That would be the long term effect as the 30% or so of the property stock required for renting gets bought up by people who do not have to worry about whether they claim tax this year or the next.
A few years ago I would have dismissed such an argument out of hand but having seen how very, very little Australians care about the effects of their mania for owning more houses than they can live in on coming generations, perhaps it's quite plausable. To be fair, maybe most just don't connect the dots.
But I'm not sure that the rich don't care about their tax bill. I'll ask my tax accountant when next I speak to her but I imagine that one of the reasons the rich are rich is because they are obsessed with amassing wealth and anything that assists that would be keenly embraced. There is far more tax avoidance by the wealthy than by the rest.
So what sort of money are the rich going to pay for all these rentals that can suddenly be no longer claimed against total income given that the majority of tenants can't realistically afford to pay their landlords mortgage as it stands now, that being one of the main reasons for renting. Sounds like a money-losing prospect, at first glance anyway.
You sure this would have no effect on the overal demand for investment property and hence the price?
A few years ago I would have dismissed such an argument out of hand but having seen how very, very little Australians care about the effects of their mania for owning more houses than they can live in on coming generations, perhaps it's quite plausable. To be fair, maybe most just don't connect the dots.
But I'm not sure that the rich don't care about their tax bill. I'll ask my tax accountant when next I speak to her but I imagine that one of the reasons the rich are rich is because they are obsessed with amassing wealth and anything that assists that would be keenly embraced. There is far more tax avoidance by the wealthy than by the rest.
So what sort of money are the rich going to pay for all these rentals that can suddenly be no longer claimed against total income given that the majority of tenants can't realistically afford to pay their landlords mortgage as it stands now, that being one of the main reasons for renting. Sounds like a money-losing prospect, at first glance anyway.
You sure this would have no effect on the overal demand for investment property and hence the price?
The fact that many of those arguing it will have no effect if removed are also strongly arguing for keeping it in place probably tells you something. They don't want to admit that it increases house prices.
The discussion began when Piccolo said taxpayers were subsidising property investors. I pointed out that the housing sector contributes $40 billion in net tax revenue for the government each year, $20 billion of which comes from investors, so in fact we highly taxed property investors and homeowners are subsidising low taxed renters like Piccolo.
Nobody subsidises negative gearing. It simply results in a deferred tax payment. It allows property investors, who already contribute $20 billion in taxes, to defer $4 billion until later.
If a shopper buys some groceries, pays $20 today and defers $4 until tomorrow, other shoppers don't subsidise that $4.
Your example only works because of the small amount ($4) and short time frame (1 day). Try go into Woolworths and, when asked for $200 to cover your groceries, tell them you’ll pay in 5 years. If you get any pushback from the checkout person, you could say that there might be deflation and so they might actually come out in front.
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A tax break normally refers to something that avoids or reduces the tax payable. I don't consider deferring tax to be a 'tax break' regardless of the 'time value of money' argument. What if we had deflation instead of inflation? Then the 'time value' would work in reverse. At the end of the day, the nominal tax paid is the same whether losses are claimed immediately or deferred until later.
If you believe that, would you be willing to loan me $10,000? I’ll give you $10,000 back in 10 years’ time.
If you offered people on the street $1,000 now or $1,500 in 5 years’ time, I’ll bet a large portion would take the money now, even though it probably doesn’t make financial sense. Whether it’s the time value of money (thanks to mandated inflation targets), the certainty of getting it now, the possibilities that it could open, or simply short-term thinking, money now is much more valuable than money in the future. Enough so that it affects people’s behaviour.
With property, it’s not a matter of get the deduction now or get it later, like you claim. Without an immediate deduction, there would be less incentive to utilised negative gearing the first place. There would be downward pressure on prices and therefore, current and future losses would be reduced, reducing the amount of losses claimed in total, and yes reducing the need for government to make up the difference from elsewhere.
If you disagree, why do you think the government restricted so many other types of immediate deductions that I outlined earlier?
Your example only works because of the small amount ($4) and short time frame (1 day). Try go into Woolworths and, when asked for $200 to cover your groceries, tell them you’ll pay in 5 years.
No, the example works regardless. In the example you just gave, if I pay $1000 today and defer $200 for five years, then it is still true that no other shopper needs to subsidise the $200.
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If you get any pushback from the checkout person
Pushback is not in scope. The government has agreed to let the $4 billion to be deferred. The shopkeeper has agreed to let the $200 be deferred. This question is whether or not that deferred payment needs to be subsidised by others. Those who oppose NG claim 'other taxpayers' are subsiding it. They are not. No other person needs to subsidise the deferred payment.
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If you believe that, would you be willing to loan me $10,000? I’ll give you $10,000 back in 10 years’ time.
Yes, if by lending you the $10K I avoided having to incur some other cost that would exceed the potential deflation in the value of the money. If the government disallowed negative gearing, then it would be forced to provide more public housing, at a much greater cost than the negligible deflation of its deferred tax revenue.
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Without an immediate deduction, there would be less incentive to utilised negative gearing the first place. There would be downward pressure on prices and therefore, current and future losses would be reduced, reducing the amount of losses claimed in total, and yes reducing the need for government to make up the difference from elsewhere.
Alternatively the lower prices could result in less stamp duty and land tax revenue. Fewer investors in the market could result in lower tax paid on rental income. The need to provide additional public housing could cost the government quite a lot. Ultimately negative gearing costs the government very little - basically just the inflation adjusted value of the deferred payment, but it ensures higher revenue from stamp duty, land tax, tax on rental income and avoidance of public housing costs. The government would be shooting itself in the foot to get rid of it.
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If you disagree, why do you think the government restricted so many other types of immediate deductions that I outlined earlier?
The rules are very similar for property investors, share investors and sole traders. Basically anyone who earns income through a sole person or individual type of enterprise can offset losses against their other personal income.
It's different for larger businesses, because larger businesses are not individuals.
No, the example works regardless. In the example you just gave, if I pay $1000 today and defer $200 for five years, then it is still true that no other shopper needs to subsidise the $200.
Pushback is not in scope. The government has agreed to let the $4 billion to be deferred. The shopkeeper has agreed to let the $200 be deferred. This question is whether or not that deferred payment needs to be subsidised by others. Those who oppose NG claim 'other taxpayers' are subsiding it. They are not. No other person needs to subsidise the deferred payment.
Yes, if by lending you the $10K I avoided having to incur some other cost that would exceed the potential deflation in the value of the money. If the government disallowed negative gearing, then it would be forced to provide more public housing, at a much greater cost than the negligible deflation of its deferred tax revenue.
Alternatively the lower prices could result in less stamp duty and land tax revenue. Fewer investors in the market could result in lower tax paid on rental income. The need to provide additional public housing could cost the government quite a lot. Ultimately negative gearing costs the government very little - basically just the inflation adjusted value of the deferred payment, but it ensures higher revenue from stamp duty, land tax, tax on rental income and avoidance of public housing costs. The government would be shooting itself in the foot to get rid of it.
The rules are very similar for property investors, share investors and sole traders. Basically anyone who earns income through a sole person or individual type of enterprise can offset losses against their other personal income.
It's different for larger businesses, because larger businesses are not individuals.
I've already demonstrated how the average negatively geared PI gets a tax break compared to PAYG.
We said that the average PI sells after 10 years (it is probably more like 7), and we said that at year 10 the average PI has an accumulated rental loss that they have claimed against other income.
So in this typical scenario lets say that at year 10 there is an accumulated rental loss of $30,000. They are on a tax rate of 40% so $12,000 of this has been subsidised by the taxpayer. They then sell for a $30,000 capital gain, which gets the 50% discount. So they pay tax on $15,000 which equals $6,000 in tax. So netting off their rental losses of $30,000 and their gain of $30,000 they have broken even. However they have received a net gain funded by the taxpayer of $6,000. The negative gearing loss for the typical PI is never recovered from rental gains. The capital gain from which it would usually be recovered is discounted by 50%.
Scenario 2. The same except they sell for a $100,000 capital gain on which they pay $20,000 in tax. So they have made $70,000 ($100,000 gain less $30,000 rental losses). On that profit they have paid a net $8,000 in tax or a rate of 11.4%. Once again the negative gearing tax break is not recovered.
I've already demonstrated how the average negatively geared PI gets a tax break compared to PAYG.
I don't know what that means.
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So in this typical scenario lets say that at year 10 there is an accumulated rental loss of $30,000. They are on a tax rate of 40% so $12,000 of this has been subsidised by the taxpayer.
The investor has already paid far more in stamp duty, land tax, and tax on rental income than the deferred tax payment relating to negative gearing.
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So in this typical scenario lets say that at year 10 there is an accumulated rental loss of $30,000. They are on a tax rate of 40% so $12,000 of this has been subsidised by the taxpayer. They then sell
How does 'the taxpayer' subsidise money that somebody else didn't make? If I am walking down the street and lose $100 from my wallet, do other people 'subsidise' the money I lost?
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They then sell for a $30,000 capital gain, which gets the 50% discount. So they pay tax on $15,000 which equals $6,000 in tax.
How do you know they didn't sell for $200K capital gain?
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However they have received a net gain funded by the taxpayer of $6,000
Other taxpayers don't 'fund' anything. If I owe you $5, that doesn't mean other people 'fund' the $5 that I owe you.
Remember, the investor has contributed a net positive sum of money to the government in the form of other taxes such as land tax, stamp duty, CGT, and tax on rental income. The tax payment deferred due to NG isn't 'funded' by anyone.
If new laws were introduced to force losses to be quarantined, then the total tax payable by the investor would be exactly the same.
If you disagree, then describe a scenario whereby the investor ends up paying more tax as a result of the losses being quarantined and claimed later against future IP income, versus being claimed immediately against other personal income.
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Scenario 2. The same except they sell for a $100,000 capital gain on which they pay $20,000 in tax. So they have made $70,000 ($100,000 gain less $30,000 rental losses). On that profit they have paid a net $8,000 in tax or a rate of 11.4%. Once again the negative gearing tax break is not recovered.
In your example, the investor paid a net positive amount of tax. What 'tax break' is there to be 'recovered'?
How would the total amount of tax have been any different if the losses had to be quarantined?
No, the example works regardless. In the example you just gave, if I pay $1000 today and defer $200 for five years, then it is still true that no other shopper needs to subsidise the $200.
Many businesses could not afford this drain on cash flow and would either become insolvent or have to put up their prices. With the latter option, those paying the higher price on time would be subsiding those who get interest-free terms.
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Yes, if by lending you the $10K I avoided having to incur some other cost that would exceed the potential deflation in the value of the money. If the government disallowed negative gearing, then it would be forced to provide more public housing, at a much greater cost than the negligible deflation of its deferred tax revenue.
Great, how can we set up this transfer?
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Alternatively the lower prices could result in less stamp duty and land tax revenue. Fewer investors in the market could result in lower tax paid on rental income. The need to provide additional public housing could cost the government quite a lot. Ultimately negative gearing costs the government very little - basically just the inflation adjusted value of the deferred payment, but it ensures higher revenue from stamp duty, land tax, tax on rental income and avoidance of public housing costs. The government would be shooting itself in the foot to get rid of it.
Lots of assumptions in there. One that I disagree with is that fewer investors means fewer investment properties. The home ownership rate is pretty stable isn't it? Fewer investors rather means fewer people competing for the same thing.
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The rules are very similar for property investors, share investors and sole traders. Basically anyone who earns income through a sole person or individual type of enterprise can offset losses against their other personal income.
The rules are different for sole traders. To prevent a significant revenue leak, the government introduced the non-commercial loss rules. There is no such leak to worry about with share investors because people are not as comfortable gearing into shares. People are very comfortable gearing into property, which is why this needs to be looked at.
As Wikipedia says, one way negative gearing works is if "the asset rises in value so that the capital gain is more than the sum of the ongoing losses over the life of the investment". Until recently this was the only way mentioned on Wikipedia. I would argue it's this most common. If negative gearing was quarantined, the sum of the on-going losses would never be able to be fully claimed - a massive windfall for the government and a huge incentive for people to make smarter investment decisions.
A few years ago I would have dismissed such an argument out of hand but having seen how very, very little Australians care about the effects of their mania for owning more houses than they can live in on coming generations, perhaps it's quite plausable. To be fair, maybe most just don't connect the dots.
But I'm not sure that the rich don't care about their tax bill. I'll ask my tax accountant when next I speak to her but I imagine that one of the reasons the rich are rich is because they are obsessed with amassing wealth and anything that assists that would be keenly embraced. There is far more tax avoidance by the wealthy than by the rest.
So what sort of money are the rich going to pay for all these rentals that can suddenly be no longer claimed against total income given that the majority of tenants can't realistically afford to pay their landlords mortgage as it stands now, that being one of the main reasons for renting. Sounds like a money-losing prospect, at first glance anyway.
You sure this would have no effect on the overal demand for investment property and hence the price?
The fact that many of those arguing it will have no effect if removed are also strongly arguing for keeping it in place probably tells you something. They don't want to admit that it increases house prices.
I think you've probably nailed it there Elastic.
It's always interesting to watch people saying one thing while obviously leaning strongly the other way. The property lobby obviously doesn't believe it would have no impact since they begin foaming at the mouth and decending into hysterics every time the issue of removing it is mentioned.
Mind you, I think skamy is probably correct in pointing out that much of the impact would fall on "mum and dad investors" with only a single investment property and no great income. These people appear to make up the great majority of investors. They would be left holding an asset that could suddenly no longer be used to reduce the next buyers taxable income - if that wouldn't dampen demand for investment property then I don't know what would.
But when a not insignificant percentage of the population engaging in a practice that collectively - not as individuals - increasingly robs coming generations of an important piece of social progress made over the past 150 years or so is called "egalitarian" then I think we have come up with an entirely new definition of egalitarianism Not that anyone actually meant to do any harm.
But it's easy for a couple of million people to blithely wave away the fact that in order for them to win, the next generation must lose - it's easy because they are vested interests with much to lose should the next generation have a win ie prices fall. This is why so many ordinary people don't appear to care about the situation, because they stand to gain from it. I wonder how that would go if the number of voters gaining from it were whittled down to a handful of rich?
So how is this small pool of rich people going to buy up and hold these huge numbers of money-losing assets that they will not be able to make claims against? Are they going to hike rents by some whopping amount and force countless numbers into poverty? Or are they going to buy a couple of million houses outright with cash?
Many businesses could not afford this drain on cash flow and would either become insolvent or have to put up their prices. With the latter option, those paying the higher price on time would be subsiding those who get interest-free terms.
There is no drain on cash flow. The $4 I defer payment of until tomorrow is received tomorrow. The $4 I deferred payment of yesterday is received today. There is no change to the cash flow position. If every day I defer payment of $4 until tomorrow, then every day the shopkeeper still receives the $4 that I deferred yesterday.
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Great, how can we set this transfer?
You can describe the cost that I am avoiding by lending you the $10K. If I agree that that cost is greater than the deflation of the $10K, then we can sort something out.
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One that I disagree with is that fewer investors means fewer investment properties. The home ownership rate is pretty stable isn't it? Fewer investors rather means fewer people competing for the same thing.
Why would fewer investors not mean fewer investment properties? If there were fewer investors then the home ownership rate would increase. It might even get up to the levels seen in Ireland and Greece and Spain, and we know how well that turned out for them...
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The rules are different for sole traders. To prevent a significant revenue leak, the government introduced the non-commercial loss rules.
There are different rules for each group, but the net result is that nearly all sole traders, share investors and property investors can offset losses against personal income.
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As Wikipedia says, one way negative gearing works is if "the asset rises in value so that the capital gain is more than the sum of the ongoing losses over the life of the investment". Until recently this was the only way mentioned on Wikipedia. I would argue it's this most common.
Based on what?
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If negative gearing was quarantined, the sum of the on-going losses would never be able to be fully claimed
Why not? People would just claim the losses against future IP income, and hold the property for as long as it takes to do so.
You seem to think it would be a good thing if property investors couldn't claim losses - i.e. you think property investors should be made to pay tax on more income than they actually receive. Housing is already the second highest taxed sector of the economy, bringing in $40 billion in net revenue for the government per annum, but now you seem to be saying property investors should pay even more tax - they should even pay tax on income they didn't receive by not being allowed to claim losses.
The fact that many of those arguing it will have no effect if removed are also strongly arguing for keeping it in place probably tells you something. They don't want to admit that it increases house prices.
Just like those who argued so strongly that house prices won't fall from 2008. Proved them wrong didn't we You can play games all you want if you have no valid contribution to this debate.
And for the record, miw, myself and quite a few other bulls who argue that removing NG won't have the effects the bears so desire actually stand to benefit from NG's removal and would be happy to see it implemented. Blows your bear cheerleaders rubbish out of the water.
Likewise if some idiot here proposed removing income tax to solve Australia's problems, I would argue it wouldn't - and it would have nothing to do with the fact I would pay less income tax.
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