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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 (33,861 Views)
Aussiehouseprices
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miw
28 Aug 2014, 01:14 AM
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.
Incorrect. The non-commercial loss rules are for businesses only. The difference between a business and a hobby is here. https://www.ato.gov.au/Media-centre/Articles/Is-it-a-business-or-a-hobby-/

So, here are the options:
1) In business - profit
2) In business - loss (commercial)
3) In business - loss (non-commercial)
4) Hobby

For 1-3, revenue and expenses from your business activities must be included in your tax return, not matter how small.
For 2, where the loss is commercial, it can be offset,
For 3, where the loss is non-commercial, it's carried forward.
For 4, revenue and expenses from hobbies are not included in your tax return; profits or losses are ignored.

Remember, you said that "if you cannot meet the criteria, then it *is* a hobby". That is false. That would mean 3 and 4 are treated the same. And would also mean there was no point to having the non-commercial loss rules.

True, a hobby would very likely not meet the criteria. But the criteria is not for hobbies. It was specifically written for businesses and if you fail, you are still considered a business and still need to include your activity in your tax return.

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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.
Wow, are you saying cases of people selling property for a capital gain while still negatively geared barely exist?? I see it quite often in my work.
Edited by Aussiehouseprices, 28 Aug 2014, 09:55 AM.
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Lef-tee
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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.


miw, I'm sorry if I didn't clarify that the remark was not directed at you. It was a referral to skamy's argument that removing NG will inevitabley result in Australia's investment property becoming concentrated into the hands of the well off.

Apologies for failing to make that clear.
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goldbug
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Shadow
27 Aug 2014, 11:33 AM
The rules are very similar for property investors, share investors and sole traders.
Yes but share investors andsole traders aren't subsidized by the government, like in the form of rent assistance to millions of welfare recipients. I noticed you dodged that fact before when I pulled you up on how much tax you claim property infestors pay.

You spin too much shadow, too many lies and too much cherry picked information for anyone to take you seriously. Though I must admit you make good easy prey for the bears to sharpen their teeth on.
Shadow was hopelessly wrong about the Gold Bull Market.
What else is he wrong about?
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Josh
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goldbug
28 Aug 2014, 02:12 PM
Yes but share investors andsole traders aren't subsidized by the government
Yes they are. I took out a loan to buy a bunch of resources shares about 8 years ago and the interest was a tax deduction.

https://www.ato.gov.au/individuals/investing/

Shares:
"You can claim deductions for costs related to the dividend income, such as management fees and interest on money you borrowed to buy the shares."

You sound neurologically challenged.
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miw
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They have one set of guidelines to stop one set of people trying to call something that is actually a business a hobby and thereby avoiding reporting. They have another set of guidelines to stop people from trying to claim deductions by calling something that is more of a hobby a business. There is a small dead spot in there where it is not clear whether something is a business or a hobby where the ATO says - OK, we don't know what it is, so you have to report the income, but you have to carry forward losses. Typical ATO worst of all worlds scenario, and if you are dumb enough to operate in that area, you deserve what you get.

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Remember, you said that "if you cannot meet the criteria, then it *is* a hobby". That is false. That would mean 3 and 4 are treated the same. And would also mean there was no point to having the non-commercial loss rules.


Actually, I do stand by that statement. If you can't meet the criteria, then you are not serious about the business and it is definitely a hobby. Just maybe such a badly-executed hobby that the ATO wants you to report the income just in case.

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Wow, are you saying cases of people selling property for a capital gain while still negatively geared barely exist?? I see it quite often in my work.


Once again you are twisting things around. Of course sometimes people change their mind and get out of the business. And if they do it inside 5-7 years there is a high likelihood they are still not cashflow positive. And to the extent they make any money, they will have to pay tax. But just now you were saying these people were unconcerned about the income from rent, even though it will have produced, on average, half their economic return from the business. That is an absurd imputation of motives on your part.

I'm not sure whether you make this claim because you just think everyone else is dumber than you are, or because you genuinely don't understand basic accounting and the business model behind making money out of an increasing dividend stream after an initial investment. It is how almost all businesses work to some extent, and it is lucky it works, because otherwise rents would be twice what they are.

Lef-tee
28 Aug 2014, 01:41 PM
miw, I'm sorry if I didn't clarify that the remark was not directed at you. It was a referral to skamy's argument that removing NG will inevitabley result in Australia's investment property becoming concentrated into the hands of the well off.

Apologies for failing to make that clear.
No worries.

For the record, I do think that forcing the quarantining of losses in any particular kind of business will make that business harder to carry on as a side business. As such, it would definitely favour those who carry it on as a sole business who have no choice but to carry forward losses.

Given that at the moment own-to-rent is mostly carried on as a side business it would shift the balance somewhat towards specialist operators. But I doubt very much it would wipe out the side business operators. There are other things that make it hard to carry out the business at scale.
Edited by miw, 28 Aug 2014, 03:59 PM.
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propertymogul
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miw
28 Aug 2014, 03:53 PM
They have one set of guidelines to stop one set of people trying to call something that is actually a business a hobby and thereby avoiding reporting. They have another set of guidelines to stop people from trying to claim deductions by calling something that is more of a hobby a business. There is a small dead spot in there where it is not clear whether something is a business or a hobby where the ATO says - OK, we don't know what it is, so you have to report the income, but you have to carry forward losses. Typical ATO worst of all worlds scenario, and if you are dumb enough to operate in that area, you deserve what you get.




Actually, I do stand by that statement. If you can't meet the criteria, then you are not serious about the business and it is definitely a hobby. Just maybe such a badly-executed hobby that the ATO wants you to report the income just in case.




Once again you are twisting things around. Of course sometimes people change their mind and get out of the business. And if they do it inside 5-7 years there is a high likelihood they are still not cashflow positive. And to the extent they make any money, they will have to pay tax. But just now you were saying these people were unconcerned about the income from rent, even though it will have produced, on average, half their economic return from the business. That is an absurd imputation of motives on your part.

I'm not sure whether you make this claim because you just think everyone else is dumber than you are, or because you genuinely don't understand basic accounting and the business model behind making money out of an increasing dividend stream after an initial investment. It is how almost all businesses work to some extent, and it is lucky it works, because otherwise rents would be twice what they are.


No worries.

For the record, I do think that forcing the quarantining of losses in any particular kind of business will make that business harder to carry on as a side business. As such, it would definitely favour those who carry it on as a sole business who have no choice but to carry forward losses.

Given that at the moment own-to-rent is mostly carried on as a side business it would shift the balance somewhat towards specialist operators. But I doubt very much it would wipe out the side business operators. There are other things that make it hard to carry out the business at scale.
I disagree with pretty much everything you've said here.

The person that does a 4 hour mowing job each weekend on the side but doesn't quite earn $20,000 is not doing that as a "hobby", but would fail the business tests set by the ATO.

The ATO doesn't consider buying property and renting it out to be a business (and neither do I), and hence they don't subject property to the same criteria as other businesses for claiming negative gearing losses. However property does get the same tax deductions as other businesses (e.g. MV, home office etc).

Once again you are twisting things around. Of course sometimes people change their mind and get out of the business. And if they do it inside 5-7 years there is a high likelihood they are still not cashflow positive. And to the extent they make any money, they will have to pay tax. But just now you were saying these people were unconcerned about the income from rent, even though it will have produced, on average, half their economic return from the business. That is an absurd imputation of motives on your part.

I'm not sure whether you make this claim because you just think everyone else is dumber than you are, or because you genuinely don't understand basic accounting and the business model behind making money out of an increasing dividend stream after an initial investment. It is how almost all businesses work to some extent, and it is lucky it works, because otherwise rents would be twice what they are.


We've already demonstrated that it is the norm for property investors to sell their property prior to making an accumulated rental profit. Even at the 10 year mark most are in this position. So most are relying on the capital gain to make a profit as opposed to the rental income, it seems most in fact expect to make a loss while holding and are happy to do that because they will get a tax deduction for it. The capital gain however will be discounted by 50%. You seem to be of the opinion that most PIs invest to make money out of the rental income i.e. you think they expect the increasing rental income to be a worthwhile part of the investment? The facts show the opposite, that most have not turned an accumulated rental profit prior to selling. While some PIs have successfully used the rental income to provide an income stream, they are in the minority.

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Aussiehouseprices
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miw
28 Aug 2014, 03:53 PM
Actually, I do stand by that statement. If you can't meet the criteria, then you are not serious about the business and it is definitely a hobby. Just maybe such a badly-executed hobby that the ATO wants you to report the income just in case.
Or it could be poorly-run side business by someone who is juggling that and a full-time job.

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Once again you are twisting things around ... just now you were saying these people were unconcerned about the income from rent, even though it will have produced, on average, half their economic return from the business. That is an absurd imputation of motives on your part.
Can you point out where I said that people were unconcerned about the income from rent? I thought I said that many people don't mind making tax deductible losses over the life of their investment as long as the capital gains more than offset their losses.

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I'm not sure whether you make this claim because you just think everyone else is dumber than you are, or because you genuinely don't understand basic accounting and the business model behind making money out of an increasing dividend stream after an initial investment. It is how almost all businesses work to some extent, and it is lucky it works, because otherwise rents would be twice what they are.
I didn’t make that claim. And I understand basic accounting. I do believe that the majority of property investors never calculated the rental yield of the property they were buying and do not fully understand how a tax deduction works. This is just my suspicion based on what I’ve come across. I can’t prove it to you. Having said that, it doesn’t make those people dumb. We all have our strengths and weaknesses, and things that we are interested in learning about and things we aren’t.
Edited by Aussiehouseprices, 28 Aug 2014, 04:29 PM.
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Shadow
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propertymogul
28 Aug 2014, 04:20 PM
We've already demonstrated that it is the norm for property investors to sell their property prior to making an accumulated rental profit
No we haven't. We don't have any data on the average holding time for property investors. The average is ten years for all properties but it would probably be longer for investors.

In any case, if they did sell before making an accumulated rental profit, then why would you expect them to pay tax on income they didn't receive?

If losses had to be quarantined then they would just hold until all the losses had been offset, so they would ultimately pay the same amount of tax anyway.

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The facts show the opposite, that most have not turned an accumulated rental profit prior to selling.
This 'fact' has not been established. It's a claim, not a fact.
Edited by Shadow, 28 Aug 2014, 04:42 PM.
1. Epic Fail! Steve Keen's Bad Calls and Predictions.
2. Residential property loans regulated by NCCP Act. Banks can't margin call unless borrower defaults.
3. Housing is second highest taxed sector of Australian Economy. Renters subsidised by highly taxed homeowners.
4. Ongoing improvement in housing affordability. Australian household formation faster than population growth since 1960s.
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propertymogul
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Shadow
28 Aug 2014, 04:36 PM
No we haven't. We don't have any data on the average holding time for property investors. The average is ten years for all properties but it would probably be longer for investors.

In any case, if they did sell before making an accumulated rental profit, then why would you expect them to pay tax on income they didn't receive?

If losses had to be quarantined then they would just hold until all the losses had been offset, so they would ultimately pay the same amount of tax anyway.


This 'fact' has not been established. It's a claim, not a fact.
http://www.equiti.com.au/who-is-the-adverage-australian-property-title/

This link says 75% of PIs sell within 5 years. About 25% decide to sell within 12 mths and a further 50% sell within 5 years. Just as expected. Your claim that PIs would hold for longer than the average OO is ridiculous (what is your logic there?). Nearly 75% of investment properties are held by people aged 45 and over.

A quote from the article re: the 75% selling within 5 years "About one third of investors sold because they needed the money, a quarter due to disappointing capital growth, 20% because of low rental returns, and one in six because they believed owning an investment property was simply too much hassle."

I've already demonstrated how the typical PI with an accumulated rental loss upon selling can break even on their investment and yet come out in front due to favourable tax treatment.
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Shadow
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propertymogul
28 Aug 2014, 04:54 PM
This link says 75% of PIs sell within 5 years. About 25% decide to sell within 12 mths and a further 50% sell within 5 years
It doesn't say a 'further' 50% at all. It says 50% within 5 years, which would include the 25% within 12 months.

'According to Mr Matusik’s findings, about 25% of the investors decided to sell within 12 months of purchasing the property and 50% sold within five years'

Still seems too high to me, I'd like to see the source data. I find it hard to believe a quarter of all investment properties in Australia are turning over every year.

There are ten million households in Australia, 30% or 3 million of which are investment properties, so that would mean 750,000 investment properties being bought/sold every year. It's nonsense. The total sales volume in Australia is only 500,000 per year.

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A quote from the article re: the 75% selling within 5 years...
The article doesn't say 75% within 5 years. You made that up.

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Your claim that PIs would hold for longer than the average OO is ridiculous (what is your logic there?)
My logic is that owner occupiers tend to upgrade to bigger homes as their family grows, and move home if they get a job in a new location, or just upgrade as they earn more income and desire a better place, and also downsize later in life when the kids move out. However those life changes don't affect investment properties. Once you have an IP there is really no need to swap it for a different one.
Edited by Shadow, 28 Aug 2014, 05:18 PM.
1. Epic Fail! Steve Keen's Bad Calls and Predictions.
2. Residential property loans regulated by NCCP Act. Banks can't margin call unless borrower defaults.
3. Housing is second highest taxed sector of Australian Economy. Renters subsidised by highly taxed homeowners.
4. Ongoing improvement in housing affordability. Australian household formation faster than population growth since 1960s.
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