Negative gearing is a form of financial leverage where the gross income generated by an investment is less than the cost of owning and managing the investment, including interest charged on the borrowings.The negative cash flow is then offset against personal incomes.
Doesn’t negative gearing just help the rich get richer?
According to 2011-12 ATO statistics, there were 12,736,030 individual taxpayers in Australia and 1,897,668 (14.9%) of them owned one or more investment properties. 73% of property investors own one property and only 4% of investors own four or more properties. For a property to be negative geared there must be a significant debt against it (they don’t own it outright).
In other words, an overwhelming majority of investors are ordinary mums and dads; they are attempting to fund their own retirement, as opposed to being a burden on Australia’s taxation system via government-funded pension.
Doesn’t negative gearing reduce the amount of revenue available to governments each year?
A report produced by REIA in August 2014, mentioned that a total of $7,860 million in losses were claimed by Australian property investors in 2011-12. The ATO also charged extra taxes on the $5,939 million worth of investment property profits.
Should changes ever be made to negative gearing and results in fewer property transactions each year, governments would stand to lose a lot more tax revenue from stamp duties, infrastructure charges, land tax, construction industry payroll taxes, and more. The existing $71 billion (and growing) spent each year on tax-payer funded pensions and allowances will increase significantly.
What impact would the removal of negative gearing have on Australia’s housing supply?
According to 2011 Census data, Australia has 9,117,003 residential properties and we are adding approximately 160,000 more each year. Negative gearing is a tax-policy linked to property – other policies include stamp duty, first home buyer incentives, tax rebates and incentives to purchase new property, land tax, and capital gains tax.
Tightening of any of these policies will directly influence consumer behaviour and become a disincentive to buying and holding property. As we’ve seen already with ‘new home building grants’, the introduction and removal of tax policies directly affects the construction industry (Australia’s biggest industry by direct and indirect jobs).
What about Australia’s social housing problem?
75% of residential properties in Australia are occupied by the owner. Of the remaining 25% that are rented only 5% are provided by governments. Governments can’t afford to fund social housing (some governments have actually been selling off parcels of properties in order to raise money for other reasons).
The National Rental Affordability Scheme (NRAS) is government admission of our social housing shortfall which governments can’t fund so they developed a policy designed to encourage others to do it for them. Removal of negative gearing would be a gross contradiction to this.
How might the removal of negative gearing affect Australia’s welfare system?
Australia’s financial literacy crisis is in our DNA - only 4% of people are financially independent by age 65. The federal government have said that we can't support our ageing population with our unsustainable reliance on tax-payer pensions. They have touted the possibility of the superannuation age increasing to 70. Stripping back incentives which encourage investment would only compound this country's problem.
Does negative gearing force property prices up and make it harder for first home buyers to get in to the market?
Property markets are affected by dozens of factors. The factors which affect property values the most are related to the general economy, employment, and credit policies, not tax policies). When property markets perform strongly, like they have in Sydney in 2013-14, it is not uncommon for segments of the community to blame investors for driving values up and making bit harder for others to get in.
Negative gearing has been in place for generations and it is no more responsible for Sydney’s property price growth in 2013-14 than it was for its flat-line performance from 2001 to 2008.
Doesn’t negative gearing make rents more expensive?
In July 1985, in response to claims that negative gearing was the primary cause of property rents rising uncontrollably, the Hawke government quarantined negative gearing. During the two years that the quarantine was in place, ABS figures show rents rose by an average of 22%. The policy was reversed in 1987 and rents still rose by 21% over the next two years. A similar trend occurred with property values. As mentioned previously, tax policies have a smaller impact on property markets (values and rents) than most people think.
What other potential impacts could occur if negative gearing was tinkered with?
Propertyology often describes property investment as a business – the business of providing accommodation – and the investor’s role is akin to that of a company director (to make responsible decisions which are in the best interest of your balance sheet and profit and loss statement).
Negative gearing involves claiming interest expenses from borrowings plus other costs associated with maintaining an asset in much the same way that more traditional businesses do. Similarly, a share investor will claim the interest expense from their margin loan. Time will tell whether property investors will be singled out or not.
A final word...
Rumours of negative gearing getting scrapped arise almost every year – either in the lead up to a federal budget or whenever there is a major review of Australia’s taxation policies. It is the responsibility of governments to periodically review everything; nothing lasts forever. The reality however is that negative gearing has existed in Australia for a few generations.
In the event that negative gearing was ever scrapped, there might be some short-term referred pain but the real estate body will eventually realign itself (once the dust settles, it will be business as usual again for most property investors). The potential implications to scrapping negative gearing will be spread a lot further than property investor’s tax returns. Any government who is bold enough to make a change faces consequences far greater than the revolt of 1.9 million people at the election box. For these reasons, it is my view that negative gearing will survive further generations.
Simon Pressley is managing director of Propertyology, a full-time property market analyst, accredited property investment adviser, and Australia’s (REIA) Buyer’s Agent of the Year (2012+2013+2014)
Negative gearing is a tax shelter which allows investors to claim depreciation and interest on houses and apartments they buy and offset that against any personal income they earn in their own name.
By taking what is essentially a commercial transaction – buy to rent – and allowing it to be offset against personal PAYG and other income, Australian taxpayers who buy investment properties are able to access a taxpayer subsidy on personal income tax payable for the purchase of the property as an investment.
The higher the marginal tax rate of the buyer, the bigger the subsidy available as lower incomes and lower marginal tax rates mean that a smaller percentage of interest and other costs can be offset against income.
It’s a system that former treasurer Paul Keating tried to do away with back in 1985 and indeed for a short time it ended. But since the re-imposition of negative gearing it’s become a sacred cow of the Australian taxation system.
But as property prices around the country boom, especially in Sydney and Melbourne, negative gearing and investors are locking younger Australian’s out of the market.
Take the latest data from the ABS, released yesterday, which shows that investors as a percentage of total finance reached the second highest level of the past 30 years at 40.3% of all loans advance in July.
The only time this percentage was higher was back in October 2003 when the last housing boom ended.
The flipside of this voracious investor appetite is the fall in the percentage of first home owners of housing finance at 12.2% – the lowest since the ABS began collecting records in 1991.
If this data doesn’t prove the distorting impact that the tax shelter that is negative gearing is causing in Australian housing then little will.
Nope. That's how John Collett believes the average property investor thinks. Without referring to any evidence.
True. Though, as a personal finance editor, I'd hope he's got his pulse on the market that he's writing about. It definitely rings true with almost all property investors I've come across from all walks of life (present company excluded).
It's what the SMH banking reporter also seems to believe:
Quote:
Why are so many people are prepared to make a loss on their investments? It’s pretty simple, really. They believe capital gains will outweigh the short-term loss.
True. Though, as a personal finance editor, I'd hope he's got his pulse on the market that he's writing about. It definitely rings true with almost all property investors I've come across from all walks of life (present company excluded).
It's what the SMH banking reporter also seems to believe:
TBH I don't think the guy can even do math. The aggregate loss was about $8B and using his number of 1.3 million investors then the average investor lost $6153 not $11,000 as he claimed, unless there is something that I haven't picked up on.
If I add back the capital costs (mostly the cost of upgrades to increase rental) and depreciation then the loss of cashflow per investor is halved to around $3000 or $59 per week. I doubt that would break the average investor.
Any expressed market opinion is my own and is not to be taken as financial advice
"Loss-making investors are hoping to be able to eventually sell the property for a price that more than makes up for the losses incurred along the way."
If one takes that view of it, they'd also be thinking that any home purchaser who coughs up more in interest repayments and other holding costs than they'd have to pay in rent, is essentially hoping the same wouldn't they? (Unless one thinks such purchasers' thinking capacity has simply been overwhelmed by some 'need for a nest' instinct maybe???)
But back to investors: There could well be some/a lot(?) who just figure things like eventually the joint will provide a nice reliable little bit of income from rent. (Again, not too dissimilar to the home purchasers who work on the thought that eventually their ownership of the joint will free them from the need to pay rent.)
It used to be called Delayed Gratification 'once upon a time' - But that concept seems to have gone a bit out of vouge maybe? ...
"Loss-making investors are hoping to be able to eventually sell the property for a price that more than makes up for the losses incurred along the way."
If one takes that view of it, they'd also be thinking that any home purchaser who coughs up more in interest repayments and other holding costs than they'd have to pay in rent, is essentially hoping the same wouldn't they? (Unless one thinks such purchasers' thinking capacity has simply been overwhelmed by some 'need for a nest' instinct maybe???)
But back to investors: There could well be some/a lot(?) who just figure things like eventually the joint will provide a nice reliable little bit of income from rent. (Again, not too dissimilar to the home purchasers who work on the thought that eventually their ownership of the joint will free them from the need to pay rent.)
It used to be called Delayed Gratification 'once upon a time' - But that concept seems to have gone a bit out of vouge maybe? ...
I agree.
The same argument can be put forward on most shares. I think the average yield of the ASX 200 is 4.2%, US shares less than 2%, versus borrowing rates of 5-5.5% - of course dividends like rents, are expected to grow.
Why do share investors expect their dividends to grow, yet property investors are characterised as only hoping of capital gain. In the same theme, why has negative gearing on shares not made our shares "the most overpriced sharemarket in the world?"
Why do share investors expect their dividends to grow, yet property investors are characterised as only hoping of capital gain.
They are characterised that way because that is the nature of their character. Having said that, I reckon most share investors buy because of the expected capital gains too. Any dividend is a little bonus.
Quote:
In the same theme, why has negative gearing on shares not made our shares "the most overpriced share market in the world?"
People are not nearly as comfortable negatively gearing into shares as they are property. This is partially because people live in houses and so understand them. Most people don't understand the share market. It's also partially because property is less volatile.
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