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.
So if a shop offered say 5 years, no interest, not deposit to all its customers, it wouldn't have a cash flow issue?
Quote:
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.
If losses were quarantined, there would be less incentive to venture into a negative gearing strategy that relies on capital gains, so no issue there.
It doesn't create a cash flow problem for them, just as allowing negative gearing doesn't create a cash flow problem for the government. In both cases, it actually increases cashflow, because the payment is simply deferred, not lost altogether. Payments that were deferred 12 months ago are flowing in today, and overall, the number of people making payments rises because allowing people to defer payments creates more willing buyers/investors in the long run. Why do you think the shops do it? Because it makes them more money!
Consider two shoppers, Jack and Jill. They both have similar jobs and buy the same basket of groceries each day. They pay $50 each from their wage income every day.
Then Jill buys an investment property and the shopkeeper starts asking her for a larger payment for the same basket of groceries. Jill starts paying the $50 from her wage income, plus another $20 because she has an IP, and the shopkeeper lets her defer $4 until tomorrow.
Tomorrow Jill pays the $50 from her wage income, plus the $20 from her IP, plus the $4 she deferred yesterday, and she defers another $4 until the nexy day.
So each day the shopkeeper receives $50 from Jack and $74 from Jill, for the same basket of groceries.
Jack then complains that he is 'subsidising' the $4 that Jill defers each day. Jack thinks he is 'funding' Jill's $4!
This is basically what is happening in the Australian housing market. Property investors pay normal income tax like everyone else, but on top of that they contribute $20 billion per annum in property taxes and defer $4 billion until later. They are paying far more tax than non-investors, yet the non-investors somehow believe they are subsidising the property investors.
In fact it is the other way around. The group paying the highest total amount of tax per person is the group doing the subsidising.
It doesn't create a cash flow problem for them, just as allowing negative gearing doesn't create a cash flow problem for the government. In both cases, it actually increases cashflow, because the payment is simply deferred, not lost altogether. Payments that were deferred 12 months ago are flowing in today, and overall, the number of people making payments rises because allowing people to defer payments creates more willing buyers/investors in the long run. Why do you think the shops do it? Because it makes them more money!
Consider two shoppers, Jack and Jill. They both have similar jobs and buy the same basket of groceries each day. They pay $50 each from their wage income every day.
Then Jill buys an investment property and the shopkeeper starts asking her for a larger payment for the same basket of groceries. Jill starts paying the $50 from her wage income, plus another $20 because she has an IP, and the shopkeeper lets her defer $4 until tomorrow.
Tomorrow Jill pays the $50 from her wage income, plus the $20 from her IP, plus the $4 she deferred yesterday, and she defers another $4 until the nexy day.
So each day the shopkeeper receives $50 from Jack and $74 from Jill, for the same basket of groceries.
Jack then complains that he is 'subsidising' the $4 that Jill defers each day. Jack thinks he is 'funding' Jill's $4!
This is basically what is happening in the Australian housing market. Property investors pay normal income tax like everyone else, but on top of that they contribute $20 billion per annum in property taxes and defer $4 billion until later. They are paying far more tax than non-investors, yet the non-investors somehow believe they are subsidising the property investors.
In fact it is the other way around. The group paying the highest total amount of tax per person is the group doing the subsidising.
Fair enough. I have issues with pretty much everything you've said but don't have time to go into such detail - especially when we getting off track with our examples. You know my position.
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.
Of course the rich care about their tax bills. But the reality is that once you get beyond a couple of IPs, you are forced to operate at least very close to positively geared anyhow. You just can't sustain the cashflows and the banks won't lend to you if you don't operate that way. One salary only supports so much debt and after that the rent has to support it.
Quarantining rental losses would to some extent increase the barrier to entry and hence benefit those who already have scale. To what extent, I am not sure.
Elastic
27 Aug 2014, 10:49 AM
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 fact that quarantining rental losses would be a good thing for me doesn't mean it would be a good thing for society as a whole.
The way I argue the point depends on which hat I am wearing.
Assuming that the people who share your point of view are the sole repositories of altruism is just like assuming that everyone else is dumb or crooked. It strokes your own ego, but beyond that it is almost always wrong and will lead you into disastrous decisions.
Aussiehouseprices
27 Aug 2014, 01:43 PM
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.
The non-commercial losses test effectively only rules out hobbies. The bar is very low.
Quote:
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.
I believe you are way wrong here. Nobody goes into property with the aim to have economic return exceeded by costs. i.e. their goal is eventually to have some profit, and if they make a profit they will pay tax on it. There is no legal way of escaping that. If you want to lose money, there are ways to do it which require far less capital and which give a much better tax deduction. Indeed some people do lose money overall in property. In fact quite a lot have done just that recently. But it is not the goal of anyone I have ever heard of, and the proportion is far smaller than that for sole traders.
Aussiehouseprices
27 Aug 2014, 01:43 PM
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.
This applies just as much to someone for whom rent is the sole source of income.
A business selling widgets which is partly supported by external income is in the same position as a rental business that is partly supported by external income.
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.
thou doth protest too much.. Strawman, followed by a hypocritical statement, followed by an unsubstantiated statement, followed by another strawman. Move along..
The non-commercial losses test effectively only rules out hobbies. The bar is very low.
The non-commercial loss rules don't even apply to hobbies. https://www.ato.gov.au/Business/Non-commercial-losses/ Yes, the bar is fairly low, but it's high enough to do it's intended job. And at least there is a bar.
Quote:
I believe you are way wrong here. Nobody goes into property with the aim to have economic return exceeded by costs. i.e. their goal is eventually to have some profit, and if they make a profit they will pay tax on it. There is no legal way of escaping that. If you want to lose money, there are ways to do it which require far less capital and which give a much better tax deduction. Indeed some people do lose money overall in property. In fact quite a lot have done just that recently. But it is not the goal of anyone I have ever heard of, and the proportion is far smaller than that for sole traders.
Are you saying you don't think anyone goes into property purely for the capital gains not caring about a few tax deductible losses along the way?? I hope not.
The non-commercial loss rules don't even apply to hobbies. https://www.ato.gov.au/Business/Non-commercial-losses/ Yes, the bar is fairly low, but it's high enough to do it's intended job. And at least there is a bar.
Actually, I would say that if you cannot meet the criteria, then it *is* a hobby.
Quote:
Are you saying you don't think anyone goes into property purely for the capital gains not caring about a few tax deductible losses along the way?? I hope not.
If you are renting the place out, then obviously you are not in it purely for capital gains. If you do not rent it out, then your losses are quarantined. Unless you are trying to flip Gold coast apartments, then rental income accounts for about half your total economic return across the whole cycle. Property flippers do not buy properties suitable as rental stock, and they do not buy properties that are attractive to FHBs.
Quote:
Not a very nice way to engage a discussion.
Yes. I agree that not having a point is not much of a basis for discussion.
The truth will set you free. But first, it will piss you off. --Gloria Steinem AREPS™
Of course the rich care about their tax bills. But the reality is that once you get beyond a couple of IPs, you are forced to operate at least very close to positively geared anyhow. You just can't sustain the cashflows and the banks won't lend to you if you don't operate that way. One salary only supports so much debt and after that the rent has to support it.
But someone who was talking about other people making simplistic arguments said that removing negative gearing would merely result in the rich buying up all of Australia's rental properties........
Actually, I would say that if you cannot meet the criteria, then it *is* a hobby.
You might say that. The tax law says something different.
Quote:
If you are renting the place out, then obviously you are not in it purely for capital gains. If you do not rent it out, then your losses are quarantined. Unless you are trying to flip Gold coast apartments, then rental income accounts for about half your total economic return across the whole cycle. Property flippers do not buy properties suitable as rental stock, and they do not buy properties that are attractive to FHBs.
Not sure why you are talking about Gold Coast flippers. You know what I'm talking about - people who buy an investment property because they think it will go up and are not too worried if they make tax deductible losses along the way. Their goal is that the capital gain more than covers the losses over the life of the investment. Pretty much every investor I've spoken to thinks that way. But maybe they are the only ones in Australia. They must have been the ones who wrote the Wikipedia entry I referred to.
Quote:
Yes. I agree that not having a point is not much of a basis for discussion.
But someone who was talking about other people making simplistic arguments said that removing negative gearing would merely result in the rich buying up all of Australia's rental properties........
That's an exaggeration. You get lots of exaggerations on this forum.
I have *never* said that, so not sure why you are throwing that strawman at me.
Aussiehouseprices
27 Aug 2014, 08:36 PM
You might say that. The tax law says something different.
The tax law says nothing of the sort. Tax law says that hobbies and businesses designed to lose money do not qualify. The commercial test weeds out both. Many people in the past have tried to pass off their hobbies as business in the past to see if they can get a break, and there is a fine line in some cases. This test helps test that line.
Quote:
Not sure why you are talking about Gold Coast flippers. You know what I'm talking about - people who buy an investment property because they think it will go up and are not too worried if they make tax deductible losses along the way. Their goal is that the capital gain more than covers the losses over the life of the investment. Pretty much every investor I've spoken to thinks that way. But maybe they are the only ones in Australia. They must have been the ones who wrote the Wikipedia entry I referred to.
You may think that, and no doubt there are some investors who at the start think that is a viable way to do things, but it is not the way it works. Basic maths will tell you that. Across the cycle, run of the mill real estate will appreciate by CPI plus a couple of percent, and a couple of percent more if you chose a place of increasing desirability. Interest rates on mortgages exceed CPI by about 3-4% most of the time and your holding costs not associated with renting like basic maintenance, land tax, rates, etc which are *not in any way deductible if you don't rent the place out* pretty-much ensure that you don't make money if you don't rent out. In other words, capital gain is not going to save your ass unless you somehow pick a low point to buy and sell at a high point - i.e. you are a flipper. What you are proposing is a straw man that barely exists in practice.
On the other hand, the rental dividend that also increases by about CPI+2% if you choose a decent area pretty much ensures that you will be cash positive on the property within a small number of years if you have a P+I loan (or an IO loan and you pay down the offset account) and conduct your business reasonably well.
Quote:
Haha. Rough day MIW?
I do lose patience with armchair experts occasionally.
Australian Property Forum is an economics and finance forum dedicated to discussion of Australian and global real estate markets and macroeconomics, including house prices, housing affordability, and the likelihood of a property crash. Is there an Australian housing bubble? Will house prices crash, boom or stagnate? Is the Australian property market a pyramid scheme or Ponzi scheme? Can house prices really rise forever? These are the questions we address on Australian Property Forum, the premier real estate site for property bears, bulls, investors, and speculators. Members may also discuss matters related to finance, modern monetary theory (MMT), debt deflation, cryptocurrencies like Bitcoin Ethereum and Ripple, property investing, landlords, tenants, debt consolidation, reverse home equity loans, the housing shortage, negative gearing, capital gains tax, land tax and macro prudential regulation.
Forum Rules:
The main forum may be used to discuss property, politics, economics and finance, precious metals, crypto currency, debt management, generational divides, climate change, sustainability, alternative energy, environmental topics, human rights or social justice issues, and other topics on a case by case basis. Topics unsuitable for the main forum may be discussed in the lounge. You agree you won't use this forum to post material that is illegal, private, defamatory, pornographic, excessively abusive or profane, threatening, or invasive of another forum member's privacy. Don't post NSFW content. Racist or ethnic slurs and homophobic comments aren't tolerated. Accusing forum members of serious crimes is not permitted. Accusations, attacks, abuse or threats, litigious or otherwise, directed against the forum or forum administrators aren't tolerated and will result in immediate suspension of your account for a number of days depending on the severity of the attack. No spamming or advertising in the main forum. Spamming includes repeating the same message over and over again within a short period of time. Don't post ALL CAPS thread titles. The Advertising and Promotion Subforum may be used to promote your Australian property related business or service. Active members of the forum who contribute regularly to main forum discussions may also include a link to their product or service in their signature block. Members are limited to one actively posting account each. A secondary account may be used solely for the purpose of maintaining a blog as long as that account no longer posts in threads. Any member who believes another member has violated these rules may report the offending post using the report button.
Australian Property Forum complies with ASIC Regulatory Guide 162 regarding Internet Discussion Sites. Australian Property Forum is not a provider of financial advice. Australian Property Forum does not in any way endorse the views and opinions of its members, nor does it vouch for for the accuracy or authenticity of their posts. It is not permitted for any Australian Property Forum member to post in the role of a licensed financial advisor or to post as the representative of a financial advisor. It is not permitted for Australian Property Forum members to ask for or offer specific buy, sell or hold recommendations on particular stocks, as a response to a request of this nature may be considered the provision of financial advice.
Views expressed on this forum are not representative of the forum owners. The forum owners are not liable or responsible for comments posted. Information posted does not constitute financial or legal advice. The forum owners accept no liability for information posted, nor for consequences of actions taken on the basis of that information. By visiting or using this forum, members and guests agree to be bound by the Zetaboards Terms of Use.
This site may contain copyright material (i.e. attributed snippets from online news reports), the use of which has not always been specifically authorized by the copyright owner. Such content is posted to advance understanding of environmental, political, human rights, economic, democratic, scientific, and social justice issues. This constitutes 'fair use' of such copyright material as provided for in section 107 of US Copyright Law. In accordance with Title 17 U.S.C. Section 107, the material on this site is distributed for research and educational purposes only. If you wish to use this material for purposes that go beyond 'fair use', you must obtain permission from the copyright owner. Such material is credited to the true owner or licensee. We will remove from the forum any such material upon the request of the owners of the copyright of said material, as we claim no credit for such material.
Privacy Policy: Australian Property Forum uses third party advertising companies to serve ads when you visit our site. These third party advertising companies may collect and use information about your visits to Australian Property Forum as well as other web sites in order to provide advertisements about goods and services of interest to you. If you would like more information about this practice and to know your choices about not having this information used by these companies, click here: Google Advertising Privacy FAQ
Australian Property Forum is hosted by Zetaboards. Please refer also to the Zetaboards Privacy Policy