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).