1. To be fair, the elimination of negative gearing only on housing would be arbitrary and would need some other justification.
However, the elimination of negative gearing on all investments is another matter.
It may have changed recently but I recall the UK tax provisions which quarantined losses on all businesses until the “commencement of trading” (in that line of business).
I don’t know if that was necessarily a good thing. For a start, it gave an incumbency advantage to firms already operating in a business compared with those trying to break into the market. Where there was a long lead time (as in many major projects) the new entrant lost the present value of tax losses when compared with incumbents expanding in the same industry.
2. The capital gains tax concessions for individuals are harder to justify.
For those who remember the history, the new CGT system (50% concession) arose out of the Ralph inquiry into company taxation in Australia . . . which was odd because personal CGT has nothing to do with company tax! There were people at the time who pointed this out, but they were brushed aside.
The realpolitik of the Ralph inquiry was actually all to do with GST. An unintended consequence of introducing GST had been to put previously untaxed (Sydney) service industries at a relative disadvantage to manufacturing and mining exporters. The Kirribilli Prime Minister responded with an urgent inquiry into company tax. Its main recommendation was to lower the company tax rate (which benefited both service industries and others) and to pay for it by winding back tax depreciation rates (which were of greater benefit to equipment-intensive mining and manufacturing).
Individual CGT concessions were chucked into the mix because Howard had always hated the taxing of income and capital on a consistent basis.
3. There is a social dimension to all of this. Is home ownership a policy objective?
Many countries have very low rates of home ownership. Democratic Switzerland, for example, has one of the lowest levels in the world, in the low 40%. So it is not incompatible with a democratic society. (Admittedly, there tends to be greater protection for renters.)
Some argue that home ownership reduces labour mobility. (The elitist Economist magazine pushes this line a lot.)
On the other hand, there is something about “ownership” of one’s house that inexplicable in terms of conventional economics. It goes beyond GDP growth rates. It goes to the very heart of the human condition.
If it is a policy objective to promote home ownership, then acknowledge it as such . . . and justify limitations on negative gearing (only on housing) on the grounds of promoting it.
Of course, it could be that the present government (and certain economists) have absolutely no interest in promoting home ownership. They want a population of highly mobile serfs – with no personal stake in country – who can be shunted around with ease to promote the business interests of the increasingly wealthy and powerful Elite.
It is a stupid anomaly. The guidelines are pretty clear about what is a capital expense and what is a current expense while the property is being rented out. Yet painting the bathroom ceiling is a capital expense the day before the first tenant signs a lease and a current expense the day after the first tenant signs a lease.
I don't think there's an anomaly. From the ATO:
Quote:
You cannot claim the cost of repairing defects, damage or deterioration that existed when you obtained the property, even if you carried out these repairs to make the property suitable for renting. This is because these expenses relate to the period before the property became an income-producing property.
2. The capital gains tax concessions for individuals are harder to justify.
For those who remember the history, the new CGT system (50% concession) arose out of the Ralph inquiry into company taxation in Australia . . . which was odd because personal CGT has nothing to do with company tax! There were people at the time who pointed this out, but they were brushed aside.
The realpolitik of the Ralph inquiry was actually all to do with GST. An unintended consequence of introducing GST had been to put previously untaxed (Sydney) service industries at a relative disadvantage to manufacturing and mining exporters. The Kirribilli Prime Minister responded with an urgent inquiry into company tax. Its main recommendation was to lower the company tax rate (which benefited both service industries and others) and to pay for it by winding back tax depreciation rates (which were of greater benefit to equipment-intensive mining and manufacturing).
Individual CGT concessions were chucked into the mix because Howard had always hated the taxing of income and capital on a consistent basis.
Actually, the Ralph inquiry was set up in 1998 to look into into all forms of business taxation in Australia, not just company tax. As such, CGT for all kinds of business entities including companies, trusts, superannuation, small business, side business and investors was very much in the terms of reference, the Objectives of which I quote below. You can get the whole report here: [url=www.rbt.treasury.gov.au/publications/paper4/]Ralph Review Report[/URL]
Quote:
The Review will pursue the strategy specified in A New Tax System of consultation on the framework of reform of business entities and on the extent of reform of business investments recognising the current problems and objectives for business tax reform identified in A New Tax System. The process of consultation will include an assessment of the design and the administration of the tax regimes affecting business to identify their main shortcomings and their impediments to productive activity and innovation.
The Review will make recommendations on the fundamental design of the business tax system, the processes of ongoing policy making, drafting of legislation and the administration of business taxation.
The recommendations will be consistent with the aims of improving the competitiveness and efficiency of Australian business, providing a secure source of revenue, enhancing the stability of taxation arrangements, improving simplicity and transparency and reducing the costs of compliance. The Review will adopt a comprehensive approach to reform driven by clear, sound principles involving a move towards greater commercial reality.
Much is made of the introduction of the 50% adjustment concession, but little is made of the simultaneous elimination of the cost base indexing concession and the averaging concession which were pretty huge for most property investors. The changes were supposed to be overall revenue neutral. It looks as if, in the event, some CGT was given away overall. But if you run the numbers, for your average property investor who has a pretty average income and capital gains that are not huge in any given year, it is pretty-much a wash. The big benefits go to people whose marginal tax rate was already at the top rate - they did not benefit from averaging anyway. Also since the changes, CPI inflation has been generally very low, meaning that the discount concession is worth more than the indexing concession would be. That could change.
The changes were specifically designed to juice the equities market and to encourage businesses (including investors) who had non-optimal capital structuring but would not change it because it would cause a CGT event to restructure when it made sense for the business. To do that, there had to be no reward for "patient money" and the indexing concession had to go.
In hindsight it would have been better to stay on the old regime, or to make it a 25% discount and keep the averaging concession, but I don't think any govt will touch CGT for a long time. Changes cause uncertainty and the benefits have to be pretty big for to make them productive. In the end the purpose of CGT is to take away the benefits of schemes that convert ordinary income into capital gain without being so high as to stop people from doing necessary capital restructuring. Even though I think the current regime has flaws (particularly in the area of vertical equity) it does achieve those two aims. At about 22% top rate it is right in the middle of the pack globally and bang on the OECD average. If you look at the US with their 28% top rate and the big problems they have with people clinging to parcels of shares they bought in the 1950s because they are trapped by CGT, it probably shouldn't be much higher than that either.
Yes. The intent might be there. But any repairs (and I mean cosmetic things that reverse wear and tear, not things that would normally be associated with improving structure) that are carried out before the asset is producing income are automatically capital works and any repairs that you do after the tenants are in place can be claimed immediately as maintenance. That's the way it works in practice. It is a stupid anomaly and it promotes unbusinesslike behaviour.
Compare to the case of buying a new dryer. That is a depreciable item, and as long as you buy it when the place is on the rental market, you can claim full depreciation regardless of whether it is installed before or after the first tenants sign their lease.
Here we go again. Ask the Left the question about repairing the budget and the drift of the answer will always be the same. Tax the rich more. Indeed, this was the theme of a series of letters published in The Sydney Morning Herald this week under a heading dreamt up by the Letters editor, “Yes, let’s raise taxes — on the well-to-do”.
Without the faintest clue of the rationale or application of the relevant tax rules, these advocates for “social justice” will still quote the billions of dollars of budget savings that could be made if only negative gearing were abolished, or at least trimmed back.
The trouble with their analysis is that it is almost always based on falsehoods and misunderstandings…
The term negative gearing is typically used in this context as shorthand for the tax deductibility of borrowing and other costs associated with investment on existing residential real estate.
In fact, this provision of the Income Tax Assessment Act is completely generic and has existed for many years. It simply enshrines the sensible principle that the costs of making an investment to generate an income should be tax deductible for the party making the investment…
In fact, the Productivity Commission thoroughly examined the taxation of investment housing some years ago in its inquiry into housing affordability. Since negative gearing has long been a feature of the tax arrangements, it found negative gearing per se did not explain the recent movements in property prices.
The more fundamental point about negative gearing, and one that lazy commentators never seem to consider, is that the flip side of the transaction is the flow of income to the lender, which is taxed. To disallow the cost of borrowing by investors would amount to double taxation and would discourage investment. If the restriction were to apply only to residential housing, the likely impact would be simply to shift investors to other tax-preferred options. The net impact on government revenue is uncertain.
If a decision were made to restrict the taxation benefits of negative gearing of housing investment, there is the issue of how the transition would be managed. Were the change to be grandfathered for existing investors, for instance, arguably the costs of the change would be unfairly borne.
But even this method of change would not eliminate significant disruption to the residential real estate market because new investors would be discouraged from purchasing properties. In all likelihood, rents would rise, at least in the short term. Existing capital values would fall and the growth of capital gains would be impeded, affecting the future flow of capital gains tax revenue.
No doubt the stream of utterly predictable and ill-formed commentary about negative gearing will continue. But here’s the thing: interest payments are, and should be, a deductible expense for any income-producing asset.
To fiddle with this principle in respect of one asset — housing — would be to create a significant disturbance in the real estate market.
No doubt the stream of utterly predictable and ill-formed commentary about negative gearing will continue. But here’s the thing: interest payments are, and should be, a deductible expense for any income-producing asset.
No doubt you are the one that is ill informed! Treasury is looking at abolishing NEGATIVE GEARING. That is the amount of expense that is IN EXCESS of the amount of rental income. They are NOT looking at taking away any tax deductions. Any expense amounts in excess of the property income (i.e the Negatively geared amount) would simply be rolled forward and offset against future property income in the same way that capital losses are currently rolled forward and offset against future capital gains.
The term negative gearing is typically used in this context as shorthand for the tax deductibility of borrowing and other costs associated with investment on existing residential real estate.
WRONG WRONG WRONG. Negative gearing is that amount of tax deductible expense IN EXCESS of the gross property income in any one tax year. So if gross rental income is $10,000 and tax deductible property expenses including interest payments amount to $16,000 then the amount that is negatively geared and hence can currently be offset against a person's other income (eg wages) is $6,000.
Removing negative gearing DOES NOT REMOVE TAX DEDUCTIBILITY!
I cant believe how many self proclaimed experts do not understand the concept of negative gearing or the marginal effects of its removal.
Removing negative gearing simply quarantines tax deductible expenses to no more that the gross amount of rental income in any one year. i.e tax neutral position. The excess amount of tax deductible expense is accumulated and rolled over into the next tax year and offset against gross rental income in that and subsequent years. This concept is no different to rolling over capital losses in excess of capital gains in any one year. It also has the same effect as classifying certain expenses as depreciation items i.e the cost of certain expenses must be claimed over a number of years.
Really its just a change in an investors cash flow. Nothing more. Its really not a such a big deal! Poor owner-occupiers don't even have this luxury and they don't complain.
Arguably the current boom in prices is being driven by investors. No doubt investor affordability is being boosted by low interest rates AND negative gearing. And yes, every property bought by an (non-Asian) investor goes back into the rental pool. So, how many owner occupiers are sacrificing their home to an investor because they want to rent again? Hmmm Not many I would imagine. So by far most property sales are investor to investor. Hence little change in rental stock so little pressure on rents either way. If however home owners could not afford their mortgage payments and were being forced to sell due to either high unemployment or rising interest rates the situation would be entirely different but that is not the case right now. Now if negative gearing is limited to new homes then existing home prices would fall (dramatically) because incoming property investors would focus on new dwellings (initially). This would make it more affordable for renters to purchase existing dwellings hence reducing demand for rental stock at the same time that rental stock is falling. Again we have a balance so little effect on rents. Eventually existing property prices would fall to the point where the rental yields become attractive WITHOUT the artificial inducement of negative gearing hence making property an attractive investment again. CONCLUSION: Like any interference from governments into a free market, imbalances from artificial inducements will occur. In this case negative gearing was introduced to increase rental stock but instead has only served to drive up property prices well beyond the reach of the average would-be home buyer. Limiting negative gearing to new construction will not only help to boost investment and employment but also increase the stock of property WITHOUT affecting rents.
In this case negative gearing was introduced to increase rental stock but instead has only served to drive up property prices well beyond the reach of the average would-be home buyer.
Incorrect. Negative gearing was not introduced to increase rental stock. Its amazing how many self proclaimed experts get such simple things wrong.
Incorrect. Negative gearing was not introduced to increase rental stock. Its amazing how many self proclaimed experts get such simple things wrong.
Perhaps not, but I have posted Hansard quotes here before were politicians use it as a justification for retaining it going back years.
Property acquisition as a topic was almost a national obsession. You couldn't even call it speculation as the buyers all presumed the price of property could only go up. That’s why we use the word obsession. Ordinary people were buying properties for their young children who had not even left school assuming they would not be able to afford property of their own when they left college- Klaus Regling on Ireland. Sound familiar?
The evidence of nearly 40 cycles in house prices for 17 OECD economies since 1970 shows that real house prices typically give up about 70 per cent of their rise in the subsequent fall, and that these falls occur slowly. Morgan Kelly:On the Likely Extent of Falls in Irish House Prices, 2007
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