Who does it benefit?
Should a average income (60k-75k) should look into it?
What is negative gearing?
d-hunterz on 20/05/2016 - 16:50
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OMG… It's the reverse gear!
The economy benefits for it, because it is negative rental loss
as investor, aim for positive gearing
perhaps "what is google?" is the more pertinent question
Sounds like a Jeopardy answer
That's not really very helpful is it?
I think you have your answer to what you asked here
While everyone is negging GameChanger, keep in mind the OP has not advised they have an investment property or even have the capacity to purchase one.
To me, the OP looks like they've heard this tax buzz word and are looking at ways to minimise their tax, even though it may not apply to them.
I don't know. Since you asked the question (not me), is it a crime?
@tomsco: Its def. not a crime from my Point of view but you definitely seems like in a huge pain coz of the #BALL that you holding on to, let it go. Its about time.
I'm actually quite surprised by the number of down votes, I never received this much before!
Perhaps Labor is onto something as it seems people think negative gearing is complete rort for rich people.
Negative gearing means that the interest you are paying on the loan is more than the income. As a result you are making a loss.
Obviously nobody wants to get into property investment to lose money. Even though most property that you will buy will be negatively geared, that is the rental income is not as much as the interest repayment, the benefit comes from the capital growth.
Ozyboy - adding on to this, scenario below, a guy owns 2 houses:
House A: Live in it, value: 800k, loan: 200k
House B: investment, value 400k, loan: 400kThis guy will not pay down mortgage on house B. He will only pay down house A. This way any costs above rental income on house B will reduce his taxable income. Running an investment property like this may only cost you $5-6k per year after the tax savings received (instead of say $10k) (Depending on rental income and property costs).
Can also depreciate parts of properties too..
Here is a senario I have been wondering about for a while:
Say house B went up in value to 500k, would it be possible to borrow the extra 100k against it and pay down house A.
Ie. ending up like this
House A: Live in it, value: 800k, loan: 100k
House B: investment, value 500k, loan: 500kWould the extra interest payable be tax deductable?
No. Only the original debit and therefore the interest on that is tax deductible.
However, if you make extra payments on the principal and then decide to redraw the funds only the minimum that the principal was will be tax deductible.
@lahiruwan:
So you can't redraw on the loan then claim a tax deduction on the extra interest payments?@JIMB0:
Correct. Let's say for example you buy a house as your primary residence with a $500k loan. Then you pay $25k as the principal due and another $50k extra. After this you decide to convert it to an investment property and redraw the extra $50k you've paid. Once it is an investment property you can only claim tax benefits for interest on the $425k and not the $475k you are left with after the redraw.If your loan was 100, and you remortgaged to 150, you can only claim interest on the 100
But it is worthwhile upping your mortage offset proportion on an investment property. Many forget, any improvements (new aircon or extensions can be added to the loan) - even relatively minor things (capital) should be allocated and increase your loan.
For the record, I am against negative gearing. I have benefited - but only a relatively small proportion of the general population can benefit. As a system it is just making housing more expensive for everyone. Losses should be offset to capital gains in the future.
every say this as the definition of negative gearing to make it sound like a dumb thing to do but in reality, negative is really about incorporating depreciation expenses such that you minimise your tax payments while at the same time your rent > interest expense. Nobody will tell you this.. but i will..
Gearing means borrowing money for an investment.
If you buy a house for $100k, save up $50k and borrow $50k, the loan repayments will be about $60 per week. The rent will probably be around $100 per week.
So you make a profit, and your expenses are less than the cash coming in, so the investment is cash flow positive.If you borrow the whole $100k, however, the loan repayments will be more like $120 a week. But the rent is still only $100/week.
So you make a loss of $20. Over a year, that adds up to $1040 loss. A negative, so you are negative geared.
The investment might still make sense if the value of the property increases a lot so the price when you sell makes up for these loses.The negative gearing talk in the news is around what happens with that loss. The way our tax system is set up, allows you to claim investment losses against your other income. So you get a tax deduction of $1024. Since that deduction is from your marginal rate, that is, the top tax rate you pay, it represents a tax return of $333ish (if your marginal rate is 32.5%, as yours is. So the tax man will send you a rebate of $333 for making that loss.
It gets more interesting if you earn more. A wealthy person earning over $180,000 will get $480 rebate in the same circumstances, because they were paying higher taxes on their other income.
The final part of the puzzle is the taxes you pay when you sell. Any increase in price is called a capital gain. For investments other than your principle place of residence, you pay capital gains tax when you sell on the price increase. This tax is worked out by adding the whole of the gain to your other income, then working out the tax owed. If you sold the house for $200k, the gain would be $100k.
Add that to your $65k income and you must pay around $37,000 in tax! But wait. If you owned the house for more than a year the government gives you a discount of 50% of the taxable gain. That means you only have to add $50k to your income to calculate the tax owed - in your case about $18k. Not too shabby considering you just cleared $82k profit!
But our wealthy friend pays $22,500 in the same circumstance. Much less tax than they would pay if they earned the money via work or other income investments.
The end result is that the negative gearing concession and the CGT discount allow billions of dollars worth of tax be avoided compared to what would have been the case without them. And as the vast majority of people with cash available for such investments are already doing quite well, it results in a benefit that disproportionately goes to the wealthy.
Considering there are many people struggling on low incomes or pensions, it seems strange that we would choose to prioritise investors who made gains for concessions.
TL:DR; Negative gearing lets you apply an investment loss against your other taxable income. It only makes sense if you expect an investment to rise substantially in value and you can afford to absorb the losses until you sell.
EDIT: corrected some numbers,
Very well explained, cheers!
Can I ask you a question?
I've heard some people say that negative gearing keeps the rent down for a number of reasons but one seems particularly spurious. That is that a landlord might keep the rent down to deliberately make a loss. This doesn't seem likely to me. Say they forgo $20 off the weekly rent in order to make a $20 loss to deduct from their income. But this doesn't make sense - if they charged the full rent, that $20 is $14 in their pocket (deducting tax). If they chose to forgo this rent, the tax man would only give them back $7. Obviously the former is preferable. The only time I can see it possibly being advantageous to make the loss are edge cases, say that they are on the cusp of paying the medicare levy or something. Am I correct in this?
In my opinion, landlords don't really deliberately make a loss. As I mentioned below, the max refund people get is the tax rate they would have paid had they not engaged in negative gearing.
$100 rental income - $120 interest expenses = $20 losses of which at say 34% (Incl Med Care levy) = $6.8 refund. The net loss of that person is $13.2.
For some this loss is bearable because it allows people to have property asset and with their income, hopefully, the debt on investment property will be reduced over time and the interest expenses would go down which means, the person's loss is decreasing, which one day would turn a profit.
Without negative gearing, the loss would be $20 and people would be dissuaded to enter property investing ($20 is an example, in real life, the losses would be much bigger like $10k to $20k pa). This means less people enterprising.
So if negative gearing is outlawed, then $20 is the new net loss which means, landlords either have to increase rents to cover for the extra cost (renters would be disadvantaged) or they may sell the property but of course, if that is to happen, CGT will apply. Now, with Labor is trying to remove the CGT discount, then if i were a landlord, I would even more less likely to sell because of my super huge tax bill so my option would be… hike the rents.
So in short, the real logical reason why ppl go into negative gearing is so they can do property investing, which is enterprising. Without this objective, racking up losses in long term don't make sense as you would be better off without negative gearing. You will always end up in negative cash position with negative gearing.
Labors plans for negative gearing will be grandfathered so if you currently negative gear a property you can continue to
Fixed. Thanks
This section from The Australian is slightly disturbing…
"Labor plans to limit negative gearing to new dwellings from July 1, next year with existing investments grandfathered. After that date existing houses and share income could be offset against investment income but not against wages and salary income."
Unless this is inaccurate, what this means is exactly what I said above.
Two problems with this. You say they'll just hike the rents. If they could do that and still get tenants, why wouldn't they just hike the rents now? If there is capacity to hike the rents, it means they are currently undercharging and that seems unlikely. The second problem is the grandfathering of negative gearing. No-one will be in the situation you describe. It is more likely they just won't go into risky investments where they have to wear annual losses.
Yes, less people enterprising because I'm not going to subsidise them to the tune of $317 each per annum. I'd rather this tax was kept by the government and put into health and education. They are free to go into any investment they like but I won't be underwriting them. I also don't want people speculating on something that other people consider an important aspect of life - owning your own home. I want the next generation to experience this too. In the future, maybe people will only invest in reliable, steady investments. What a terrible thing!
Edit: You say "Unless this is inaccurate, what this means is exactly what I said above."
It's poorly worded. Existing negatively-geared investors can continue to avail themselves of negativing-gearing until they sell the property. The only reference to this is the term "grandfathered". Everything else in that quote refers to the arrangements that apply to people who buy property after July 1 next year.
Not completely sure I understand it tbh but I don't like it though it makes some sense as to why they would do it at least. New dwellings works but grandfathering and ongoing seems like conflict of interest/not losing votes while kind of addressing the issue.
lol my tax agent actually suggested i drop my rent for this reason! I basically told him to get bent. I suspect the reason he wanted me to do it is so that come tax time, he looks fantastic and i get a big return. This of course disregards the loss I make the rest of the year!
Rents are decided by supply and demand of rental property in the market. It's very much like the share market. When more investors want to buy a company's share than people want to sell, the price goes up.
Because of negative gearing, more property investors bought properties than there would be without negative gearing. These investors put their properties into rental market, changed the balance between supply and demand and drove down rents.
When government keep saying high property prices are because of shortage of supply. That's just half of the story. The supply is in short because we have artificially high demand, driven up by negative gearing.
So people who enjoy the low rent are at expense of other people who want to buy their home, especially first home buyer.
An investor buying a property instead of a homeowner means there's one more landlord and one more renter than if the situation was reversed. The ratio of supply and demand has not been altered. Which is the same reason that when negative gearing is removed, rents won't go up because renters will become homeowners reducing supply and demand by exactly that's same amount.
Rent is currently lower because of greater supply for rental properties to renting entities.
Negative gearing helps and incentivizes (lots of) rich people who have investment properties to buy more investment properties. So you have a ratio of one landlord to many rental properties.
This doesn't seem like it is enough to drive down rent - since everything finds a balance and many of the renters are the would-be home owners (since it's hard to buy when you don't have the deposit because you are paying rent and landlords keep buying up more houses which is keeping the price up.)..
BUT renting entities don't have to rent at an even ratio with the available market. Many will try find ways to be more cost efficient with things like shared accommodation, living with folks/family, moving to somewhere cheaper, etc. This way there isn't going to be exactly one renter per rental property. There will be less renters. So supply would dictate that the price is reduced. This would be where we currently balance.
(Unless the area is in abnormally high demand due to its location/facilities or something else that is, if there is demand regardless it will just keep rising cough.)
If negative gearing is dropped, so may many of the investment properties as there is less reason for investors to hold on to them. There should be a decent chunk of the market that is investment properties. If these suddenly all hit the market at once supply will be greater than demand. Renters may not be immediately ready to buy, some won't have a large enough deposit, some might not even be saving or some might not be willing to commit to a mortgage. Property prices will drop (regardless of residential or investment).
The way I see it - given there is less incentive to sell for a steep loss - if (just hypothetically) IF all landlords, instead of selling at this point, decided to just increase rent instead (since negative gearing doesn't offer anything), things would be pretty dandy for them. This does require collusion or coincidence but removal of negative gearing may assist that coincidence to some level. If they've decided not to sell there should be at least some space to increase rent.
Since not everyone is ready to buy and not everyone is ready to sell, anyone still left with renting arrangements once things re-balance will probably find an increase in rent.
The losers will be anyone who owns a house already or anyone still renting after the fact.
The winners will be anyone ready-ish to buy a house but hasn't bought till the price dip.
I would say the latter is a much smaller subset.If housing market drops then officials might be more comfortable with increasing interest rates again depending on how everything else balances out?
tl;dr Just my opinion. I'm not really good at this stuff and I'm super sleepy so not sure if it makes sense lol. It could really go either way I guess but in the very least, the instant removal will result in upset to the market.
I'm not sure you have taken into account the grandfathering which is very important? Let's break it down into three groups:
Existing negatively-geared properties. Grandfathered so they can continue to be negatively-geared by the current owner - no incentive to raise rents. Investors will hold onto these. When they are sold, they are unlikely to be sold to another investor because they are loss-making and thus high-risk. Hence will be bought by a renter. Net effect on rental supply and demand is zero.
Existing positively-geared properties. Could potentially be sold to either investors or existing renters. Not really affected by this policy change.
New dwellings. More attractive to investors. Should be more built by investors - hence more rental supply - obviously constrained by other factors though.
Net effect of all this - not much change at all to the rental market.
It was originally introduced to grow the rental market and allow more properties available to be rented, that demand outstrips supply still so rental prices are still going up.
An accurate explanation MsKeggs except the other side of the story is not told.
A person on negative gearing will always end up in a negative cash position vs if you don't negative gear at all. After all, what you get back from the losses are the taxes (that is, for example, 32.5%) that you would have paid. This part of the debate has never been highlighted.
As many of the users of negative gearing are property investors hence a removal of negative gearing deductability would increase the losses of the users which will force them to increase their rentals. Others may argue competition will drive it down but when everyone's on the same boat, rentals would most likely increase.
The other aspect of this is the tax principle where expenses that are incurred in gaining assessable income, is an allowable deduction. Removing this deductability is unprecedented and creating a precedent allowing for the government of the day to dictate what expenses being disallowed depending on the mood of the government of the day. That is to say, if losses on investment is permitted to be disallowed deductability, then what's stopping the government of the day to disallow other deductible expenses (eg: removing donation as deductible expenses)? The end of this, if left unchallenged, would effectively be taxation based on earnings instead of taxation based on income minus deductible expenses basis.
Lastly, my opinion is sometimes people need to realize that with most of us being taxed at 34.5% excluding 10% GST and other statutory taxes (like Council rates), what is left is often less than 50c in a dollar. If that's the case, what's the point of working?
If I ever earn $180k, I wouldn't want to be earning the next dollar after that because I would get less than 40c in a dollar (49% + 10% GST + other taxes). 100% extra stress for less than 40% rate of return.
When NG was removed in the past, there was no identifiable movement in rent. It's conjecture at this point to suggest rent will go up (in fact, the evidence that does exist suggest other market factors have considerable more weight than NG). You can go around the world and see if this holds true globally; the US removed what we call NG of investment properties 30 years ago without adverse affects on investment.
That is to say, if losses on investment is permitted to be disallowed deductability, then what's stopping the government of the day to disallow other deductible expenses (eg: removing donation as deductible expenses)?
Given that a. existing properties are grandfathered (which would have more to do with electoral palatability than anything else) and b. the electorate will have a year's notice, there's no issue with it. The taxation system in its entirety is dependent on the government of the day; if we were to elect a government that wanted to overhaul and reform the tax system (say, by actually implementing the HRT in its entirety) then…. that's the way it goes? This is a complete non-argument.
Lastly, my opinion is sometimes people need to realize that with most of us being taxed at 34.5% excluding 10% GST and other statutory taxes (like Council rates), what is left is often less than 50c in a dollar. If that's the case, what's the point of working?
The same as it always has? Living a more comfortable life style? Regardless of what the underlying minimum basis of taxation is, earning more money (working harder or investing smarter) is still going to net you more in a progressive system. Removing negative gearing isn't going to make people want to quit their job and job on unemployment benefits.
If I ever earn $180k, I wouldn't want to be earning the next dollar after that because I would get less than 40c in a dollar (49% + 10% GST + other taxes). 100% extra stress for less than 40% rate of return.
… Sorry, this isn't how marginal taxation works, at all. If you earned 180,000, your income tax liability is about 30%. If you lived in a private estate with 5,000 rates and spent every last cent you earned on goods incurring GST and had the worst accountant ever and the worst investment advice ever, you'd still only chalk up a marginal tax rate of ~40%.
The US also allows ppl to claim interest on their private homes on loans of 500k per person as a deduction. I think we'd all trade NG for that. Lol
claim interest on their private homes
Indeed, it is an amazing rort, yet I am sure they defend it as just the natural way taxes should be.
The US also allows ppl to claim interest on their private homes
Was also allowed in Australia for a while too, introduced in 1982, not sure when it stopped though.
I appreciate you putting forward an alternative view, so I will try and be thorough in responding.
If I ever earn $180k, I wouldn't want to be earning the next dollar after that because I would get less than 40c in a dollar (49% + 10% GST + other taxes). 100% extra stress for less than 40% rate of return.
It isn't especially reasonable to count GST as it doesn't apply to necessities like food and healthcare, but even if you do and the highest tax rate was 90% in the dollar, do you think high earners would sit at home? While you personally might feel extra income isn't worth it after $180k, I can assure you that Ahmed Fahour (CEO of Auspost on $4m) or Andy Penn (CEO of Telstra on $2m+) are very happy to take home the millions they earned even after paying full taxes. I would suggest you are a very rare bird indeed if you knocked back any pay rises after $180k because you would only get 40% of the gross figure.
An accurate explanation MsKeggs except the other side of the story is not told
Thank you, even if I get on a rant I try to be fair and accurate ;-)
I'll preface the rest of this comment by saying you are looking at negative gearing through the distorted lens of a market where it has been in place for 30 years (and the 15 years of CGT discount). In markets undistorted by this tax shelter, homes are priced as consumption goods for their housing benefit, not their investment returns. In other words, they cost 3 or 4 years income. Because we have preferenced real estate investment (we can ignore negatively geared shares as they almost don't factor as an investment strategy) for so long, we have forced prices up, casting them adrift from wages or rents.
In other markets where taxes on capital growth are treated as income, and losses can only be offset against the same investment class, real estate is valued sanely. We can surely agree that higher real estate prices are an overall drag on the economy? Because with a growing population there will always be more people disadvantaged by high housing costs than benefitting.Removing this deductability is unprecedented and creating a precedent allowing for the government of the day to dictate what expenses being disallowed
Nonsense. Tax deductions are almost completely arbitrary. I can't deduct capital loses against my earned income, I can't deduct travel to and from my first place of employment, but I can the second, I can deduct next years interest this year if I pay before June 30, but I must depreciate items over different periods depending on their value. There is no argument to natural justice with the tax code we have in place, the government already chops and changes on a whim and it is sovereign risk whether you win or lose. Look at the car novated lease companies that saw their share price swing 40% based on the election result last time round.
taxation based on earnings instead of taxation based on income minus deductible expenses basis
You say this as if it is some horror, but many countries effectively have this by eliminating lots of the deductions we have. It means they collect some more tax from some taxpayers, but can lower the overall burden on others if they keep revenues even. To take a flippant example, sunscreen is currently deductible if you work outdoors, but Vitamin D tablets aren't if you work in an office. This is just the rules we have settled on, there is no reason not to eliminate sunscreen as a deduction too, grow the tax take commensurately and give everyone a 0.00001% tax cut from the extra revenue. If we accept some level of tax is justified, then the rest is just an argument about who pays how much - there aren't any truths or sacred cows just opinions.
A person on negative gearing will always end up in a negative cash position
Well yes, but if you saved a higher deposit, or invested in a property with higher rental returns (like outside capital cities) or chose whether it was a good investment without the tax offset the result over time will be lower priced real estate in terms of multiples of wages. Everything has a marginal cost. Landlords can't just raise the rent indiscriminately because some 20yro people will choose to stay at their parents longer, some people will share with room mates and some people will be left homeless. Housing isn't air that we are all forced to consume at similar rates. Should the tax shelter be wound back attempts to raise rents will likely fail, as rents are already quite high. The most likely outcome is fewer new property investors will be made, as they choose other investment strategies, and the growth in capital of real estate will slow.
Remember, a lower growth of housing costs is a net benefit to the country, even if it is less enjoyable for property investors.what you get back from the losses are the taxes (that is, for example, 32.5%) that you would have paid. This part of the debate has never been highlighted.
I agree and let me highlight this strongly. The reason higher income earners benefit disproportionately from negative gearing and CGT discounts is that we have agreed in society to a progressive income tax. We think it is fair to pay more if you earn more. This gives the poor a leg up, and gives the wealthy the option to earn less if they wish to pay less tax.
Negative gearing and the CGT discount are structured to remove that progressivity. They reward higher income earners with lower tax bills if they channel their wealth via capital gains rather than fully taxed income. This is a broken part of a progressive tax system, and should be corrected.I don't disagree that removing negative gearing (remember, the wild Labor proposal grandfathers existing investors and still allows it for new properties! It will literally affect almost nobody in the first years) will wind back the overall wealth of some property investors slowly over such a long period they almost won't notice, but if it acts to make housing more affordable over time and direct investment back towards things like business investment rather than static housing, it will be a net positive for the country.
… direct investment back towards things like business investment rather than static housing…
I think this is one of the most understated benefits of winding back NG. Get investment flowing into business, not housing. We need some investment in housing, but we don't need the entire GDP in it.
@pais:
Housing is also a business. Construction companies are businesses that employ people and use materials that need to be manufactured by other companies and transported etc.
Less investor demand equals less houses/apartments built so less business for the huge construction sector which is one of the very few manufacturing still happening in Australia…they cannot import houses from China!The proposal is only to remove NG from houses that have already been constructed - from which the construction companies make no additional money.
If investors are less encouraged to buy old properties, I can't see demand for new construction falling.
investor aim is positive gearing.
investor will not buy new housing, as the 1st day you own it, the value drops (as less demand for "old house")
As for long term, with population growth, it became government responsibility to provide housing for people who wants to rent. (currently subsidized/ helped by investor)
by all means, do not grandfather old properties on NG and capital gain tax, cancel altogether and let the government do their job (likely low cost high rise apartments like in singapore) then you will feel the inequality more, wealthy people stays in certain suburbs and renter in another. Chain effects continue when council rate could not afford to develop the infrastructure.
Banks are not stupid, they clearly understood that and will tighten borrowings (as after a new house is sold, values drop due to less demand)
meaning banks will only lend buyers a lot less than now, pushing 1st home buyer away even further
You can also offset your other expenses like maintenance & repairs and depreciation which gives you a bigger loss to claim back too.
Thanks mskeggs
In your example let's say you do have the $50k for the $100k property
Should you only take $50k loan start the investment property as positive cash flow ?
Or should you still take out the full loan?
Where does the $50k you have go then ? Offset?If you had the 50k I would still take the 100k loan and make sure it has an 100% offset. Then put the 50k in the offset. Then you can take it out of the offset anytime without affecting your calcs for NG or what parts you can claim on tax.
Well explained. It's no surprise the Liberals back something that advantages wealthy millionaires more than the average Australian.
Not entirely correct. You can still make a tax loss but still be positively geared on cash basis.
If you have a massive depreciation and capital works deduction (need to obtain tax depreciation report), you may fall under this scenario.So with your explanation negative gearing from liberals allows Landslords to operate as a chain of houses as Motel operators without putting the responsibility on themselves but the onus of the tenants to look after the house.
Sounds bloody dodgy to me.. No wonder they want to crack down on it, if they wanted to be a motel owner they should build or buy a motel, housing isn't suppose to be this way.
A good explanation. I think interest paid on one's home is tax deductible in America, and situation that likewise favours wealthier individuals.
Beautiful explanation Mskeggs!
Only thing i want to correct is cash loss is different to tax loss on the rental property.
cash loss takes into account your full loan repayments but the tax man only lets you deduct the interest for tax loss purposes. So you will be getting a smaller refund.
The man has the intelligence of a muppet and speaks in buzzwords. Why would you go to his personal website for information about anything let alone important financial matters.
You must be sucked in by his debonair manners.
Do you think that every relevant money lender in Australia is looking after the national interest, or their own profits. I mean come on. Do you really believe what you wrote?
I can accept there are indebted investors scared that negative gearing rules will change (although note they are grandfathered under Labor's plan) and I can accept there are greedy people who see it as a way to make money, but to say it is right?You don't even have to look elsewhere! Here is what Malcolm said in 2005:
"In a speech to a conference co-sponsored by The Australian newspaper and the Melbourne Institute of Applied Economic and Social Research in September 2005, he described negative gearing as a form of ‘tax avoidance’, one of the few open to PAYE and other ‘unincorporated’ taxpayers.
A month earlier in a paper co-authored with the ANU’s Jeromey Temple, Mr Turnbull observed that “Australia’s rules on negative gearing are very generous compared to many other countries”, noting that “the normal deductibility principles do not apply to negatively geared real estate such that the taxpayer is not obliged to demonstrate that the negatively geared property will generate positive cash flow at some point in the distant future”
Source: http://thenewdaily.com.au/money/2016/03/30/turnbull-has-said…Negative gearing is tax welfare or well off investors. You can support it if you want, but it is far from right.
Do you mean Malcolm Turnbull's view on negative gearing before he was Prime Minister or after he became Prime Minister because the two views are opposite?
Maybe your irony was too subtle. Or more scary, you actually believe it.
I hope i had a faulty sarcasm detector!
For God sack, he was minister of communication and look what he did to NBN. Do you really think he knows anything about economics
The inequalities that come about from the majority of such taxation laws is almost irrelevant since we essentially have no inheritance tax OR gift tax in Australia. Even in countries with inheritance tax it is easy enough to avoid via living abroad, trusts, life-insurance policies, property and business investments. Even progressive Sweden repealed it's inheritance tax since in practice less than 2% of estate values were taxed on average (…and IKEA's owner finally returned after living abroad for 40 years). China's threat of an inheritance tax has seen ridiculous amounts of Chinese money invested in properties abroad. Why does this matter? As anyone that's played Monopoly would know, he who owns all the houses and hotels in the country isn't worried about paying utility bills, sleeping one night in your slummy B&B on Euston Rd or winning beauty pageants. And neither will his kids.
Regarding negative gearing, it's useful if you plan to sustain your usual income until the day you rid yourself of that debt (ideally by selling for a profit). It's not a passive income. Don't refinance your mortgage and live it large like the people I know. Those people are all bankrupt or penniless now (some of the latter thanks to divorce).
Just to be clear, any capital asset can be "negatively geared". It's not limited to property.
So i can take a loan to buy shares. My dividends per year are less than my interest expenses so i make a loss. I can deduct the loss from my other income in the same way as rental loses.
Also, just want to add, labor saying they want to limit negative gearing to new properties is just dumb. New properties are gold mines for investors. A few ppl mentioned that if you're negatively geared, you're making an actual loss. For the most part that's true…except you can be cash positive yet tax negative because of notional deductions, primarily depreciation. What gives the best depreciation? Brand new properties.
I think it's a good idea to limit it so that it's not abused by the really rich but the simplest way to do it is to say "Only individuals (not companies or trusts) can negatively gear to a maximum of $70k in losses from property (or whatever figure)in their life". That's true fairness there. Everyone is subject to the same limit. Basically gives home owners the chance to rent out their main residence for a few years if they need to and/or help ppl get one investment property for a few years. Especially since future generations are unlikely to get much of a pension. At the very least, if either party TRULY wanted to limit negative gearing, they'd limit it to individuals…but nope it's all just political fodder
Why not limit it to $0 per person, much easier to calculate and enforce.
Negative gearing on shares is small fry, yes, it is possible, but because it is impossible to get the same leverage into shares (95% in real estate, 50% is the usual max for equities so it is a correspondingly smaller deduction.
I guess I am even fine with offsetting investment income losses against passive income gains, the issue is really that we have created such a distorted ponzi scheme of capital gain. In truth, it is the CGT discount driving the misallocation of funds, but the best we have is Labor trying to wind it back to 25%.
Much better in my mind to tax income from everywhere the same, including if that income is a capital gain. It would be interesting to see what would happen if we went the other way and taxed CGT at marginal rates with no inflation uplift. All of a sudden the rich would be employing people to do jobs so their wealth could be expressed as income instead of capital.I fail to see why labor allowing negative gearing on new properties is dumb. The point is to provide an incentive through the tax system to build new housing. Obviously this has flow-on effects - increasing the supply of rental properties, employing more people in construction, etc. Seems like a good idea to me.
labor is trying to sell the opposite view - that negative gearing does not actually provide an incentive and does not foster new building developments. instead, labor say that it increases demand and pushes prices up.
To quote the Labor website:
"Negative gearing and the capital gains discount have not achieved their aim to boost housing supply and encourage the building of more new houses"from an investor point of view, new properties are a gold mine because they offer amazing notional deductions via depreciation. so 'limiting' NG to new properties is well.. fine by them. what it does mean is that owner-occupiers will probably get some relief on pricing on existing/old apartments, but i don't even know if there's enough supply of "older" units or whether all people even want to buy old. gees when i was looking at existing units a couple years back it was a nightmare.
in the alternative, if im looking to buy a house as an investor, then really, im in pursuit of capital growth bcos that's what land is for.. and in that case im happy to buy an existing house w/out NG because well, if you're looking to buy a house in the inner city/inner-outer city, you're likely to be looking at old housing where there's no/little depreciation anyway…or you look to new housing in the development areas.. and hey there's your depreciation again.
Negative Gearing from REAL CASH losses isn't a gold mine for investors. It simply reduces their loss which needs to be offset by capital growth. Yes this is achievable with an apartment if you get your pick right. But NG created from minimal cash loss/cash neutral/cash positive situation created from a notional deduction? POW! After tax net position positive + capital growth (even small growth) = cash cow.
That quote is referring to the current situation. It has failed to create new housing and that is one of things Labor is trying to fix with its new policy. If you read a bit further down the same page, it's perfectly clear that Labor is saying the same thing I am:
"Labor’s reform of negative gearing tax subsidies is aimed at shifting the incentive to the construction of new housing. Independent modelling by the Parliamentary Budget Office assumes that following the changes, negatively geared investment in new dwellings will almost double."
I hate the term negative gearing, as most people don't understand it, I work in an industry that deals with this daily and is frustrating especially with so much focus on it in the media. To be negative or positively geared is the same tax system most people do it not out of strategy obviously we would all like to have positive cash flow, the amount of clients who say to me, "is there anything I can do? I'm worried I'm going to be positively geared?? People have this misconception that some magic kicks in when your negatively geared, it's the same tax system, same rules it just effects your overall tax liability, it's the same system that lets you claim your work boots or computer as an expense. Property investment is there occupation and the expenses they incur are tax deductible, most people who vote against it will not have a grasp of what it is. There is negative feeling against it because generation X and Y can't afford houses nicer than there parents have, and the me generation wants it now and this could win a lot of votes, I think the tax laws around this do need a lot of cleaning up, as a lot of people take advantage of vague tax laws, however wholesale changes to the system grandfathered or not could have very strong effects on banking sector construction sector, house prices, baby boomers retirement strategies as well as the nations economic security, locking capital in Australian property expensive or not secures Australia and give our youth security, as our manufacturing sector slowly dies, if all our investments are tied to stock market we will be tied to the whims of the foreign markets. The spiralling cost of property has more to do with the insecurity of superannuation after the GFC and the influx of foreign investment, and the lack of infrastructure spending in regional areas. Most people who use this are not blue blood rich toffs from eastern Sydney, but 50yr old joe average hard worker looking to secure there future. As hard as that is to swallow for some.
Most people who use this are not blue blood rich toffs from eastern Sydney, but 50yr old joe average hard worker looking to secure there future. As hard as that is to swallow for some.
I read your post, it was a little disjointed. I gather from this last line you feel NG is a good idea. Statistically, it is never going to be the small number of people in east Sydney benefitting from negative gearing, but it is almost always people who have above average incomes who benefit. Afterall, if you earn under $18k you pay no income tax so by definition beneficiaries will be well off.
Please make an argument that it is better for our country to have negative gearing and CGT discounts. I have heard arguments that says it benefits wealthy investors, but I am open to justifications that show it helps the average or poorer person. I have thought about it a bit, and personal greed seems the main reason to support negative gearing. Personal greed isn't a bad thing necessarily, but if your greed impacts others we need to have a talk about it.
Please make an argument that it is better for our country to have negative gearing and CGT discounts. I have heard arguments that says it benefits wealthy investors, but I am open to justifications that show it helps the average or poorer person. I have thought about it a bit, and personal greed seems the main reason to support negative gearing.
You, sir, are a champion!
Personal greed isn't a bad thing necessarily, but if your greed impacts others we need to have a talk about it.
Hear hear! mskeggs For Prime Minister!
On this planet, greed ALWAYS impacts others. There is no moral justification when at least 10% of the world population still practice open defecation.
I'm not necessarily for or against NG housing, but isn't the argument FOR it largely around the fact that it drives massive massive investment in new housing, renovating older crappy housing and improves the standard of living for the majority as a general statement? Something we need/needed. Yes it helps the rich get richer generally speaking, but it also helps the middle income workers build wealth too if they so choose.
Put another way, if NG didn't exist, developers wouldn't have a business case to build all those those new buildings/subdivisions?
The labor proposal continues to allow NG for new builds, so if anything, it would encourage additional housing if NG is really driving property investment.
it helps the rich get richer generally speaking, but it also helps the middle income workers build wealth too if they so choose
Sure, but so would any other tax cut of billions of dollars a year. Is this the priority for the nation? Could it be better targeted? Is it fair to collect GST from an aged pensioner and direct a portion to middle income or wealthy people via tax lurks?
@mskeggs: Fair enough.
Building better housing across the nation I'm sure is important to any government, although I can't speak for them and I'm not an economist. But it makes sense in my head. It also appears to me like a very stable, non volatile way of building wealth for people. But new dwellings are only half the picture right - a lot of NG goes to buying and renovating older places surely…
Would other tax cuts work? Possibly, but low,medium and high income people would possibly go and buy TVs and beer with extra tax cuts. At least with NG it's very controlled and goes to one purpose that is highly desirable - improving housing (not necessarily making it cheaper, just improving the standard).
@Skramit:
The issue becomes that giving a substantial tax break to investors drives the prices for this asset class higher.
Preferencing investors over first home buyers seems perverse, as surely as a country it is in our interest to see more people with a first home than more people with a second?NG housing investment runs 90% toward existing dwellings, so it is doing little to grow housing. Labor's plan would favour new builds, allowing the available housing stock to grow, and reduce the number of investors competing for existing housing. This would also stimulate construction activity.
I personally think the changes will make a trivial difference in the housing market, but as they will result in billions more to repay government debt, it helps that way too.
See the ABC for some realistic commentary:
http://www.abc.net.au/news/2016-02-15/janda-nothing-to-fear-…@mskeggs: Agree it's an issue for first home buyers. But it's also not a showstopper either. Whenever we see the "poor them" segments on TV about first home buyers not being able to afford their first home, there is never any in depth discussion about their a) spending habits b) saving history c) income. It's always just "poor dave and donna, those rich people make it impossible for them to buy their first home in south yarra where they want to live". :P I saved for years, was frugal and managed to buy my first house in a suburb nowhere near where I desired. I just wish a bigger piece of reality and self responsibility played into the "poor first home buyers" arguments. Anyway that's a bit off topic.
Again I'm not arguing for or against NG, just trying to see both sides. So far the thread has been dominated by why NG is bad, and msot of the points are valid, but NG also stimulates the economy which is good as well.
Regardless of the 'youth of today', having tax policies that favour investment in housing so strongly that prices have soared is a problem.
If that investment had been channeled into a productive end, the country would be better off.
Nowadays, an average buyer must work 10 years to pay off the average house, in the past it was 3 or 4.
This massive waste of resources, 6 years of work more for an equivalent outcome, is a disgrace.
Despite existing home owner's net worth statements looking rosier, it is impoverishing us as a nation, as even those with investment properties are forced to pay more for where they live.
You may enjoy a listen to 'Follow the Money' podcast from the Australia Institute. Each episode is a succinct exploration of topical economic issues. Refreshingly free of BS, cuts through the conceptual noise. Cynics may object to it's progressive standpoint, but it turns out reality has a well known progressive bias.
https://itunes.apple.com/au/podcast/follow-the-money/id10787…
Or you may prefer to watch "Follow the money" once a week on SBS: https://en.wikipedia.org/wiki/Follow_the_Money_(Danish_TV_series)
Negative gearing is poorly constructed policy brought in by a Government who at the time needed to encourage the building of new homes in Australia. It is now unnecessary and has been known to be unnecessary for quite some time. However sucessions of gutless leaderships means it has remained a burdon to Australian society and the sooner it is stopped, the better. But to be fair to existing citizens partaking of this tax anomaly, any changes should not be made retrospective.
It's a sales scam used by marketeers to sell way overpriced property to any sucker with a taxable income, AND/OR
It's a tool used by the rich to FURTHER dodge tax.
Negative Gearing itself isn't particularly interesting and is never something to pursue or "look into" no matter how much you earn, rather it is an instrument that can be used to slightly augment the financial position of the owner of an Investment Property. It is a different beast abused by the rich combined with the 50% CGT concession of course, but this is not very much relevant here.
Think Investment Property as a business like anything else. You make money from renting the property out (rent income less the mortgage interest, expenses) you pay tax on the profit. If you lose money well the government allow you to deduct the loss from your primary income.
So the question is not whether you should look into Negative Gearing but whether you feel comfortable get into the Investment Property business at all. If you do believe that the property price (or at least the one you want to buy) will keep going up like it did, and you can survive the stress of any possible downturns and the possible interest rate surges, the benefit of Negative Gearing is the icing on the cake. Otherwise no matter how good paying less tax may sound, you definitely do not want to get into a business that genuinely causes you to lose money.
Negative Gearing can also be instrumental for one who owns a property which he intend to call home at a later time (could happen when planning a future family or temporarily living interstate). By renting the place out for a couple of years it is possible to leverage the Negative Gearing to claim some money back from the depreciation of your future home (which can be substantial if it is a newly built one or recently renovated). That said, you may claim a loss without actually making a loss out of your pocket. But that also make sense only if you believe the property will worth more in the future (otherwise why all the hassle) and you want to lock yourself into the current market price.
So the answer of question entirely depends on your opinion of the Real Estate market (or whatever else you want to invest in).
For capital gains tax, I understand you don't pay it if it's your primary residence when you sell. For example, if I have a property, but I rent it out and generate income, and I then choose to (myself) rent and live elsewhere. I earn income on the property and I can negatively gear it and claim tax deductions if I am making a loss.
But when it comes time to sell my property, I have to pay capital gains tax on increase in property value when I sell? What if I moved back into the property for a certain period of time? Does it then become my primary residence and hence I won't have to pay capital gains tax?
Depends on time it was rented out. You may end up paying cgt on that portion of time. Can't remember the exact number of years
You can rent your property out for up to 6 years and be exempt from paying CGT. As long as you are renting yourself you'll be fully exempt for the 6 years, however if you buy another property to live in as your principle place of residence then the 6 year rule doesn't apply.
My question is similar to magikz, what if before selling you make your investment property as your primary residence and make other primary residence as investment property. Will it still count as investment property and you have to pay CGT.
From my understanding of the rules you can't move between properties to avoid CGT. If you move into your investment property making it your primary residence and then sell it you will have to pay CGT on the years you rented it out. For example if you rented it for 4 years and then moved back in for 1 year you will pay tax on 80% of the capital gain.
@Becsavers: Thanks Bec, any links to this 6 year rule? So the sequence should be:
Buy an investment property to rent out -> live in a rental yourself -> Sell the investment property whilst still renting yourself -> buy new property with the money and avoid capital gains tax.
@magikz: Here's some info from the ATO that might apply to you, and gives some examples of the 6 year rule: https://www.ato.gov.au/General/Capital-gains-tax/In-detail/R…
Paying out $1 during the course of the year just so you can tell your dinner guests how clever you are when you get 50 cents back at tax time.
Need some advice on my situation:
- I own a house that is on a 100% Offset account.
- Loan is $300K, but I have $300K in savings so pay no bank interest.
- House is rented out to tenants who pay $500/week and my weekly bank loan repayments is $380, so I'm making abut $120 a week.
- I have to pay upfront ATO PAYG quarterly installments of approx $1700. Come tax time I usually have to pay back $100-200, so in total I pay around $7000 in tax.Is this better off than if I was to negative gear my investment property? I do plan to buy another house later on, and keep my current property till just before the 5-6th year that it's been rented out for, and then either sell it or move back in for a year to avoid paying Capital Gains Tax from what I've been told.
i wouldnt negative gear. i would do some maths. how much money can you take out of the 300k which will still allow the 500 to cover the loan. i.e if i take out 100k will the 500 a week (which it should) over my loan. if so go buy yourself another property. use that 100k.
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When you drive a manual car and you shift down instead of up.