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Good News: Treasury pushing remodel of Negative Gearing for only new homes!; Corrupt and vested real estate interest run for cover!
Topic Started: 14 Aug 2014, 09:26 PM (33,897 Views)
herbie
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stinkbug
18 Aug 2014, 04:45 PM
Clutching at straws.
I'd actually like to hear MIW's reply ...
A Professional Demographer to an amateur demographer: "negative natural increase will never outweigh the positive net migration"
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miw
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piccolo
18 Aug 2014, 04:36 PM
I think you are incorrect on this miw. Are you saying that the negative gearing losses on property have to pass these tests https://www.ato.gov.au/Business/Non-commercial-losses/ that other businesses have to pass in order to offset the losses against other income? If so that would mean that every property that either
- generates less than $20,000 in rental income and
- has not turned a profit in at least 3 of the last 5 years and
- is worth less than $500,000

would not be able to claim losses against other income. This is a lot of properties.
You can't read, or don't understand the difference between AND and OR. The test is that you have to meet one or more of the following 3 criteria:

a) generates at least $20,000
OR
b) has turned a profit in 3 of the last 5 years
OR
c) has an invested capital of $100,000 or more ($500k for real property)

OR

The business is investment in income-producing assets.

You can also ask for the requirements for one of the three conditions to be waived and it will generally be granted if (a) you are in startup mode and it takes a while to show a profit or get to $20k turnover (b) you would have passed one of the tests except for exceptional circumstances.

Obviously own-to-rent passes the criteria because it is an investment in income-producing assets (BUT you can have the deduction denied if you are running it in such a way as to try not to make reasonable income, such as setting rent too high, setting rent too low, not maintaining it in a fit condition for habitation, etc etc etc.). In addition, most investors who are not already passing the $20k gross rent or $500k invested capital could get there pretty easily if they had a good reason to, even if they are negatively geared, and they could also quite reasonably apply for a startup exemption if it was their first property.
The truth will set you free. But first, it will piss you off.
--Gloria Steinem
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piccolo
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miw
18 Aug 2014, 06:11 PM
You can't read, or don't understand the difference between AND and OR. The test is that you have to meet one or more of the following 3 criteria:

a) generates at least $20,000
OR
b) has turned a profit in 3 of the last 5 years
OR
c) has an invested capital of $100,000 or more ($500k for real property)

OR

The business is investment in income-producing assets.

You can also ask for the requirements for one of the three conditions to be waived and it will generally be granted if (a) you are in startup mode and it takes a while to show a profit or get to $20k turnover (b) you would have passed one of the tests except for exceptional circumstances.

Obviously own-to-rent passes the criteria because it is an investment in income-producing assets (BUT you can have the deduction denied if you are running it in such a way as to try not to make reasonable income, such as setting rent too high, setting rent too low, not maintaining it in a fit condition for habitation, etc etc etc.). In addition, most investors who are not already passing the $20k gross rent or $500k invested capital could get there pretty easily if they had a good reason to, even if they are negatively geared, and they could also quite reasonably apply for a startup exemption if it was their first property.
Hmmm, ok lets go through the facts again miw.

The reason I used the word AND is because I was saying that properties that don't meet all three criteria would not be able to offset their losses if normal rules for businesses were applied to properties (re-read my post). However the rules do not apply to properties as clearly stated on the ATO website. So I'll just run that logic again, to meet the criteria they only have to pass one test (i.e. OR) therefore to not meet the criteria they must fail all three tests (i.e. AND).

Also re-read the link, it clearly says the following ...

The non-commercial loss rules don't apply to:
investment losses - if you have investments (for example, shares or a rental property) we generally do not consider you to be in business. The non-commercial loss rules don't affect you.


Therefore the rules that apply to normal businesses don't apply to property. Can I make it any clearer? Geez I thought you were one of the smart bulls...

The exceptions to these rules for normal businesses can only be granted by the tax commissioner, however I will repeat again (for the third fricken time) these rules do not apply to property, i.e. property gets favourable treatment.
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piccolo
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piccolo
18 Aug 2014, 06:21 PM
Hmmm, ok lets go through the facts again miw.

The reason I used the word AND is because I was saying that properties that don't meet all three criteria would not be able to offset their losses if normal rules for businesses were applied to properties (re-read my post). However the rules do not apply to properties as clearly stated on the ATO website. So I'll just run that logic again, to meet the criteria they only have to pass one test (i.e. OR) therefore to not meet the criteria they must fail all three tests (i.e. AND).

Also re-read the link, it clearly says the following ...

The non-commercial loss rules don't apply to:
investment losses - if you have investments (for example, shares or a rental property) we generally do not consider you to be in business. The non-commercial loss rules don't affect you.


Therefore the rules that apply to normal businesses don't apply to property. Can I make it any clearer? Geez I thought you were one of the smart bulls...

The exceptions to these rules for normal businesses can only be granted by the tax commissioner, however I will repeat again (for the third fricken time) these rules do not apply to property, i.e. property gets favourable treatment.
Edit: And just in case you try to twist your earlier position this is what you said:

Investing in own-to-rent and stocks bearing dividends have to meet exactly the same criteria as any other business. The general consensus is wrong. If there is a difference, it is that own-to-rent is assumed to be for the purpose of making profit unless deemed otherwise. Some kinds of businesses are assumed to be hobbies unless you can show otherwise. I have seen the odd case where people are playing fast and loose with the rules (most commonly by having the property on the market, but at a rental such that nobody will pay it so the place stands empty) but these guys are playing with fire.

I have clearly shown this to be incorrect.
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miw
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piccolo
18 Aug 2014, 04:36 PM
I think you are incorrect on this miw. Are you saying that the negative gearing losses on property have to pass these tests https://www.ato.gov.au/Business/Non-commercial-losses/ that other businesses have to pass in order to offset the losses against other income? If so that would mean that every property that either
- generates less than $20,000 in rental income and
- has not turned a profit in at least 3 of the last 5 years and
- is worth less than $500,000

would not be able to claim losses against other income. This is a lot of properties.


Seems my understanding of the meaning of the word "either" is different to yours, or maybe you just had a typo. I will accept that you intended it the way you explained it later, though.
Edited by miw, 18 Aug 2014, 06:48 PM.
The truth will set you free. But first, it will piss you off.
--Gloria Steinem
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piccolo
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piccolo
18 Aug 2014, 06:21 PM
Hmmm, ok lets go through the facts again miw.

The reason I used the word AND is because I was saying that properties that don't meet all three criteria would not be able to offset their losses if normal rules for businesses were applied to properties (re-read my post). However the rules do not apply to properties as clearly stated on the ATO website. So I'll just run that logic again, to meet the criteria they only have to pass one test (i.e. OR) therefore to not meet the criteria they must fail all three tests (i.e. AND).

Also re-read the link, it clearly says the following ...

The non-commercial loss rules don't apply to:
investment losses - if you have investments (for example, shares or a rental property) we generally do not consider you to be in business. The non-commercial loss rules don't affect you.


Therefore the rules that apply to normal businesses don't apply to property. Can I make it any clearer? Geez I thought you were one of the smart bulls...

The exceptions to these rules for normal businesses can only be granted by the tax commissioner, however I will repeat again (for the third fricken time) these rules do not apply to property, i.e. property gets favourable treatment.
Pretty funny though that you were saying I can't read or don't understand when in fact it is you who has got it wrong several times over now...
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piccolo
Unregistered

miw
18 Aug 2014, 06:46 PM


Seems my understanding of the meaning of the word "either" is different to yours, or maybe you just had a typo. I will accept that you intended it the way you explained it later, though.
True the word either should not be there - however the intention of the paragraph is fairly clear as I have used the word and to show that if all three criteria are not passed, for a normal business, they can't claim a loss against other income unless they get a ruling from the tax commissioner. Not so for property however.

Thank you for conceding that the intention is clear, that puts you above Shadow and Strindberg.
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miw
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piccolo
18 Aug 2014, 06:21 PM
The non-commercial loss rules don't apply to:
investment losses - if you have investments (for example, shares or a rental property) we generally do not consider you to be in business. The non-commercial loss rules don't affect you.


Therefore the rules that apply to normal businesses don't apply to property. Can I make it any clearer? Geez I thought you were one of the smart bulls...

The exceptions to these rules for normal businesses can only be granted by the tax commissioner, however I will repeat again (for the third fricken time) these rules do not apply to property, i.e. property gets favourable treatment.
We are splitting hairs here. And you didn't mention that for investment-related income there is a whole slew of *other* rules that apply that the average small business owner might find onerous.

The intent of the rules is to weed out the ones who are engaged in pure speculation or actively trying to make a loss for tax purposes. (So you cannot claim deductions against shares that do not produce a dividend, commodities such as gold or wheat, vacant land that you are not developing, a property that you are not renting out for market rate, art, rare coins, etc etc etc.) Obviously the test for an investment business and for a turnover business will be slightly different because payday comes at a very different time.

Maybe you have never made an application to the tax commissioner, but I have. It means writing a letter to the ATO and it is not hard. It will never get to the actual commissioner - some droid will write a reply stamped with his/her signature. I can assure you that any small business owner who is running a business that *should* be able to get to $20k turnover will not get turned down, at least for the first few years. It is not a high bar. I ran a shop in a residential college that was open twice a day for 30 minutes total time invested about 10 hours a week, 40 weeks a year - and its turnover was way more than $20k per year, and that was in the 1980s.

In addition, if you did apply the business test to PIs, they would almost all be able to meet one of the criteria or successfully apply for the startup exemption. Either they will get to profitability fairly quickly in most cases or they will buy a second property and meet both the other criteria.
The truth will set you free. But first, it will piss you off.
--Gloria Steinem
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Lef-tee
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miw
18 Aug 2014, 03:28 PM
You speak as if it were individual landlords who set rents. They don't. They take the market price which is determined by both LLs and tenants. In my experience the market is pretty efficient over time and numbers, although there are always examples of sweet deals for tenants around.

There would be a delayed increase in yield but you would only notice it in aggregate numbers over time through a slowing down in capital growth and speedup in rent increases. I wouldn't expect the average gross yield to increase by more than a percent or two, and in the final washup it would be almost entirely expressed in rent increases, because house prices are in the end governed by the boundary conditions of geography and the cost of building new stock, neither of which would change. Maybe there would be an overall softening in the market for places that nobody wants to own as their home but which many people are prepared to rent for a while.

You would also see some decrease in the average gearing of investors which is also consistent with an increase in yields. Back before the deregulation in banking when LLs were mostly pretty-much ungeared, gross yields were much higher - up to 10% in some cities.


Incorrect. Investing in own-to-rent and stocks bearing dividends have to meet exactly the same criteria as any other business. The general consensus is wrong. If there is a difference, it is that own-to-rent is assumed to be for the purpose of making profit unless deemed otherwise. Some kinds of businesses are assumed to be hobbies unless you can show otherwise. I have seen the odd case where people are playing fast and loose with the rules (most commonly by having the property on the market, but at a rental such that nobody will pay it so the place stands empty) but these guys are playing with fire.
Not too sure what you mean miw. Are you saying that nearly 2 million NGeared LL's don't have enough collective market presence to make a difference?
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piccolo
Unregistered

miw
18 Aug 2014, 07:38 PM
We are splitting hairs here. And you didn't mention that for investment-related income there is a whole slew of *other* rules that apply that the average small business owner might find onerous.

The intent of the rules is to weed out the ones who are engaged in pure speculation or actively trying to make a loss for tax purposes. (So you cannot claim deductions against shares that do not produce a dividend, commodities such as gold or wheat, vacant land that you are not developing, a property that you are not renting out for market rate, art, rare coins, etc etc etc.) Obviously the test for an investment business and for a turnover business will be slightly different because payday comes at a very different time.

Maybe you have never made an application to the tax commissioner, but I have. It means writing a letter to the ATO and it is not hard. It will never get to the actual commissioner - some droid will write a reply stamped with his/her signature. I can assure you that any small business owner who is running a business that *should* be able to get to $20k turnover will not get turned down, at least for the first few years. It is not a high bar. I ran a shop in a residential college that was open twice a day for 30 minutes total time invested about 10 hours a week, 40 weeks a year - and its turnover was way more than $20k per year, and that was in the 1980s.

In addition, if you did apply the business test to PIs, they would almost all be able to meet one of the criteria or successfully apply for the startup exemption. Either they will get to profitability fairly quickly in most cases or they will buy a second property and meet both the other criteria.
No I don't think we are splitting hairs here. Most businesses have to pass one of three criteria that property simply does not have to pass. I agree with you on the intent of the rules for normal businesses, however those rules don't apply to property so the intent was clearly to have different (i.e. easier) hurdles for property versus other small businesses. As you said as long as the property or shares generates a return it can claim the losses, whereas any other business must generate $20k worth of revenue. We both know this hurdle would exempt a huge chunk of properties.

I've never personally made an application to the tax commissioner, I'll admit. However I have worked as an accountant for over a decade. You said your shop generated more than $20k so it will have passed the test anyway and wouldn't require an exemption. I've seen a lot of good dealings with the ATO, and a lot of very poor dealings. In my experience it is getting more and more difficult to get any exemptions from the usual rules granted. Can you provide a link for the start-up exemption, I haven't heard of that before?

You say almost all PIs would meet the criteria? Rubbish. I haven't looked recently but the median property price Australia wide is somewhere around $500k, which puts approximately half of properties below that threshold. Of those below $500k, most would generate less than $20k in rental revenue (at least 80%). And we all know that most properties over the first 5 years are usually negatively geared. Even with interest rates at 5%, a rental return of 5% will leave you negatively geared after rates, insurance, landlords insurance, maintenance, rental agents fees. And obviously the past 20 years has generally since interest rates much higher. You may have an argument if you can provide a link to this start up exemption though, I just haven't heard of it.
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