One of the few areas of difference between the Liberals and Labor is negative gearing, which I saw this morning described as having connotations of “ of wealthy rental owners buying properties in order to reduce their taxable income and to sell them later at a profit …. “.

This claim is offset by the recent claim from treasure Freydenberg that most landlords have an income less than $80,000. For most of us not in the know, it's probably a case of who we believe - a lefty MSM reporter or a politician; and that's a real problem!

The lefty reporter thinks that negative gearing is “tax dodge”; and that the treasurer “would have you believe our entire housing market is reliant on a tax dodge …. “.

As a conservative who is 'supposed’ to be on the side of landlords, I am in fact, with Labor on this one. What are the feeling of others?

ttbn,

It depends what you are trying to achieve. Allowing people to reduce their taxes by investing in properties does have some public good, in that properties for rent are almost always investment properties.

If you ban negative gearing, the return on investment properties drops considerably, people invest their money elsewhere, the stock of properties for rent drop, and the prices shoot up.

Presently the rent/$ invested in Aus is about 1/2 of what it is in countries typically without negative gearing, so without negative gearing, the long term outlook would see house prices drop and rentals increase. Considering that the people renting are mostly in the lowest earning brackets this would effectively be a tax on the poor.

In every industry in Australia, a business person is entitled to deduct the interest paid on money borrowed to invest in their business from income, before their taxable profit is rated.

Why should investing in rental property be any different to every other business activity?

Is it OK to deduct the cost of borrowing, if it is a shopping centre or factory you are renting out? Is it only housing that should be different to any other business investment?

The left are very good at demonising those they don't like, particularly if that demonising gets them the vote of non thinking people. The catch phrase "negative gearing" is like a red rag to a bull, when used against landlords.

The problem is of course our overvalued housing market. In the US, & most of Europe, with lower housing prices, the interest on a housing loan, even if 100% of the properties value is borrowed, is still less than the rent for the property. That is the rent on a property, verses the purchase price is much higher.

After the crash, which must come some time, we may get back to something sensible. The "council flat" does at huge cost to the taxpayer, put a ceiling on rents & housing prices in England for example. I wonder if we can get back to sensible housing prices, without the poor bloody tax payer, who is trying to buy their own home, having to fund housing for those too lazy to do it for themselves

Tax deductions for the cost of business are one thing. Negative gearing affects landlords entire earnings from all sources.

If politicians cared more about the real economy than the size of the deficit/surplus then negative gearing would not be so controversial
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ttbn,
>For most of us not in the know, it's probably a case of who we believe - a lefty MSM reporter or a politician;
Surprisingly they're both telling the truth - in most cases wealthy owners buy properties in order to reduce their taxable incomes to less than $80000.
____________________________________________________________________________________

Shadow,
>If you ban negative gearing, the return on investment properties drops considerably, people invest their
>money elsewhere, the stock of properties for rent drop, and the prices shoot up.
That effect would be cancelled out by the increase in the number of people buying their own homes, resulting in a corresponding loss of rental demand, so rental prices aren't likely to rise very much.

However, due to the land tax exemption that owner occupiers have, that would probably mean a drop in state government revenue. So arguably the real public good of negative gearing is more revenue for state governments.

____________________________________________________________________________________

Hasbeen,
>Why should investing in rental property be any different to every other business activity?
Possibly because it doesn't increase production.

The world's second worst treasurer, after number one, Wayne Swann, often claimed that the abolition of NG briefly in the 80s caused a rise in rent prices. However, rents rose ONLY in Sydney and Perth. There were no rises in Adelaide and Brisbane and low to no real increases in Melbourne. In Sydney and Perth, there was a low vacancy rate, which is more likely to have been the reason for rent increases, with landlords taking advantage of the shortage of rental properties to jack up prices. Well know economist, Saul Eslake, says that the increase would have to be general for it to because by lack of NG. Negative Gearing was reinstalled by the Hawke Labor government in 1987, under pressure, probably.

Well known economist, Paul Eslake, says that for the loss of NG to effect rent prices, the prices would have had to rise universally. And the famous, or infamous, ABC 'Fact Check' deemed Joe Hockey's claim to be iffy.

AC0SS places some of the blame for the high cost of housing on tax breaks – negative gearing and the 50% discount on Capital Gains tax available to investors. It also calls out the myth that it is all 'mum and dad' investors benefiting from negative gearing:

“This is an illusion due to the way the Taxation Statistics break down deductions for rental property investment by taxable income, which is itself reduced by negative gearing strategies. Many households that appear to be ‘middle income’ actually have higher incomes before deductions are subtracted. In reality, over half of individual taxpayers with geared rental housing investments are in the top 10% of personal taxpayers (earning over $100,000 in 2011) and 30% earned over $500,000.”

NG simply time-shifts a loss from being offset against future profits (thru' carrying the loss forward) to being offset in the present income year. Any notion of barrow-load of money to spend on public housing from its abolishing is pea'n'thimble self-delusion by the left, or, a confidence trick to imbed a case for class-warfare.

NG gives small time investors a chance to handle the cash-flow that leads to capital gain and positive-gearing, so leading to self-reliance and relieving the welfare system.

If the left thinks small investors, particularly, are going to trip over themselves to provide new housing that can be negatively geared, it will only be after the business case stacks up through rocketing rents and/or gov't subsidies, which will surely come to pass.

The left's case for election is based in class-warfare on NG and other fronts (including emissions), all which are presented very simplistically. This will be the hallmark of its governance.

Aidan: You say "That effect would be cancelled out by the increase in the number of people buying their own homes, resulting in a corresponding loss of rental demand, so rental prices aren't likely to rise very much."

This statement is based on a very flawed assumption, specifically it assumes that most people who rent want to buy homes and are capable of buying homes. But this is simple not the case.

Some renters actually choose to rent even though they can afford to buy a home. An example reason for this behavior is being able to change address easily (changing address when you own a home is very expensive if you sell your current house to buy another elsewhere). Another reason why people choose to rent instead of buy a home even though they could easily afford it is because it is financially beneficial for them (eg: those who can make more money by investing the money it takes to buy a home).

But the biggest reason why many current renters will ALWAYS be renters (even if they claim that they want to own a home) is because they lack the character attributes and/or the financial nonce required of someone to buy and manage a home. Many renters are absolutely hopeless at managing money and lack the self discipline and forward planning required to save or prepare themselves against unexpected expenses. Many simply cannot resist the urge to spend all their money on short term gain items instead of doing without somethings now so that they have a lot more latter, or they have drug/gambling/other addiction issues or they have personal problems/baggage such as busted relationships they their still paying for or they were born/became people with low IQs, etc. In the worst cases even if given a house for free, they would soon loose it because they are incapable handling the cost/responsibility of maintaining it.
These people (and it is a seizable portion of renters) are destined to be renters all their life unless they have a massive personality / mental / life change.

Dear Shadow Minister,

You write;

“If you ban negative gearing, the return on investment properties drops considerably, people invest their money elsewhere, the stock of properties for rent drop, and the prices shoot up.”

Labour has not called for removing negative gearing totally but rather on existing housing stock. It is still available for those investing in new homes. So what possible reason do you see preventing the measure building further housing stock as more new houses attract more investor capital?

The rest;

“Presently the rent/$ invested in Aus is about 1/2 of what it is in countries typically without negative gearing, so without negative gearing, the long term outlook would see house prices drop and rentals increase. Considering that the people renting are mostly in the lowest earning brackets this would effectively be a tax on the poor.”

Again we will not be 'without negative gearing' but rather it will be focused it more appropriately, into new houses. So you will have to explain to me how “ the long term outlook would see house prices drop and rentals increase” in this scenario.

All our rentals are positively geared now as any reasonable investment should be. Last year we built a rental as an investment property in a fairly low socio-economic suburb being revitalised. It is positively geared and has gained $100,000 in capital. We will probably look to do another in 12 months. The older stock has been artificially inflated because of investors like us but in a fair and caring society it should really be left to owner/occupiers.

SR, you say, "All our rentals are positively geared now as any reasonable investment should be."

..."now"? So, the rentals were negatively-geared previously, right?

Now you're down on NG after enjoying the convenience of time-shifting losses it facilitates. That's fine, however, for new investors in established houses shouldn't income losses be able to be carried forward to offset future profits, as with any other business, until they reach the investment's income break-even point?

Also, you suggest investments are "reasonable" once positively-geared, i.e. do not make a loss in any financial year beyond some point in time. Presumably, up until reaching that point, investments are unreasonable. Why?

Dear Hasbeen,

«In every industry in Australia, a business person is entitled to deduct the interest paid on money borrowed to invest in their business from income, before their taxable profit is rated.

Why should investing in rental property be any different to every other business activity?

Is it OK to deduct the cost of borrowing, if it is a shopping centre or factory you are renting out? Is it only housing that should be different to any other business investment?»

Indeed, it is not OK to deduct the cost of borrowing, regardless of purpose.

Borrowing and using money that is not your own, beyond one's means, is an unwholesome trait.
While it should not be prohibited by law, it should not be encouraged either and those who do so should receive for it neither medals nor tax-deductions.

Negative gearing eventually equals negative economy. Flat tax is the ONLY economically sound system no matter what the greed monger experts claim.
People must stop looking at this in the short term.

Australia and New Zealand are the ONLY countries in the world where this tax PERK gives landlords deductions on their ENTIRE incomes, and not just rental income. It's a RACKET, used by the wealthy as well as the so called mums and dads.

thinkabit,
"This statement is based on a very flawed assumption, specifically it assumes that most people who rent want to buy homes and are capable of buying homes."

No it isn't It is based on the very safe assumptions that SOME people who rent want to buy homes, and that more of them will be capable of buying homes if the price is lower.

It does not assume them to be the majority, because it does not assume the majority of rental opportunities would no longer be available.

SR,

It doesn't take a brain surgeon to realise that it will cause the existing house prices to drop when the 25% of the market is excluded, and that even new houses will be a poor investment as when they are as their resale value will crash.

All this grandfathering does is slow the impact.

In 1985 the ALP under Bob Hawke and as a result of pressure from the left, decided to disallow negative gearing by disallowing property losses to be offset against other income.

Rents went up. Big surprise, heh?

In 1987, the treasurer Paul Keating reversed the earlier changes and again allowed all property losses to be offset against other income - the current system.

Those who fail to learn from history .....

When Hawke abolished NG rents did not go up in response. Read posts other than your own.

it will cause the existing house prices to drop when the 25% of the market is excluded, and that even new houses will be a poor investment as when they are as their resale value will crash.
Shadow Minister,
So ? Houses will become more affordable-stuff the investors ! What good have investors ever been especially those who take the profits out of the country. Think about next year for a change instead of always just today.
Who do you think is the root cause of the presnt economy ? Foreign investors that's who !
Give the not so greedy locals a break & they will make things work. It'll never be a fair-level playing field if it's not a flat tax.
Obviously the system has failed miserably over the past two decades so why insist on hanging onto it !

Abolishing NG will have little direct effect on prices. These are determined by supply and demand, which varies across the nation hence differences in median prices.

NG has been here since the 1920's and prices have risen and fallen. While there may be correlation at times between the popularity of NG and prices there is clearly no causation. NG only affects the momentum of a rising market, not the level it settles to (Melb and Syd prices are in decline from their peaks).

How abolishing NG will indirectly affect prices is a consequence of fewer people having the cash-flow to carry investments in established housing. This will lead to competition for rentals and higher rents.

Property investment, with or without NG, is a mugs game unless values rise beyond inflation (so well done SR on your 100K gain). There are other investments that are more liquid and don't involve bad tenants, management fees, maintenance, rates, insurance, land tax, stamp duty, etc.

Higher rental returns will drive a rise in values and hence the incentive to build new houses. Gov't intervention will include more rent assistance and subsidies/tax breaks to build low-income housing, i.e. higher taxes will result.

Luciferase,
1920 ? So why continue with a system that really does not help to sustain the economy. All NG does is to borrow from the borrowers who pass on their debt-riddled system onto the next generation of borrowers.
How about taking a serious look at sustainability for a change ? I don't give hoot what all those financial experts who have dragged us from one failed scheme to another have to say. Earn a Dollar-pay 20 Cents tax & be done with it. Failed systems don't maintain an economy, incentive does ! let people make money if they can but but only let them do it by paying the same tax as everyone else. You'd be surprised at the result competent & smart people could produce if only the insipid experts didn't always stand in their way. Those who lack the drive will still make a good existense on the minumim wage, just don't keep on punishing those with drive.
Morrison would do well thinking about that.

ttbn,

I had seen your post about the Hawke government and NG but since it is merely a regurgitation of the misleading information from Wikipedia, it hardly merits a mention.

The fact is that the removal of NG won't and didn't cause an immediate rise in rents. Because there was a grandfathering component, the effects would take time to become obvious. In fact rents did rise in Sydney and Perth where vacancy rates were lowest. similar rises would work their way through the system as investors withdrew from the market.

This is what the Hawke government saw coming down the road and that is why they reversed course.

You need to ask yourself why Keating changed his mind over this after two years. Wikipedia says it was 'pressure'. From who and on what basis is left unsaid because its a made-up rational which those opposed to both NG and historic understanding are happy to just believe.

Should the ALP be so foolish as to ignore history, they will find the same problems after 3 or 4 years.

I used nothing from Wikipedia, but if it helps your ego to think I did, you believe that. You are clearly not a very sophisticated researcher yourself. Wikipedia indeed!

NG is nothing more than Welfare for the commercial sector, paid for by real taxpayers.
This nonsense needs to have an end put to it. The playing field will never level out unless we have a Flat Tax. Period !

indi, the commercial sector doesn't NG, but forms companies that carry losses forward to write down against future profits, and it pays a lower rate of tax than most f/t public servants. I suppose flat-taxers will use whatever's at hand to push their case. Denying deduction of losses will stunt enterprise.

Labor's class-war misinformation campaign is clearly working a treat.

Denying deduction of losses will stunt enterprise.
Luciferase,
Says who ? There's no enterprise left in Australia to stunt, Try Flat Tax & you'll find that by easing taxes for those who presently pay too much will spur on local enconomies & those who presently make too much will not feel anything !
No big multinational companies will lose, they'll simply just make less than what they're wishing for. The rhetoric of Company losses is wrong & misleading. They don't lose they just make less which would actually be better for all as there would be more funding freed up.

Luciferase,
>Labor's class-war misinformation campaign is clearly working a treat.
It's generally the Liberals who engage in class warfare nowadays, though it was Gillard's attempt to get Labor into class warfare which allowed the Libs to do so.

_____________________________________________________________________________

individual,
>Says who ? There's no enterprise left in Australia to stunt,
Who do you think (other than the government) is employing people at the moment?

Aidan, here are some numbers to add real context to this topic:

Current population: 25 million
Total population increase last 12 months: 400,000
composition of population increase:
- migration 250,000
- natural increase 145,000

Number private dwellings:approx 9 million @ average 2.6 occupants
Composition of occupied private dwellings:
- renters: 31% (approx about 27% from private landlords, 4% social/public hosing),
- owners: 65% (31% owned outright, 34% owned with mortgage),
- other 4%

So the total number of privately owned dwellings currently being rented is about 9mx27%= 2.43million. A very large proportion of the people renting these dwellings will ALWAYS be renters as discussed in my previous post.

OK, now let's examine the consequence of the increasing population numbers:
Firstly, the yearly increase of 250,000 by immigration. Almost ALL of these people will start out as renters when they first arrive and many will ALWAYS be renters (especially many of those we import from the third world- those who are uneducated/unskilled are pretty much destined to be life-long renters).
Secondly, with the 145000 natural population increase by new births there is a comparable number who are 18-25ish and are leaving home and they will almost all be renters at first.

In other words, given the two facts that many people will always be renters and that we have an increasing population this means that EVERY YEAR hundreds of thousands of people need to be provided with NEW rental properties. This is the situation even though some of the existing renters become home owners for the first time. But importantly, it will remain the basically the same if even a few more as you envisage are incentivised to become owners; because it is such a huge number of new rentals that need to be supplied EACH year that it dwarfs the few extra new home owners that you propose.

--- continued below ---

--- continue from above ---

This new accommodation is provided for by landlords (except public housing), and the ONLY reason that they do this is to make money. However, renting property by itself doesn't have very good returns as opposed to other investments and comes with a fair bit or risk and lots of bother, eg: the risk of renters wrecking the place, the laws now vastly favour the renter instead of the landlord so it is very hard to evict bad tenants or tenants who are behind in rent, tenants in Australia don't tend to take long term leases so quite regularly you need to find new tenants which costs you inconvenience, time and lost income when the place is sitting vacant between tenants, etc. In short, very often the only thing that makes landlording appealing to an investor is the use of negative gearing- without it many would never be landlords.

So, what happens if you remove negative gearing? Well extremely quickly you will notice a very steep decline in new rental builds since many landlords can now longer justify the investment. So now all renters will end up paying MORE rent since new dwelling supply has shrunk way faster than demand. And what happens when rent goes up to first home buyers? Well since almost every first home buyers is a renter to start with it becomes harder to save up for a deposit on (or buy outright) a home since they new have less money left after paying rent.

Basically, removing negative gearing will TOTALLY SCREW UP THE WHOLE HOSING SYSTEM by making life a lot harder/costlier for life-long renters and potential first home buyers.

[PS: in my previous post I typed the word "nonce" this should have been "nounce"]

Just a glitch in the logic there, thinkabit, with, "So, what happens if you remove negative gearing? Well extremely quickly you will notice a very steep decline in new rental builds since many landlords can now longer justify the investment."

New rental builds will be able to be negatively geared while purchasing an established house for rental won't. Rental builds will rise when rents rise sufficiently to offset the lost cash-flow advantage NG currently provides through time-shifting losses (from the future to the financial year that is current).

The other things that will happen are gov't incentivization of rental builds, greater rent assistance, and building more public housing (beautifully gov't managed, of course), all leading to higher state and federal taxes.

whoops, in my previous post I missed the word "no" in the following, "Well extremely quickly you will notice a very steep decline in new rental builds since many landlords can now longer justify the investment."
It should read "...can now NO longer justify the investment."

So to reiterate what I'm saying: If negative gearing is abolished then the decline in new rental builds will happen extremely fast (indeed, for proposed builds that an investor isn't committed to yet they can even be canceled the next day). It can take just mere seconds for an investor who is relying on negative gearing to decide not to build a new rental if it is removed, instead they will invest elsewhere such as the stock market, gold, etc.

However, it typically takes many months or even years for a currently renting potential home owner to save for a house deposit. So potential home owners (who are at any given time are a minority of renters- since most renters are destined to be life-long tenants because they typically aren't responsible with money or simply don't earn enough) cannot quickly change from renters to new home owners as fast as an investor can change from being a potential landlord to some other investment.

Overall, new rental builds dramatically decrease but demand for them can't possibly decrease as fast (demand can only decrease if the population stops growing or current renters switch from renters to owners), thus rents INCREASE. Rents increase to the level that it becomes attractive once again for investors to invest in housing.

But not only does increasing rent affect life-long tenants it also has a detrimental effect on first home buyers, because it takes even longer for first home buyers to save up for a deposit since they have less money available for saving after paying the increased rents.

So to sum up: removing NG will not make rents cheaper nor houses more affordable for first home buyers!

Well, of course the removal of NG wouldn't be any good by simply removing it. I don't think anyone has ever advocated that. If NG were to be done away with then of course taxes would differ greatly too. A flat tax would simply mean everyone pays the same rate. Rich or poor or inbetween. Most opponents of FT can't envisage a system that gives no-one the edge & therefore thepresent monopolies would become thing of the past.
Get rid of asset tests until the asset actually becomes an asset i.e. when the asset is sold.
Want to start a business ? Save & borrow & as you make a profit you pay back the loan.
No taking the mates for dinner or buying a boat or holidays overseas for "the business" & writing it all off for all the taxpayers to make up the shortfall.
How about a little patience to make more money ? Keep your services/goods affordable. Can"t be done without NG I hear you say ? Well, how about giving it a go before dismissing something that's good for all in favour of something that's overly generous for a few.

The reason negative gearing was introduced in the first place was to generate additional housing by getting investors to build new houses and also stimulate the building industry and therefore the economy.

It has since become a tax minimisation vehicle so people can invest in existing property (93% on negative gearing is for existing property) and get the interest effectively paid by taxpayers and has spread to other forms of investment, like the share market.

In other words it has changed from it's original purpose and in most cases produces nothing of benefit for society but personal gain for the individual.

It has since become a tax minimisation vehicle..
rache,
Precisely, thar's what's causing the inequality problems plagueing society. One lot pays hardly any tax & the other can no no longer bear the level of tax thrown at them.
To bring the the economic down-slide to a halt only one system will wor-Flat Tax. It is the only system that can revive incentive to work & save. It'd bring a level of prosperity never known in this country before. Imagine all the money that is presently going into the coffers of other countries, staying right here. Imagine the local enterpeneurs coming to life. The only casualty would be greed.

rache you claim that NG "in most cases produces nothing of benefit for society
but personal gain for the individual". This is simply WRONG. NG gearing does provide a huge benefit to society, specifically it encourages investors to supply rental properties and this benefits renters. And just to make it clear, renters include almost all of the less-well-off, ie. the poor benefit from NG.

Another missunderstanding you seem to have is the impression that whenever an investor buys a dwelling for renting-out it comes at the long term of consquence of decreasing the number of dwellings available to the home-buyer. This is simply WRONG. The number of dwellings available is not fixed and the partition of dwellings for renting v's home-ownership is NOT a zero sum game!!
Even if investors exclusively bought existing houses it doesn't mean that home-buyers have to miss out on buying houses. I'll demonstrate this by comparing two scenarios in the following hypotheticals:
Case 1:
A potential land-lord builds a new dwelling and rents it out.
Case 2:
A potential land-lord buys an existing house from an existing owner-occupier and rents it out. The owner-occupier then builds a new dwelling with the money from the sale and moves in.
Results: Note that in both cases the overall result is same in terms of number of dwellings and newly housed people, ie. the number of dwellings increase by one and a renter is now newly housed.

Repeating the figure I've already given: our population increases by approx 400,000 EACH year. And a chuck of that increase* needs to find NEW rental accommodation each year. So EVERY year new rental dwellings need to be provided and it is provided by investors. But note, the new rentals provided DON'T have to be a newly constructed dwellings- but they still MUST be provided for everyone to be housed

** continued from above **
What would be a problem for new home-owners is if investors bought dwellings but didn't rent them out- eg: people who buy personal holiday homes. But this has nothing to do with NG because NG can't be claimed for this sort of investment (ie: NG can only be claimed for an active business, it cannot be claimed for purely appreciating asset investments).

By-the-way there is a reason why many landlords wouldn't rent out brand new buildings. It is because most tenants wouldn't care for it the same way an owner-occupier does. Often, if you let tenants a brand-new building, chances are that you will lose more money to damage they cause than you collect in rent. This is especially true these days because of our anti-discrimination laws: they prevent landlords from minimizing the risk they take with potential bad tenants and as a consequence the landlord has to drop down the quality of their lets to a level that suits the worst type of tenant (ie: they buy the worst houses in a suburb for rentals since they can't stop riff-raff rubbish tenants from renting them)

*: a higher proportion than the percentage of renters in general population since the majority of the population increase is by migrants, and migrants have a higher proportion who are initially long-term or even life time renters than the general population