices up considerably. For you to say that NG does not impact prices reveals you to be in a state of denial bordering on delusion.

Butch has always been deluded. Get rid of unfair competition. NG is the problem, unfair persuasion. The banks agree to finance a house not stating an upper limit, only to get young people into hopeless debt. The first downturn and it all collapses. The bank says that is your problem.

The housing market is full of white ants under the pretext they are the good people.

Doog, the VERY last thing banks want to do is kick people out of their houses. Gee I wish you had a better understanding of the market and what drives it.

Housing affordability is mostly an isolated problem.

The other myth about investors paying $700K for a rental in Sydney is that in order to NG the property, one has to have a short fall.

How on earth does an individual borrow $600,000 plus on a PAYG income? Remembering, they must first service the loan, then claim the tax back.

It's a media beat up.

As always, you ignore the challenge of explaining that it is not supply and demand driving price rises AND price falls.

Explain Perth and Darwin, where house values are much where they were ten years ago. Explain why, even before the intro of a CGT, there were property market falls with NG in place. Any reference calling for the abolition of NG that does not deal with this must be garbage.

Investors don't invest for a CG when they don't see one, NG or no. Where they see one I will only concede that NG can move the market faster towards expectations, but it does not set the market.

Directing immigration, if that is possible, would alleviate the fact that 100000 people a year are trying to gain a foothold in the Sydney bowl alone.

Re the vacancy tax, it would have to apply only to property purposefully quarantined from the rental market, lest it force rents up generally by increasing landlord carrying costs between tenancies.

On CGT more generally, some property markets have not see a gain over a decade, yet CGT will be payable at one's top marginal tax rate from the first dollar should a rise transpire. That is, a real loss is suffered yet tax is paid. Shouldn't CGT only be paid on real gains?
The CGT tax concession superceded the full indexation of the cost base for the assessment of CGT, which should be reinstated if the concession goes.

We've been here before, Steely, there is NO SUBSIDY in NG, only the time-shifting of losses. The tax man gets his full pound of flesh in the end.

There's scope for compromise to limit the nett loss deduction in a financial year, with any remainder carried forward, ultimately to be written down against any future income (or capital gain, which is currently done when determining a capital gain in the year of sale). Many aspire to financial independence from gov't through property ownership, and we should not completely remove the NG enabling more to do this, IMO, benefiting the public purse in the long run.

To follow up on my last point, when people apply for welfare their investments are included in asset tests and rental money is considered income while an operating loss is ignored. I would qualify for the dole, say, only if I sell my rental to reduce my income and my freed equity doesn't tip me over the asset limit.

Not too many with housing investments would or could qualify for welfare, and that situation will only get tighter.

The long view has to be taken on NG, not a knee-jerk national approach to issues specific to Sydney and Melbourne.

Dear Lucifrase and Butch,

We have indeed been here before which is why I am going to bow to the opinion of the former chief economist of the ANZ Saul Estlake.

http://www.abc.net.au/news/2017-04-10/affordable-housing-plan-must-include-negative-gearing-eslake/8430482

I'm sure we would all agree he is far more qualified than the three of us and that his opinion must carry significant weight. On the other side is Scott Morrison who before working for the Property Council did score an honours from UNSW on, wait for it, Applied Economic Geography.

Perhaps if you could find someone of Estlake's expertise to put the opposing view without an ideological agenda I will listen but until then we are probably wasting ink so to speak.

Steel, I have emailed Saul and he agrees that Sydney and Melboure are unique areas and do influence the AH debate somewhat.

I would also ask why prices in the likes of Perth have not been inflated by NG.

The simple truth is Sydney and Melbourne do not make up the whole of Australia and if one chooses to buy there, they need plenty of cash and a high paying job.

If they dont have these, then they have to buy somewhere else.

SteeleRedux, 'Saul, a heavy from the finance industry says and on this occasion that is what I say too, so its right'

There is no good reason at all for either of the two posters to throw in the towel on their critical faculties and disregard their conclusions arrived at from their own experiential learning in investment housing.

I'd say with confidence that nothing has really changed or could change in the finance services industry and there are just as many sharks as ever. Which is why small investors take their risks in real property. That is despite the array of risks, including the increasing government regulation and interference that always ends in unexpected negative effects and tears.

Government, both sides, all levels of government, has continued to see residential housing as a milch cow for taxes.

On the other hand Government has continued to act on its informed belief that government housing is too costly and impossible for government to supply and to manage. For many years Government has been forcing its responsibility for such housing onto the private sector.

So SteeleRedux, what about you tell everyone how government itself is going to provide for welfare and low cost housing and take up the slack if and when the run gets going from 'investment' property?

Realise that confidence once lost, will become a run that is not stopped so easily if at all. That has flow-on effects for such things as self super for the future, providing $ for children's education and so on.

Shorten's Class War is aimed at Useful Idiots and he knows there are always some about. Shorten gets it right in that at least.

There is a shift from the federal reserve. We may very well see a forced devaluation. Something has to happen and fast.

We can not go on like it is. But he's insistence it is a Sydney or Melbourne problem is rubbish. House prices are out of control all over the state.

45 percent of new debt is made by investors in vic and fifty percent in nsw.
Ist time home buyers get nothing, or pay unrealistic prices that will not be paid back with the first rate increase.

So the housing economy is false and unsustainable

Devalue now.

Maybe I have to be even more blunt and add that the mums and dads money that is shied away from investment housing will be expended on living. On the lifestyle that those mums and dads are presently denying themselves to provide shelter for others.

Still, the finance services industry will greedily take commissions and eventually the rump of any of those hard-earned dollars that might come their way in lieu of into property.

The Big End of Town will still be needing those ever-increased record immigration numbers as consumers, and the overcrowding in the large metropolitan centres will continue.

"I'm sure we would all agree he is far more qualified than the three of us and that his opinion must carry significant weight."

If Eslake's saying buying a house, renting it out and selling it is subsidised by the taxpayer, then he's wrong, whatever his qualifications.

Butch, if you know him, ask him why NG/CGT have not the same effect in Perth as in Sydney. Ask him if buying-renting-selling as a company entity is subsidised, and whether individual negative-gearing is time-shifting losses by comparison, or not. The taxman gets fully paid under both arrangements.

If he can't answer these questions credibly, I'd have to ask whether he is a dispassionate observer, or motivated such as Steely is for family reasons.

Again, Sydney and Melbourne are local supply problems needing local solutions, not a harmful national sledgehammer approach.

There is no such as a local supply issue. As soon as the freeway from Melbourne to country vic was completed the corridors exploded. Spending their one million house gift from Melb and downsizing in financial terms in country vic.

The great divide is not a problem, Abbott is now sprucing using super to buy houses. What would the super savings of a sub 30 year old be. Not to mention what super was designed to be for.

There is one solution on the table

Dear Lucifrase,

I know whatever I put in front of you you are unlikely to change your mind on this but let's go through the exercise anyway.

The Grattan Institute says;

“The Treasury’s tax expenditure statement (TES) lists the cost of the capital gains tax discount as $6.15b for 2015-16. The TES does not list the cost of negative gearing, but using Grattan’s total figure and subtracting the value of the capital gains tax discount, this shows that the cost of negative gearing is around $5.5 billion… this cost exceeds the cost of child care assistance or university education as per the budget papers.”

And you can add to that the 6 billion dollars the federal government is forced to spend each year on improving housing affordability and you get a subsidy figure of around $18 billion a year.

Both as taxes spent and taxes foregone this is a public subsidy in almost anyone's language.

Granted negative gearing by itself is not the whole problem but once it is combined with the generous CGT discounts then it is little wonder investors make up over a third of house loans – over 50% in NSW.

Butch may be referring to a time both he and I with other hashed this out with Mr Estlake on OLO.
http://forum.onlineopinion.com.au/thread.asp?article=11849#202878

Why wouldn't you accept a tax regime which allowed you to account for losses on a property only against the income it made for the year and that any further losses be carried forward until the asset is realised?

A correction in paragraph two, of course,: ".... is 'ever' subsidised by the taxpayer..."

Companies carry forward operating losses and write them down against future profits. Individuals offset investment operating losses against income from paid work in the same tax year, i.e. time-shifting to the present what companies must defer to the future.

Where is the subsidy? Should gov't share in operating income but not outgoings? The claim off a subsidy by Eslake is motivated hogwash.

He says in Steely's link, "...get their interest bill subsidised or who are in otherwise advantaged by the tax system, particularly investors..." What is the garble after his bogus assertion about interest? He is either confused, motivated, or doesn't know what a subsidy is. The taxman gives nothing away through the allowance of NG over the term of an individual investment.

I take umbrage at being referred to as an ideologue because I call out Saul Eslake on basic facts, so take my statement about your motivation as intended, Steely.

"Why wouldn't you accept a tax regime which allowed you to account for losses on a property only against the income it made for the year and that any further losses be carried forward until the asset is realised?"

You mean why don't I support the total abolition of NG? I've made my case often enough, but in brief, some degree of it allows Joe average a better opportunity to achieve financial independence and it meets a community housing need. I've already suggested a limitation to NG that would retain a degree of this, on this thread and past threads, but you still insist I am an ideologue.

The Grattan Institute analysis cannot be correct because, as I have cogently explained, NG is a time-shifting mechanism. There is no loss to the taxman over the buy-rent-sell cycle. This is not denial, but fact. there is nothing gained by the taxman to spend on anything by abolishing NG. Yes, abolishing the CGT concession (unfairly as I have previously explained to your silence) will pull bucks.

What does this mean, "....but using Grattan’s total figure and subtracting the value of the capital gains tax discount, this shows that the cost of negative gearing is around $5.5 billion"? What 'total figure'? Whatever it is it must be a boondoggle, because no subsidy exists, and why the unnecessary emotive charge about child care and education attached to the statement? It rings of motivation and politics.

Dear Lucifrase,

Firstly to me calling you an ideologue on this. It has become my default reaction whenever intemperate language is used so this was more a response to “Sook, whine, gimme, gimme, gimme, whine!” than any in depth appraisal of your leanings. It usually saves me time but happy to withdraw it in this instance.

But back to business.

You wrote;

“The taxman gives nothing away through the allowance of NG over the term of an individual investment.”

Oh come on mate. So someone foregoing taxes through NG, when they are at their earning peak and on a high tax rate, then selling the property after retirement when their effective capital gains tax rate is not only substantially lower but receiving a 50% discount on top of it, doesn't mean the taxman receive less? Bunkum!

Look, there certainly are many aspects to this issue. For instance perhaps the case can be made that the billions of dollars floating around in super funds over priced the share market to such an extent that many are forced toward property to invest in.

But there is little doubt that the huge increases in those turning to housing for investing have driven prices and therefore capital returns, thus making the market more attractive in a self fulfilling cycle which obviously impacts affordability. You yourself recognise that NG is an enabler. More in the market has lead to higher prices, to making it substantially harder for first home buyers to escape the rental trap, and to less tax revenue for government.

Steel and Doog. Until you can provide clear answers to why markets in the likes of Perth have not seen any real increases, despite having negative gearing and CGT discounts, then there is no reason to change the thought that the affordable housing is an isolated issue, related maninly to Sydney and Melbourne.

In fact, the biggest influence on upward values in the past two decades has been the first home owners grant whereby buyers were given a 'gift' from the tax payer and this gift simply saw prices increase.

When prices increase, limmiting ownership, rents increase.

Now if this had been an interest free loan for ten years, the benefits would have been ten fold.

As for negative gearing V company investment, PAYG earners (the only ones who can use NG) pay their taxes up front, then claim them back. A company/trust does the opp which allows for more flexabily, tax minimising, planning.

Perhaps they are barking up the wrong tree.

SteeleRedux, "the rental trap"

More wrong and crooked thinking from the Class War rhetoric of leftists.

Leasing an asset frees dollars for investment elsewhere or for consumption. It is about choice.

Even apart from that, who is to say that tying up large sums of money in an illiquid asset that does not allow for convenience in living, especially in relocation for children's education for work and so on is a good idea for everyone?

It is interesting that the same interests engaged in the misleading rhetoric against the 'devil' of negative gearing I(but they hate positive gearing too!), are also those who sledge older Aussies for continuing to live in their homes where they raised their families and in an environment that is familiar to them.

The demand for 'necessary downsizing and mobility' of the elderly is simply a grab for their asset, so that some double income no kids Chardonnay socialist can own and enjoy it instead. Then the very same interests want to take the remainder of the oldie's estate in Death Duties.

There is no argument that all should have shelter. -Although they should also have a duty to contribute to and care for it. But it is absolute nonsense that everyone should own a property, even if they don't want to and would, as many do, prefer to live a better lifestyle now instead of scrimping and saving on the lifelong mortgage and consequent overheads as their parents may have done.

Steely, just when I thought you might be catching on you come up with your "Oh come on mate...." statement. Geez!

Under the abolition of NG, that retiree would have rolled losses forward and written them down against capital gain on sale, just the same. NG has no bearing on the outcome. Don't you get that?

You want the investor nobbled from gearing into a more expensive property than he might otherwise afford and so increase absolute (not percentage) capital gain in a general market movement. OK.

You want the concession on capital gains on houses removed, despite the fact it taxes those making real losses as well as real gains, as I have pointed out, and as the tax system recognized prior to the concession's introduction. I might concede no concession in relation to financial assets, such as stocks, because they are principally shares in profits using depreciable physical assets, and supply and demand for them is accommodated by capital raisings and buybacks.

When a fully depreciated physical asset fails to at least maintain appreciation in line with inflation, it is devalued and the owner makes a real loss on its sale. Why should property investment carry the risk of being taxed on a nominal rather than a real gain? There is no CGT on the principle place of residence, and isn't that a non-level playing field from an investors viewpoint? Why flail him more with a removal of the CGT concession which superceded indexation of the cost base?

I'd rather see NG and CGT, and philosophy surrounding them, discussed outside the heat of Melbourne and Sydney where it is abundantly clear that supply and demand is the chief issue.

cont'd

The supply side is constrained by many false barriers and gov't tax gouges dissuading new land development. Today I've learned an application for a battle-axe subdivision of my home block may go through. To get to this point, after 4 long months, I have had to engage a town planner to navigate the maze. I have had every authority reviewing my application take the default "no" position.

I have paid thousands to the planner as a base fee and to negotiate this bureaucracy, and thousands just as a development application fee. I will pay tens of thousands to bring services in and connect them (7 thousand just to attach the sewer alone). Upon sale I will pay GST. All up, the block will cost at least 120K before I can make a dollar. All this BS has to stop if supply is not to fall further behind demand and push prices higher.

Stop blaming investors for everything (explain Perth) and stop believing in the Magic Pudding of a supposed NG subsidy by taxpayers. It's a mirage that can provide nothing towards more affordable housing.

Well, Steely, I've shot my bolt trying to educate you on the reality of property investment, and haven't even told you any of my bad tenant stories. You have to drill down below the noise to look at the underlying supply issue and taxation philosophy, and I hope you have gained a fuller perspective, even if you disagree.

PS, and the buyer of my block will pay around 20K stamp duty, plus his own round of gouging fees and charges to authorities to build and move in.

But do let's keep kicking the stupid investor on housing affordability.

Out of posts by now. Cyas

Dear Lucifrase,

As much as I dislike battleaxe blocks you subdividing your own property does not put you in the realm of the speculator. Rather than excluding a property from a potential home owner you are creating the opportunity, unless of course it is an investor who is buying it.

You wrote;

“Under the abolition of NG, that retiree would have rolled losses forward and written them down against capital gain on sale, just the same. NG has no bearing on the outcome. Don't you get that?”

Just the same? Strewth mate you really are failing to grasp this aren't you.

Okay, for most properties the major item of expense is depreciation.

The first is depreciation on 'fixtures and fittings' which is calculated on either a Prime Cost (PC) or Diminishing Value (DV) basis. If it is DV then the items are again divided into those above a thousand dollars and those below which go into the 'Low Value Pool' and get a higher rate. While the DV rate allows for greater deductions early the PC amounts drop more slowly over time.

I have no problem with depreciation on fixtures and fittings being part of the expense calculation for positive or negative gearing calculations.

What I do have an issue with is the second class of depreciation, that on the building itself. It's often the largest chunk of expenses and claimed at the 100% deductible rate. Sure claiming it yearly increases the CG amount when the property is sold but given the 50% discount, compounded if the vendor is in a lower tax bracket due to retirement, there is obviously tax foregone. I can not fathom why this is so difficult for you to grasp.

Look ultimately I would wear NG and CGT if the depreciation deduction on the building was removed. The NG amount would be less and the period that the expenses outstrip the income would be notably shortened. This was the situation before 1985 and we should return to it now. It is something this government could do in the upcoming budget without abolishing NG.

Steel, if they do outlaw NG, which I doubt they will, all that will happen is investor will no longer buy in their own names, as they will simply buy in trusts, or worse still, not at all.

Two questions
1. What will that achieve?

2. Where will people live if we dont build much needed housing?

Yes, just the same! Gawd.

What difference does depreciation make whether there is NG or not? It is treated exactly the same under both scenarios. It's introducing a new and obfuscating point that does nothing to challenge my statement. If you want to talk about depreciation, make your point but don't weave it into what is already clear, cut and dried.

If I replace a HWS AC, oven etc in my old rental, I depreciate it over the tax-man's mandated time period. Depreciation may be the only thing keeping investors in new builds if/when NG and the CGT concession are abolished. As for my rental, I'll assume fair grand-fathering of any changes dreamed up by pollies under the heat of the under-supply situation in Melbourne and Sydney.

BTW, the home block I am battle-axing is 4500 sqm with a 6m wide driveway reserve from the road, sorry you disapprove. I don't care who buys it, but there will be 120K of my costs and GST built into the price I accept, on top of the stamp duty etc, etc. to be paid by the buyer to a voracious gov't that uses property as a milch cow.

Land tax, up by 50% in one year with another rise to come. The whole lousy situation of governmental gouging is a killer for renters and new entrants.

When house prices go up it is because land value has risen and/or the cost of new building has.

Buildings don't last forever and are therefore depreciable. Only the rate is at question. If you want that rate to be zero, fine, but don't conflate that with tax treatment of losses, with or without NG in place. They are completely separate issues.

Note that financial assets such as shares are not depreciable, while houses are.

Dear Lucifrase,

Good lord. Really?

Firstly this is not a new or obfuscating point at all. Depreciation on a building, especially a new dwelling is a sizable chunk of the cost make up of negative gearing, often 3 to 4 times that of all the other depreciatable items put together.

You wrote;

“What difference does depreciation make whether there is NG or not? It is treated exactly the same under both scenarios.”

You sir really appear to be showing very little appreciation of what negative gearing actually is.

Here is the Wikipedia definition;

“The investor may enter into such an arrangement and expect the tax benefits (if any) and the capital gain on the investment, when the investment is ultimately disposed of, to exceed the accumulated losses of holding the investment. The investor would take into account the tax treatment of negative gearing, which may generate additional benefits to the investor in the form of tax benefits if the loss on a negatively geared investment is tax-deductible against the investor's other taxable income and if the capital gain on the sale is given a favourable tax treatment.”

It is the differing tax treatments which are the key.

It is pretty obvious I am going to have to step you through this.

So let's isolate the building depreciation as an example.

I have a purchased a house and land package for $250,000 for which the house cost was $150,000. The Prime Cost Rate is 2.5% thus delivering a depreciation amount of $3,750 per annum. My annual salary is $120,000 so I am paying 37 cents in the dollar in taxes. The amount I pocket each year is from the 100% deduction for the building depreciation is $1387.50.

cont..

cont..

If I hold on to the property for 5 years during which time it remained negatively geared then sell it for $350,000 I will have pocketed up to that point $6937.50 in refunds from the building depreciation. Disregarding everything else, including possibly wandering into a higher tax bracket, I will be up for a CGT liability of $18,500 which is 37% of $100,000 less the 50% CGT discount. In other words an effective tax rate of 18.5%.

So what would happen if I instead claimed the $18,750 (5 x $3750 per annum) building depreciation at the time of sale to reduce my capital gain by that amount?

I am now liable for CGT on $81,250 profit which at 18.5% would be $15,031.50. Therefore while I am paying $3468.50 less in capital gains tax you will notice it is half what I would have pocketed by claiming the depreciation figure annually through negative gearing.

Is this starting to dawn on you even a little or are you really going to stand by the claim it is “treated exactly the same under both scenarios”?

Negative gearing existed many decades before a CGT ever did, so the Wiki definition seems a recent embellishment.

Under the no NG scenario the depreciation is carried forward as an accumulated loss over the five years, not written down against income from paid work annually. Let's presume for the argument the entire accumulation will be able be written off against the capital gain upon sale (altho' that is moot, as currently it is only the loss in the financial year of sale).

In such circumstance, and with the current CGT concession in place, the written off is effectively half the top marginal tax rate upon the 220K income in the year of sale (120K from paid work plus 100K capital gain), which is 50% of 45 cents in the dollar (ignoring the levy being removed), i.e. 22.5%. A 100K CG would most definitely push into higher marginal tax rates, so shouldn't be ignored, IMO.

You original reference to the specific case of retirees clouded my thought, as did the fact depreciation is but one cost and no more special than another. I now concede your point, so well done, and thank you. Next is what to do about it.

Is it to remove negative gearing with no allowance to write down accumulated operating losses against capital gain upon sale (assuming there is one)? In fairness, investors should then be able to carry operating losses forward into new ventures, just as capital losses are carried forward for write down against future capital gains.

And what of the reasonable principle that only 'real' capital gains on physical assets be taxable at the full marginal tax rate, i.e. only gains indexed for inflation, as was introduced with the original CGT? Should there continue to be a CGT concession in lieu of this?

The field is yours, Steely, to put up something that gives Joe Average a fair crack at wealth and independence withot without having to form a company to access lower tax rates (expected 25% cf 37% PAYE in your example).

Dear Lucifrase,

You wrote;

“I now concede your point, so well done, and thank you.”

No need to thank me, it was a robust discussion and I certainly could have been clearer in making my points.

You asked what to do next and challenged me to “to put up something that gives Joe Average a fair crack at wealth and independence without without having to form a company to access lower tax rates”.

It is late so to be brief, as stated a big first step in my opinion would be to have the building depreciation only calculated at the point of sale rather than on an annual basis. This would claw back some of the billions of dollars foregone to our common weal by an overly generous negative gearing regime.

Most of all I want the greatest number of so called Joe Average's to have a “fair crack at wealth and independence” this includes many of the younger variety who are missing out on hopping on board through owning their own home.

I feel the current tax arrangements have skewed the housing market unfairly. I realise we disagree on this point which is fine, but there are many who are giving up on the idea of ever owning their own home and in a country like ours that is a shame and something that can be tackled through policy change.

There is no easy fix to housing affordability, however, I stress again, Sydney and Melbourne are fairly isolated cases, as there are plenty of affordable houses/dwellings in Oz.

Either way, anything we do to housing comes with huge risks as many houses are securing debt and, should the LVR slip through government intervention, all hell could break lose.

Alternatively, if government finds a way to make buying a home easier, it will simply inflate the market, point in case, the introduction and fiddling with the first home buyers grant.

There is no easy fix, but taking a sledge hammer to the whole of the country is just not warrented. The only solution is for those wanting to buy a home in these two cities, but cant afford them, is to look elsewhere.

If Labor won the argument I would strongly doubt it would champion your proposal on depreciation, Steely.

I think a reversion to indexed capital gains taxed at the top marginal rate would be a good thing and force more investors into a longer view.

NG is under threat from Labor on established housing, and even from Joe Average himself with the disparity growing again between his top marginal rate and the business rate (and perks).

Let's not forget that owner occupiers pay no CGT, so the lot of prospective live in homebuyers is not altogether unhappy. Perhaps they are the culprits forcing investors to pay more, not t'other way round, revealing fertile ground for gathering tax revenue towards public housing through CGT on the sale of the family home. :-) :-) :-)

"Let's not forget that owner occupiers pay no CGT"

Rest assured that the big-spending Labor and Greens have for years been jealously eyeing that pot of gold and the have regularly flown political kites proposing taxation.

The other target for Labor and Greens is the reinstatement of Death Duties.

Leoj, I have no real issue with inheritant tax, provided there is a large safety net.

Lets face it, something has to happen to our outdated tax system because if it doesn't, we are screwed.

If one is in their late 60's and the family home was purchased in the 50's, for a meer pittence, is it fair that those who inherit receive millions in many cases, while other, through no fault of their own get nil.

I say any recipient should be entitled to $500K tax free (per person of direct kin) then the balance be taxed. Even at 20% would be fine.

If anyone in their 60's cant live on half a mill FOR NOTHING, then thats their problem.

And, if an asset is owned by a trust/company, then it should be taxed at the normal cgt rates, whether its sold or not.

rehctub,

OK, so who inherited the dough and got you so jealous? A relative you don't like, a customer, some random person?

That is what makes Shorten's Class War, the politics of jealousy, wedge politics, so successful. So many people are so busy looking into others' backyards and minding their business for them that they forget the first priority which should be small government and getting the very best bang for their present bucks from government.

All Shorten does is stir the green-eyed monster and it finds myriad (often conflicting) causes for blame. Then he steps into the guvvy jet and heads over there somewhere, with a smug look on his dial. You let him off so easily and all he has to do is pull your strings.

Shorten knows that with Turnbull he is free to set the agenda. Because Turnbull isn't so sure of his own values and consequently is over-willing to please others. Yet Turnbull has the upper hand as PM.

Imagine a LNP leader who is equipped and prepared to (for argument's sake) firmly re-state the values of Australia, while at the same time drawing out the parallels in the values of many cultural groups.

Turnbull has to be positive and eschew the temptation to score easy political points and to leave the catty remarks to the other side. The left is much better at sniping anyhow, with the politics of jealousy for example.

Turnbull can easily come down positively, constructively and firmly on the shared (with other cultures) common values of: family; freedom of thought, conscience and speech for ALL; fruitful work; free and fair markets and free enterprise; fiscal responsibility and accountability; and political ideas and actions that are rooted in a transcendent moral framework.

Even as an orator with the reins of government in his grasp, Turnbull comes across as pleading for love. He desperately needs some instruction on presentation and to allow his speech writers some room, instead of constraining them with 'but what will the ABC think about that..'.

Leoj, my motivation is not driven by jealousy, although I do know a few distant relies who will inherit in excess of 20 million each. Not bad for doing little more than being born lucky. In fact, under my scheme my own children would have to pay some tax.

The whole point is that unless we do some serious sole searching for a better, fairer, tax system, we are simply going to run out of money.

Besides, under my proposal there would be a very small percentage who would actually pay much tax at all, however, for those who leave hundreds of millions, if not billions, it would appear to be a way of generating taxes without effecting the masses, and without depriving those who inherit of what most would consider a very considerable amount, that being $500,000 (tax free) per sibling. With any remaining funds being more than half of the balance in after tax dollars. Not bad I would say.

Removing Ng or doing anything to falsely alter the housing market would be treading on dangerous ground simply because, like it or not, the economy runs on debt secured by the values of housing.

If we effect the values of housing to any real extent, in a negative way, which removing NG most certainly will, then the economy will shrink simply due to reduced borrowings, resulting in reduced spending.

Steely's concerns sheet back entirely to the CGT concession and tax planning surrounding it.

NG existed long before the CGT, so its convoluted Wiki 'definition', laced with with CGT considerations, is on tax planning using NG and not what it actually is (writing off a FY business operating loss against the FY income from paid employment).

NG stands apart from CGT and should be left untouched to leave the focus on the CGT concession. NG simply allows for bigger bets and therefore bigger absolute capital gains. How the gains are taxed is what needs addressing.

I'd explore a difference in CGT treatment between physical and financial assets. The value of a company share is based in the company's earning potential, which may or may not rely on it owning physical assets. I propose CG on physical assets, such as houses, should be indexed for inflation, but not CG on shares.

Costello's largess on super taxation needed some winding back, IMO, and the same is now needed for the CGT concession. Alone, NG is just time-shifting an operating loss and should be left as is because the taxman is no worse off. Steely's example of a retiree minimising tax by realising a capital gain in a year of no income stands aside of NG, and I see no reason why it should be legislated against.