Explain Negative Gearing to Me Like I'm Stupid

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• 

  Quantumcat on 12/01/2023 - 19:00

  Is there any real benefit to having many houses as a wage monkey vs setting up a company to run it all?

  Yes, not everyone is a contractor who can pay themselves income through a company.

  And maybe to summarise, can someone provide a scenario that an individual could be using to exploit negative gearing in a way people see as a bad thing?

  Individuals don't really exploit it, there's only so many negatively geared properties you can have before you can't afford to live day to day. It is only a bad thing in that is has encouraged more investment over a long time leading to house prices climbing for decades.

  • 

    Alexxx on 14/01/2023 - 16:22

    +3

    Company vs personal.
    Benefit of a company is the company profits are at company tax rates (which can be lower than your personal tax rate if you are in a higher bracket), the company can then 'employ' people to work for it especially family that is in lower tax brackets or the company can hold the profits (paying a company tax rate) and then employ you when you retire from your main job.
    The company can also be set up as its own entity so it doesn't impact your personal borrowing capacity (if you set it up right).
    Downsides are having to set up the company and all the paperwork associated with it.

    For negative gearing
    You can exploit it by having an on paper loss (due to depreciation) while still having it cashflow positive.
    For example the rental income minus expenses is total $10k positive, and depreciation is $15k. That mean on paper you have a $5k loss but overall you actually have $10k + ($5k x your tax rate).

  • 

    spaceflight on 14/01/2023 - 19:48

    there's only so many negatively geared properties you can have before you can't afford to live day to day

    This is an old article but at the time 60% of rentals were negatively geared
    https://binvested.com.au/property-investors-lose-money/

    That means that even if you only held one investment property there was a good chance it was negatively geared

• 

  CyberMurning on 12/01/2023 - 19:15

  +6

  Its very great marketing tool for the real estate agents to get buyers especially in the asian markets (and off the plan apartments).

  Look…. you will get money back from ato…..

  • 

    HeWhoKnows on 13/01/2023 - 13:09

    +1

    It refers to shafty agents selling Gold Coast property as well

    A twist of reality…….

    The real estate agents spruke….

    "Hey. this is a great way to reduce the tax you pay OR….
    You see the government helps you pay for your (excessive) expenses (including the interest on the loan) to make it more affordable for you to buy and in return you provide a much need place for tenants to live"

    The real situation…..

    "Well this place is loosing money hand over fist"
    The outgoings (expenses) far outweight the income (rent).
    And because you are losing money in this investment the government allows the "excess" expenses over and above the rental income for this property to be offset against other income such as your salary.
    Thereby reducing your overall tax.
    But thats because you are actually loosing money!
    The governemt isnt doing you any favours here.
    You "hope" the capital gains you make over time will offset the loses you are incurring now (if you can afford them) And if you lose your job along the way you are totally stuffed!
    Furthermore because its basically more affordable to buy property as an investment, this artificailly pushes prices up beyond the reach of home owners.

    Without negative gearing
    Investors would be forced to view investment properties like a business.,
    They would need to look and income, expenses, cash flow etc.
    Any loses in the current year would be rolled over into the next year and accumulated over time.
    The accumulated losses could only used to reduce your tax when the property eventually shows a profit or when you sell at a profit (hopefully) - either could be many years away
    So excess expenses (i.e.losses) are accumulated over time instead of allowing the tax deductions to be claimed today.

    So its all about cash flow really. Nothing more.
    Its not a loss of tax deductions at all as the scare mungers claim.
    Its really all about "when" you can claim all of the expenses.
    In the case of no negative gearing - later rather than sooner.
    Property prices would also reflct this in lower prices

• jv on 12/01/2023 - 19:16 Comment score below threshold.
  • 

    DashCam AKA Rolts on 12/01/2023 - 21:49

    +2

    … mate.

    • 

      jv on 12/01/2023 - 22:03

      -1

      You didn't read the thread title?

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  Drakesy on 12/01/2023 - 19:17

  +16

  Basically negative gearing has become a tax dodge vehicle that costs the Australian taxpayer (you and me) billions of dollars a year, subsidising an investor's (not a very good one) gambling habit as they hold out, restrict supply of the market to falsely generate a shortage of stock. Best thing is when they sell, they still get their profits at the end of the day as well!

  I do agree though that it's only a fraction of people that are affected by it, but still, it over incentivises taking out as many properties as possible knowing you can fail and just take it out of your tax.

  • 

    jv on 12/01/2023 - 19:22

    +20

    If you can't claim expenses, then you shouldn't tax profits.

    • 

      mskeggs on 12/01/2023 - 21:21

      +17

      The issue is CGT profits are taxed at a reduced rate, so you claim the expense losses at your marginal rate, and you book the profits at 50% off, with the other tax payers subsidising your gain, should you make one.
      This distorts investment towards non-productive asset inflation, instead of investing in businesses or other investments that might be better in terms of generating income.
      The people providing capital profits are buyers paying inflated prices for houses, instead of directing that investment to something that might generate employment and income growth for employees, for example.
      Asset inflation just makes the community poorer overall, compared to sharing the benefit more widely if it came from business activity that made a profit from extra productivity.

      • 

        Almost Banned on 12/01/2023 - 21:34

        +3

        Other taxpayers do not 'subsidise' the gain. This suggests that the government has a fixed expenditure and that it must take more from one place if it takes less from another.
        That is simply untrue. The government could simply reduce its expenditure to match its income. The fact that it will not do so doesn't change the fact they could.
        As for the CGT discount, firstly it requires holding the asset for more than a year. Secondly, it applies to all capital assets, not just residential property.
        Finally, the government has a million and one distortions in the tax field - and offers far more lucrative depreciation benefits to businesses than they do to landlords - yet there is very little bleating about those.

        • 

          mskeggs on 12/01/2023 - 21:40

          +8

          @Almost Banned: Not sure how you can see there are many tax distortions yet feel a 50% CGT discount is somehow not a subsidy compared to other tax rates.
          Obviously, those paying full tax rates are subsidising all lower tax rates, as there is no reason a decline in spending should also be disproportionately directed at CGT.
          In short, why should I be taxed full rates for a term deposit but get a discount for a capital gain? And if the argument is somehow capital gains are prefer(e.g. to encourage business investment) why offer the same discount to existing assets?

          • 

            jv on 12/01/2023 - 22:07

            +1

            @mskeggs:

            yet feel a 50% CGT discount is somehow not a subsidy compared to other tax rates.

            If you own a property for 20-30 years and the tax office ignores inflation, that takes a huge chunk away from the gains…

            • 

              camjl on 13/01/2023 - 01:34

              +1

              @jv: Until the changes in 1999, you could only get a reduction of the capital gains equal to the CPI indexation of the asset's cost base.
              Now, you can get a 50% reduction just by holding the asset for 12 months. But that doesn't increase, even if you hold the asset for 50 years. How does that make sense? It was done to make things simple, not fair or sensible.

              When comparing CPI indexation vs the 50% general CGT discount options, it really depends on whether the value of the asset has grow by at least twice the rate of inflation or not. If less, then generally CPI indexation is better than getting a 50% discount. If it has grown at a rate more than twice CPI, then the 50% discount option is your friend. We just don't get the CPI option anymore for post 1999 assets.

              Unless you were really really unlucky, I suspect that if you have held property for 20-30 years, it's growth is probably going to be far in excess of twice CPI indexation over that time, so you're still going to be in pretty good shape. In my area, vacant land has increase about 4x and house & land deals at least 2.5-3x over the last 20 years.

              ie It looks like the Sep22 CPI figure is 128.4 and in early 2006 it was about 86. So if you bought a property in 2006 and it has at least doubled in value, then by claiming the 50% discount over the CPI indexation (it is was still available), you would be better off.
              Would be interesting to know of places where prices haven't at least doubled in the last 16 years - I guess there might be some mining areas that have been through a boom and bust period.

          • 

            Almost Banned on 12/01/2023 - 23:33

            +3

            @mskeggs: Oh, don't get me wrong. The CGT discount is absolutely another distortion - but it is only one of many and yet attracts far more attention than the vast majority, and generally much more when it applies to residential housing than when it applies to art.
            Why?
            Because the fact is people care much more about heat than light, and residential housing arguments generate heat but very little light.
            The entire tax system needs a massive overhaul to simplify and reduce distortions - but some distortions are simply not politically possible.

          • 

            duchy on 14/01/2023 - 23:14

            @mskeggs: Because government only invests in about 4% of property stock (social housing) and lets property investors provide for the rest of the housing. I would argue it's still a pretty good deal for the government (less headache with management etc…).

        • 

          camjl on 13/01/2023 - 00:35

          +2

          @Almost Banned: I understand your argument, but still, where one group of taxpayers engage in and benefit from a certain tax minimisation activity eg negative gearing, the ATO's tax receipts are reduced. In order to offset this reduction in taxes collected, the ATO must find a way to collect more from other taxpayers, so effectively they are subsidising the first group, or the income available to the government is impacted which in turn affects beneficiaries of government spending which is most of us in one form or another.

          However, this is the same for businesses claiming 100% depreciation, people claiming non-compulsory super contributions, workers claiming work related expenses, retirees' super funds not paying tax on ECPI attributed to their super pensions on balances under the relevant TBAR limits, tax incentives to make EV's more affordable etc. It's just that some activities attract more attention than others, have a larger impact on the ATO's tax receipts, are available to only a few that can afford to partake etc.

          The 100% depreciation claims are 'only' a timing issue that will come back to bite them in the butt when the concessions end soon and the business owners sell or trade in their vehicles or equipment and find out that 100% of the proceeds (excl GST) are assessable income with only a comparatively small depreciation claim available on the new items they purchase.
          No doubt many will forget or not be aware, will put the full proceeds/equity towards the new asset and not have the funds available at tax time.

          "The government could simply reduce its expenditure to match its income."
          Sure thing, and politicians could speak the true more often, opposing solicitors could come to a mutual agreement in divorce cases quicker instead of dragging them out to earn more fees, used car sales people could tell us the truth about the condition of the crap boxes they are selling, low income earners could choose to not claim a refund of their excess franking credits etc etc. It's a poor argument.

      • 

        jv on 12/01/2023 - 22:04

        so you claim the expense losses at your marginal rate, and you book the profits at 50% off

        That is net profit, after expenses.

        Also, you need to take into account inflation.

      • 

        SlickMick on 13/01/2023 - 10:08

        +1

        I think you're mixing up capital costs and gains vs income and expenses.

        Income (rental) is taxed at same marginal rates as deductions.

        There are no deductions on capital costs, other than depreciation. There is no deduction on the cost of land. Older buildings are worth less, but they are depreciated so that's okay. I don't see CGT as anything but a tax grab, it's like a death tax in that way. 50% seems a whole lot fairer than 100%.

    • 

      Ryk on 12/01/2023 - 22:09

      +1

      correct, revenue should be taxed.

      • 

        jv on 12/01/2023 - 22:10

        -1

        That's called GST

        • 

          camjl on 13/01/2023 - 02:06

          @jv: Better to pay (income) tax on profits than on revenue, especially if you are operating in a low margin retail/wholesale market.

          Unfortunately GST is paid by the end user ie workers on wages and small businesses or other entities that are not registered for GST.

          It is not a cost to other businesses as they simply add GST to their sale price and collect it on behalf of the government. And when they pay GST on expenses, they just claim it back from the government. Their 'cost' is one of administering the system / lodging BAS's.

          The whole system needs a re-write, but don't ask me for the answers though.

        • 

          Ryk on 13/01/2023 - 08:21

          +1

          @jv: GST is a value added tax added at each point in the cycle. very different from an income tax on revenue.

          • 

            jv on 13/01/2023 - 09:04

            -1

            @Ryk:

            GST is a value added tax

            It doesn't add any value to me, and is a tax on revenue, not profits.

  • 

    AustriaBargain on 12/01/2023 - 19:28

    On the flip side if they artificially make it look like they are making a loss on paper, then they won't qualify for even more credit so they can't buy even more houses, at least not for a while yet.

  • 

    Almost Banned on 12/01/2023 - 21:31

    -7

    It doesn't 'cost' the taxpayer anything.
    What it does is provide a mechanism for taxpayers to reduce their taxable income so that the government forcibly takes slightly less of people's incomes.
    The government is not entitled to the money I earn - so they do not 'lose' anything if I am permitted to keep slightly more of it.

    • 

      Drakesy on 13/01/2023 - 01:09

      +5

      Its a tax break
      Its costs the taxpayer money

      • 

        Almost Banned on 13/01/2023 - 01:20

        -3

        It 'costs' the taxpayer nothing because the taxpayer is obtaining the benefit of keeping their own money, and the other taxpayers do not need to pay any more if the government adjusts their expenditures accordingly.
        It costs the government money in exactly the same way that handing over slightly less than all of your money to a robber costs the thief money.

        • 

          camjl on 13/01/2023 - 01:54

          +3

          @Almost Banned: Sure, how about no one pays any tax to the thieving government. Then there are no 'free' or even subsidised services provided by government and everyone has to 'pay as you go'.

          Full price to go to hospital, full fees for all education, no pensions, no NDIS (for genuine cases of need), build your own roads, first responders are only available to those that can afford to pay. That is the government adjusting its income accordingly. Sounds awesome.

          BTW, no-one ever hands over slightly less than all of their money as taxes to the government. Well, not since they changed the rules around breaching both the excess concessional and non-concessional super contribution caps and you had to pay something like 93% tax.

          I don't think we should socialise everything, but ridiculous comments and extreme examples (like mine above) weaken any point of view until it becomes irrelevant.

          • 

            Quantumcat on 13/01/2023 - 10:33

            +1

            @camjl:

            Full price to go to hospital, full fees for all education, no pensions, no NDIS (for genuine cases of need), build your own roads, first responders are only available to those that can afford to pay

            Also. No hospitals exist.

          • 

            Almost Banned on 13/01/2023 - 11:49

            -1

            @camjl: You missed my point entirely. My point is much more about the way we see our money and tax.
            I am not saying that taxes shouldn't exist or public benefits like roads, schools, or hospitals.
            What I am saying is that the person who earns the money is the one entitled to it.
            Governments do not earn anything, so they are not entitled to anything.
            To the extent that they must pay for public goods, the amount they take should be the least possible to provide those goods, and be levied in the most fair and efficient way possible.
            That means that allowing me to keep slightly more of my own money is not giving me a benefit - it is merely minimising my detriment - because it is my money, not theirs.
            It is also not increasing the burden on any other taxpayer. That is entirely a product of the government deciding who it will tax and how much. They could simply tax everyone at the lower rate, accept a lower tax take and reduce their expenditures accordingly. If they choose not to do so, that is not the fault of the taxpayer who takes advantage of a deduction.
            Government does not do such a good job spending money that they deserve a single cent more than absolutely necessary.

            • 

              greatlamp on 14/01/2023 - 15:41

              @Almost Banned: The government publishes it's budget every year. You can see where all the money goes. They aren't building a nest egg of profits in a side account, every dollar of tax is spent on something else.

              You see the government as so wasteful, if these services were privatised they would be more expensive, or lower quality, or both, to maximise profits.

              • 

                Almost Banned on 14/01/2023 - 19:36

                @greatlamp: Having worked in the public service - both state and federal - I know for a fact that there is massive wastage and people employed to do nothing - or nothing except make work for other public servants.
                Like I said - they don't do such a great job they should get a single cent more of my money.

                • 

                  greatlamp on 15/01/2023 - 09:56

                  @Almost Banned: Can you give an example? A lot of the 'make work' that people talk about only exists because of all the transparency and reporting required in government.

                  Compare the public servant workforce to the workforce of a big 4 bank. Public servants get paid less, there are no commissions, and there is no profit made at the end. Are you so confident that privatisation would be more efficient?

                  You can't just point out the problems with government and ignore the bigger problems with the alternative

                  • 

                    The Hawk on 26/01/2023 - 16:26

                    +1

                    @greatlamp: Having worked in two different state governments it was about the same in both. The BAU staff are usually stretched through attrition, hiring freezes, downsizing and "savings" drives to reduce costs. Often (but not always) paid less than equivalent private businesses and working their arses off doing the best they can with the limited resources they have. There is no bonuses at the end of the year, no magic promotions (you have to apply for anything higher than the job you are doing) and the old 'job for life' doesn't exist when restructures downsize people out the door. The only perks are (typically) the possibility to salary sacrifice for a car or super and maybe flex time (but not everyone gets that).

                    Conversely, 'projects' get stupid amounts of money, hire expensive consultants and other contracted resources and bleed money like it's going out of fashion. In my opinion, this is where real reductions could be made in waste… but their budgets are usually separate and not subject to efficiency gains.

                • 

                  sakurashu on 18/01/2023 - 12:30

                  @Almost Banned: Having worked in the private sector - it's the exact same. They should be more efficient with their spending but that's a separate variable and discussion

      • 

        born2reign on 13/01/2023 - 16:12

        technically you are right, but if they don't give this tax break and all property investors disappear, it will be a whole lot more expensive for the government (and tax payers) to provide housing, which has been a disaster time and time again whenever they've tried.

      • 

        duchy on 14/01/2023 - 23:16

        Yes, but it's still cheaper than if the government provided the housing itself.

    • 

      2esc on 13/01/2023 - 09:29

      +4

      Dont know how we could have roads, hospitals, etc etc if the government dosnt tax us.

      • 

        Grunntt on 13/01/2023 - 10:29

        Dont know how we could have roads, hospitals, etc etc if the government dosnt tax us.

        With the amount of resources extracted from this country it does not need to be from 'us'.

        • 

          greatlamp on 14/01/2023 - 15:44

          @Grunntt: We could be living like Emiratis. Australians don't even aspire for something better.

    • 

      Yttrium on 14/01/2023 - 17:07

      It's called a "Tax Expenditure" in the Govt's financial statements.

  • 

    HeWhoKnows on 16/01/2023 - 14:42

    This is obviously written by someone that has absolutely NO IDEA!
    No idea about negative gearing
    No idea about property
    No idea about tax

    Its not a tax dodge at all thought its promoted by property spruikers as one.

    You are obviously very poor and envious of the smart people that choose to invest in property.
    Many of these people are firemen, nurses, policemen etc.
    i.e People that work for a living to save your life!
    These people are the ones that allow you to have a roof over your head.
    How about that?

    • 

      Drakesy on 16/01/2023 - 14:50

      I struggle to see how people buying houses and holding onto them while writing off losses against their pay is doing renters a favour?

      if they scrapped negative gearing, people will still invest in houses, just the market will return to a free market. Negative gearing is a way to reduce your taxable income on a loss making gamble, nothing more.
      It distorts the market as those that can afford to make a loss stifle the supply until they can make a significant capital gain.

      I'm in the rather happy position of being able to put down a 50% deposit on my first home, many however are unable as they've spent their entire professional life chasing house prices that are increasing faster than their bank account whilst those with the finances snap up investment homes that would otherwise be someone's first property.

      • 

        HeWhoKnows on 16/01/2023 - 15:03

        +2

        That is not entirely correct

        Negative gearing is simply a cash flow excercise.

        The property investor is entitled to claim ALL legitimate tax deductions.
        Removing negative gearing does not change this

        The difference is this..
        With negative geraing the tax payer can claim property investment losses against other income earnt in the same tax year (if there is in fact other taxable income in that tax year)

        Without negative gearing the excess expenses (losses) for the year are rolled forward and accumulated. They can still be used to reduce tax payable when the property eventually becomes profitable or when the property is sold at a profit.

        So its just a matter of WHEN all the expenses can be claimed.

        Without negative gearing the tax payer simply wont be paying any tax on the property for many more years.

        Does it help the renter?
        Yes 100% because people are encouraged to invest in providing rental accomodation thereby increasing rental stock

        Do I agree with negative gearing?
        No because people are encouarged to invest in a loss making asset which may never turn out a profit. And plenty of property investors have been burnt doing this. How is that good for the investor?

        Do property investors compete with first home owners (but with an advantage)?
        Yes, 100%
        Home owners get no tax deductions whilst property investors get to claim all expenses including the interest on the loan
        HOWEVER…
        the home owner pays ZERO TAX when they sell their home whilst the property investor pays tax on 50% of the profits (50% only if held for over 12 months) thereby setting them back significantly with their next property purchase.
        So the advanatge the property investor has over the home owner is reduced in a big way when it comes time to sell

        Will Property investors make a significant gain whilst making losses on the property each year?
        Not with interest rates going up the way they are.
        Watch people make huge losses instead.
        Thats a double whammy loss for property investors.

      • 

        sakurashu on 18/01/2023 - 12:37

        I'm sure many suspect that the "free market" you refer to will result in reduced rental properties available at a time when we are already at a shortage.

        Abolishing negative gearing will also obviously result in a drop in house prices but this only benefits those in a position to buy at these reduced costs; when a large portion of Australians are living paycheck to paycheck buying a house would still be out of reach and finding somewhere to rent would be even more difficult?

        If the government were to accept the shock of falling prices to the economy (and perhaps they should) then they should probably also look at more social housing etc. to ensure supply for people renting

• 

  Pelicannn on 12/01/2023 - 19:23

  +15

  can someone provide a scenario that an individual could be using to exploit negative gearing in a way people see as a bad thing?

  Here is a simple explanation (and be advised this is not factoring in a lot of things to keep it that way).

  You're earning 200k a year, and you've saved up 400k (you know… just the average OzB's salary and savings account balance for those aged 26-30) and you decide to buy 4 x ~500k IPs on a 20 year mortgage each costing you $2600 per month ($31,200 per year x 4 = $124,800) to pay back to the bank. The rent is $400 a week ($20,800 per year x 4 = $83,200).

  Net ownership cost to you is repayments - rent so $41,600 annually. Your income is now ~$160k per year with the loss and you are saving about $16,000 in tax. Meaning if you consider tax a sunk cost, it's only costing you $25,600 a year because the $16,000 would otherwise go to the government.

  Your IPs go up a modest value of 4% every year. After 20 years, your properties are now worth $4.4 million and you've only paid 20 x $25,600 annually plus the initial $400,000 in deposits (less than $1 million total) to have 4 x houses paid off.

  Here's the thing though… There are lots of things not considered here, including other costs of owning an IP, insurances, upkeep, rates, strata (if applicable), rates going up or down, cost of selling and purchasing property, crap tenants who trash your property, the time it took you to save for the intial deposits, and the risks of being a property investor as well - it's all fun and games until you have 4 x properties with no renters and you're paying it all yourself or suddenly the ass drops out of the market and you're stuck with property going backwards in value.

  The alternative is you could have put 400k into the S+P 500 and 25k annually on top and that same money you put into the IPs would have grown to around $4 million (assuming average 20 year growth of S+P 500 to be 9.87% [2001-2021]). Now there's four more houses that owner occupiers could have purchased, but on the other hand there's four less houses for people to rent.

  • 

    The Hawk on 12/01/2023 - 19:53

    -2

    But that's not correct as I understand it.

    Income is all income and taxable, it's then reduced by the costs component which is only the interest and not the total payment as that includes principal amounts. As time goes by and the loan reduces, the amount of the interest component reduces which in turn reduces your claimable costs. Long before the loan is paid off the rent is more than the interest so you are now liable for tax even though your rent hasn't changed nor has your mortgage payments.

    • 

      Pelicannn on 12/01/2023 - 19:58

      You are correct, I have really tried to simplify it as much as possible, there are a lot of other costs involved and to be honest, if you wanted to 100% maximise your negative gearing it would be better to leave the property empty and get zero rent, which a lot of high income earners probably do and that in turn would probably be a form of negative gearing that would piss people off the most.

      • 

        Thrawn on 12/01/2023 - 21:07

        +4

        Property has to be available on the market for expenses to be eligible for tax deductions

        If you have no rental income, ATO would deny deductions unless there are exceptional circumstances (like property under repairs)

        • 

          duchy on 14/01/2023 - 23:19

          @Thrawn: This is correct. You also can't claim interest rate deductions if the money isn't used for an income producing asset.

  • 

    greatlamp on 14/01/2023 - 15:47

    Now there's four more houses that owner occupiers could have purchased, but on the other hand there's four less houses for people to rent.

    So 4 renters would instead own their own home. When they have paid it off they will spend their disposable income in the Australian economy, increasing opportunities for everyone who owns a business.

    • 

      Pelicannn on 14/01/2023 - 16:52

      +1

      Depends if they were eternal renters for 20 years or if they’re people who only rent a few years to save a deposit to then buy a home I guess.

    • 

      duchy on 14/01/2023 - 23:21

      +2

      Students, divorcees, kids kicked out of a family home, widowers, people moving around the country due to their job…

      So many scenarios of people who WANT TO rent and don't want to become owners….

      • 

        greatlamp on 15/01/2023 - 09:34

        Yes and they have always been around. What proportion do they make up now that the average house price is $1 million?

        This doesn't change the fact that negative gearing is making the poor poorer.

        "The home ownership rate of 30–34 year old’s was 64% in 1971, decreasing 14 percentage points to 50% in 2021 (Unpublished, AIHW analysis of Census data). For Australians aged 25–29, the difference was similar – 50% in 1971, compared with 36% in 2021. Home ownership rates have also gradually decreased among people nearing retirement. Since 1996, home ownership rates for the 50–54 age group has fallen by 7.9 percentage points over 25 years (80% to 72%"

        https://www.aihw.gov.au/reports/australias-welfare/home-owne…

        The people who WANT to rent are not relevant to this conversation. There will always be property available to rent. This 'counterpoint' that landlords somehow are providing a public service is used to shut down a real problem, that our entire society is becoming poorer while wealth concentrates at the top.

        The point that rent will somehow become unaffordable is shared particularly by the construction and real estate lobby - so will their rentals remain empty? It's B.S. If the costs of being a landlord go up, rents don't automatically go up, there is another alternative which the real estate lobby like you to ignore - rents stay the same while the value of the property goes down. Both options increase yield .

        If it was so easy for landlords to pass on higher costs to tenants, rents would be a lot higher, rent has not kept up with house price growth for 30 years.
        https://www.rba.gov.au/publications/rdp/2014/2014-06/images/…

        The only reason that makes sense is because negative gearing tax laws allow it to remain profitable. Negative gearing is interference with the free market skewed towards the benefit of the investor - or really the developer, the real estate agent, and the bank. The investor isn't getting such an amazing deal, while at the renter and the taxpayer lose.

        Without it, prices would go down rather than rents go up.

  • 

    HeWhoKnows on 16/01/2023 - 14:45

    This is not an example at all
    Its a price of made-up rubbish that appears to be written by a jealous person that cant make ends meet.

    And property doesnt always go up
    Ask those that purchased a new apartment in Western Sydney in 2003 for $330,000 and sold in 2012 for $280,000.
    The only winner was the person renting that apartment

    • 

      Pelicannn on 16/01/2023 - 16:01

      written by a jealous person that cant make ends meet.

      Firstly, I am quite happy in my job, guaranteed I’ve got more job satisfaction than you or 95% of people on OzB will ever have, and I get paid very well to do it. So I’m not jealous of anything, nor do I struggle to make ends meet.

      Secondly, I own investment property.

      purchased a new apartment in Western Sydney in 2003 for $330,000 and sold in 2012 for $280,000.

      Maybe they shouldn’t have sold in 2012 then.

      • 

        HeWhoKnows on 17/01/2023 - 21:50

        Thats they problem with many property investors Im afaid to say
        They buy when prices are too high then sell when prices are low because they cant afford to hang on any longer.
        Negative gearing just makes the losses even greater.

        As I said before, negative gearing is sold by property spruikers as a tax lurk
        But in reality its a loss making buisness that should never have been purchased for the price that was paid.

        Thats why so many property investors get burnt.

        Watch how many burn this year as they come off those ultra low fixed rate loans.
        Its just lucky over the last 2-3 years that thier pay has gone up about 2.5% to 3% per year and now rents as well.
        Might be the only thing that saves them this time.
        But maybe not when they find thier loan repayments have more than doubled!

• 

  MS Paint on 12/01/2023 - 19:33

  You lose money on purpose so you get a fatter tax return.

  • 

    camjl on 13/01/2023 - 02:24

    +2

    Crazy hey - intentionally earn less to avoid paying a proportionally lesser amount of income tax.
    It's like taking a pay cut to reduce your tax. Or looking for the term deposit that pays the lowest rate of interest.
    Nah, give me a pay rise any day for no reason and I'd happily (welll….) pay 40% of it in tax.

    Tax is simply a cost of doing business, working or investing. Earn as much as you can first, then look to legitimately reduce your costs (incl tax) as much as possible. Something like that.

    I doubt the rich ever intentionally lose money - MS doesn't 1/2 the cost of Windows and Apple doesn't sell its phones at a sensible price to avoid paying tax. They might look for ways to write off as many unintentional losses and expenses as possible though.

    • 

      HeWhoKnows on 17/01/2023 - 21:54

      100% correct
      People must view the situation as..
      "If you are making more money then you pay more tax" and visa vera in every way

      Paying excessive expenses in order to Reduce your income so you pay less tax is plain DUMB !

      They will say they do it for the long term capital gains

      But capital gains are not guaranteed and neither is the future of interest rates and rents

      When the time comes when these people are all forced to sell, so is everyone else and prices come tumbling down

      The 2008-9 GFC was a classic example!

  • 

    HeWhoKnows on 19/01/2023 - 21:42

    That is absolutely correct!

    And thats what accountants say as well

    If you pay less tax thats great.
    Never mind its because you are losing money on the investment.
    But the accountant doesnt measure the return on investment
    Thats not thier job. Its yours!

    Every seen any "rich" accountants???

• 

  brendanm on 12/01/2023 - 19:36

  +6

  Negative gearing doesn't only apply to houses.

  • 

    AustriaBargain on 12/01/2023 - 20:38

    I think houses are what people really care about because no other investment is "guaranteed" to skyrocket in value 20 years later, and no other investment is required for people to live and sleep in.

    • 

      Almost Banned on 12/01/2023 - 21:35

      +1

      Let me introduce you to a new concept:
      https://en.wikipedia.org/wiki/Hotel

      • 

        AustriaBargain on 12/01/2023 - 22:03

        The returns on a hotel are easier to estimate than housing so it is not seen as attractive an investment.

    • 

      brendanm on 12/01/2023 - 23:41

      There are people who don't want to/can't buy. To service this market, people buy property as an investment. Like all other personal investments, they are able to offset the costs against their income.

      I don't actually care whether negative gearing goes or stays, just find it funny that people parrot the same things over and over about negative gearing, and think it's some thing invented just for property.

  • 

    HeWhoKnows on 17/01/2023 - 21:59

    Correct, applies on shares as well
    When you borrow money to speculate on shares its very high risk

    Or on any asset the produces a taxable income

• 

  TheMindsetTraveller on 12/01/2023 - 19:48

  +8

  Let's say $1m investment, 5% pa interest & rent $1,000 PW.

  Interest is $50,000 per year. Rental is $52,000 per year. Appears to be positive, but wait, now deduct:-

  Council rates $2k, ppty insurance $2k, landlords insurance $1k, cost to manage property $2.6k, capital depreciation $15k (must get a depreciation report), accountancy fee $1k …..

  Therefore it is costing you interest plus costs = $73.6k , but now you have only made $52k …. you effectively have made a $21.6k loss —- this is then able to be deducted from your taxable income. Now, if you are on the average tax bracket you will get 32 cents in the dollar back = $7,000 refund from your taxes.

  And in the meantime, you hope that your property has appreciated in value.

  • 

    El-Rhi on 12/01/2023 - 20:02

    So you can effectively be cashflow positive or at worst neutral from negative gearing, that’s the key benefit.

    • 

      trapper on 12/01/2023 - 20:27

      +4

      You can be far in the red with negative gearing also, especially with rising interest rates. It's not all roses.

      • 

        El-Rhi on 12/01/2023 - 20:36

        Indeed, that’s possible

      • 

        ThithLord on 13/01/2023 - 10:26

        Yeah but, you're still far, far better off with the NG than without it

    • 

      camjl on 13/01/2023 - 02:33

      Gearing just means you have borrowed to 'gear up' or multiply your purchasing power.
      Positive or negative refers to the cash flow ie income less expenses/costs.
      Well, some might look at cash flow, others only look at the net tax position of profit or loss, which can be quite different to net cash flow.
      So depending on your definition, you can't really be negatively geared and cash flow positive - unless your definition is tax losses that result from non-cash deductions like depreciation / building allowance claims. Need to take into account the capital component of loan repayments as well.

      • 

        trapper on 25/01/2023 - 13:28

        unless your definition is tax losses that result from non-cash deductions like depreciation / building allowance claims.

        Well exactly, that's the sweet spot.

  • 

    HeWhoKnows on 17/01/2023 - 22:24

    Well some of your figures are way out but the gist of the example is absolutely correct.

    The fact is that gross rents are still coming in below 4% in the cities so more like $770pw or $40,000pa
    But allow say 2 weeks vacancy factor and we are already back to $38,500
    A $1M "property investment" in the city is likely an apartment so no property insurance and only $300 landlords insurance but add strata fees of probaby $1500pq or $6,000pa

    You cant claim depreciation anymore unless its brand new so thats out.
    And depreciation is a paper expense for tax purposes anyway. Its not an outgoing.
    Accountancy more like $600, Property management 5% so $2000pa plus letting fees of 1 week + GST
    You would only be able to borrow 80% at probably 5% today so $40,000 in interest

    So we have $38,500pa income less $40,000 in loan interest and we are already at NEGATIVE income for the year of $1,500.

    Then take into account Strata levies of $6,000 + Council rates of $1,600 + water rates of $600 + insurance of $300 + agent commission and letting fees of $3,000 + Accountant $600.
    We are at loss of over $13,500 already ($260pw) that must be somehow funded from an alternative source of income.

    And dont forget the high cost of repairs and maintenance and the need for painting ($5,000), carpet ($5,000) and HWS ($1,500) every 10 to 12 years. Add a new kitchen every 15 to 20 years ($15,000).

    And hopefully you dont get a rogue tenant that wrecks the place or doesnt pay the rent for weeks on end
    See property investment is not all its made out to be and neither is negative gearing

• 

  trapper on 12/01/2023 - 20:25

  +6

  Negative gearing is a strategy used by some investors to increase their income through deductions on their taxes. The basic idea is that an investor borrows money to purchase an asset, such as a rental property, and the income they earn from renting out that property is less than the expenses they incur, such as mortgage payments and property maintenance. By deducting these expenses from their income, the investor can reduce the amount of tax they owe, which can result in a larger overall return on their investment.

  Here's an example of how negative gearing works:

  Let's say an investor buys a rental property for $500,000 and takes out a mortgage for $450,000. The investor is responsible for paying the mortgage, property taxes, insurance, and any other expenses associated with the property, such as repairs and maintenance.

  Let's say the investor rents out the property for $1,500 per month. After paying the mortgage, taxes, and other expenses, the investor is left with a net loss of $300 per month.

  The investor can deduct this $300 per month loss from their income when they file their taxes. If the investor's income tax rate is 30%, this would result in a tax saving of $90 per month.

  The property may also increase in value over time, which could lead to a capital gain when the property is sold. While the investor may not have positive cash flow with the rental property, the tax savings and potential capital gain may make the investment worthwhile. However, it's important to note that the value of the property can also decrease and the investor is responsible for the mortgage even if the property is not rented.

  • 

    AustriaBargain on 12/01/2023 - 20:40

    -1

    Yup, even if you have to pay the tax in the end when you sell the property, the value of the property has gone up so much that it makes it more than worthwhile, letting them live the good life on the profits. Of course the profits have to come from somewhere and that somewhere is struggling renters/eventual owner occupiers.

    • 

      brendanm on 12/01/2023 - 23:44

      you have to pay the tax in the end when you sell the property,

      You pay capital gains tax, you wouldn't pay back the tax you avoided through negative gearing.

      that somewhere is struggling renters

      Then buy or move somewhere cheaper.

      • 

        AustriaBargain on 13/01/2023 - 01:20

        +1

        I live in Adelaide, it's already cheap here. Although now that we have a new airport, the world's most expensive hospital, an Apple Store, and an IKEA it probably won't be long until we turn into Melbourne.

        • 

          brendanm on 13/01/2023 - 07:47

          @AustriaBargain: Then what's the issue?

        • 

          spaceflight on 14/01/2023 - 19:51

          @AustriaBargain: Adelaide has a new airport?
          Where's the second one?

          • 

            AustriaBargain on 14/01/2023 - 19:57

            @spaceflight: They upgraded the old one. You don't have to walk across the tarmac anymore.

            • 

              spaceflight on 14/01/2023 - 19:58

              @AustriaBargain: So they have a new terminal not airport then.

              • 

                AustriaBargain on 14/01/2023 - 20:04

                @spaceflight: Kind of like when you get a makeover and your hair done and say you're a whole new woman, when you just have on a new dress and hairstyle.

                • 

                  spaceflight on 14/01/2023 - 20:12

                  -1

                  @AustriaBargain:

                  Kind of like when you get a makeover and your hair done and say you're a whole new woman, when you just have on a new dress and hairstyle.

                  You might say that, but I don't.

                  I might say that I look like a whole new woman.

                  Saying I am a whole new woman is stupid because I'm not.

                  • 

                    AustriaBargain on 14/01/2023 - 20:39

                    +1

                    @spaceflight: There's about the same number of google results for "I'm a whole new woman" and "I feel like a whole new woman". Much fewer results for "I look like a whole new woman".

  • 

    camjl on 13/01/2023 - 02:42

    Ideally, negatively gear through your working career to claim tax back while in a higher tax bracket, then the investments begin to be positively geared and or sold after you retire and your income is in a lower tax bracket. Then spend the kids' inheritance / hide your money under the mattress, go on the pension and complain about the younger generation.

  • 

    HeWhoKnows on 17/01/2023 - 22:35

    @Trapper
    Sorry but you have most of this WRONG

    1. Mortgage repayments are definitely NOT tax deductible!
       Only the interest charged on the mortgage is. HUGE DIFFERENCE!
    2. Negative gearing arises not from "deducting expenses from income" but rather from being allowed to offset the expenses over and above the property's income (i.e. losses) against other income which you earn. So you must have income other than the income from that property.
    3. Negative income is NOT a strategy to increase income through deductions at all. In fact these are at odds to each other. A deduction arises from an expense. And an expense actually REDUCES your income…. By reducing your income you pay LESS TAX. Hohum. Pls get your facts right!
    4. If you are lowering your income because you are claiming more tax deductions (expenses) how does that equate to a higher actual return? In fact its exactly the opposite my friend. You are in fact running a business at a loss and so losing money!

    I wouldnt want you to be my accountant. You would end up sending your clients broke!

    But you almost got this part right…almost
    "By deducting these expenses from their (OTHER) income, the investor can reduce the amount of tax they owe"
    Its just what follows that is completely WRONG…"which can result in a larger overall return on their investment"

    But anyway the example you gave does illustrate the point nicely.
    Just remember that the property loss must be offset against some OTHER form of income the investor is earning.
    i.e. If the rent from the property is the only form of income then negative gearing cannot take place.

    Now for everyone's benefit

    Negative gearing is nothing more than an adjustment in cashflow in favour of the tax payer
    It doesnt increase or reduce actual income or expenses.
    It doesnt increase the return of any investment.
    These are just false claims made by property spruikers

    The tax office simply allows you to claim all of a property's expenses today by allowing the excess expenses to be offset against other income you earnt in the same tax year. So yes you pay less tax in that year because you are running a LOSS!
    This situation might run for 5 or 6 years until the investment property turns a profit.
    Then the investor starts paying MORE tax! So the tax man eventually gets thier tax back.

    Alternatively without negative gearing those property losses would be rolled over and accumulated over several years.
    They could eventually be used to reduce taxable income when the property income eventually exceeds the property expenses.
    So the investor might not be paying any tax on that investment property for up to 20 years!
    This situation favours the tax man as it defers some tax deductions to later years in which the property returns a profit
    OR when the property is sold at a profit (if it does)

• 

  Heaps for Cheaps on 12/01/2023 - 20:49

  +7

  For a 6 year old:
  Negative gearing is when someone borrows money to buy a house or apartment and they rent it out to people who live in it. But sometimes the money they make from rent is not enough to pay back the money they borrowed to buy the house or apartment. So they are losing money. But they can use that loss to help them pay less taxes. It's like using a toy that you don't play with anymore to trade for a toy you really want. But remember, just like trading toys, it's important to be careful and make sure you are making a good trade. And it's always good to talk to grown-ups, like your parents or a financial advisor, to help you make good decisions.

  For an adult:
  Negative gearing is a strategy used by some investors to make money from property. It happens when the cost of owning a rental property (such as mortgage payments, maintenance, and other expenses) is more than the rental income the property generates. The difference between these costs and the income is called a "loss" or "negative gear." Investors can use this loss to reduce the amount of tax they have to pay on their other income. This can make it more affordable for them to own rental properties, and can also help them make a profit in the long run if the value of the property increases. However, the property market can be unpredictable, and it's important to carefully consider the risks before investing in property.

  For an advanced adult:
  Negative gearing is a financial strategy where an investor borrows money to purchase an income-producing asset, such as a rental property, with the expectation that the income generated by the asset will be less than the cost of borrowing and owning the asset. In other words, the investor expects to incur a net loss, or a "negative gear," on the investment. The investor hopes to make up for this loss through capital appreciation of the asset, or by offsetting the loss against other income for tax purposes. Negative gearing can be a high-risk strategy, as the investor is counting on the asset's value to increase to make up for the ongoing losses.

  As a ryhme:
  Negative gearing is a game, where you borrow some dough
  To buy a property, and then you rent it though
  The hope is that the rent you collect, will be more
  Than the money you pay back, that you abhor
  But sometimes the opposite happens, and you make less
  And you have to pay more, from your own dress
  But the hope is that property values will go up
  So when you sell it, you'll have a cup full of sup

  • 

    trapper on 12/01/2023 - 22:28

    +15

    thanks ChatGPT!

  • 

    HeWhoKnows on 22/01/2023 - 21:45

    Everyone keeps getting this part WRONG
    And it applies to all ages

    Mortagage payments ARE NOT TAX DEDUCTIONS!

    Only the interest charged on the mortgage is.

    Thank you

• 

  SF3 on 12/01/2023 - 21:06

  Explain Negative Gearing to Me Like I'm Stupid

  You pay less tax, due to the money you “lose” from your investments. Lose could be, interest from loans to support an investment or loses that occur (sell an asset for less than what you bought).

• 

  mskeggs on 12/01/2023 - 21:25

  +4

  Negative gearing is ok if you pay tax on the capital profits, then it is just swings and roundabouts. The issue is the 50% CGT discount reduces the total tax rate when you sell, so this form of investment is subsidised by taxpayers, compared to things like putting money in the bank, which is always taxed at marginal rates.

  • 

    stirlo on 13/01/2023 - 08:00

    +1

    You can also make a small profit or break even on cashflow but using depreciation make a large paper loss giving you the tax deduction without losing actual cash out of your pocket.

  • 

    duchy on 14/01/2023 - 23:31

    Would you rather if the government invested a MUCH LARGER sum of money to build housing for people?

    • 

      mskeggs on 15/01/2023 - 12:00

      Of course! Look at DHA as an example of effective housing delivery.
      The government currently tries to provide business cycle support via tax breaks on housing construction. Why not do the same thing but have the government reap the benefit directly, so more houses get built in slow times, fewer in boom times, with the gov effectively always buying the dips.

      That way benefits flow across the board to the community, not just to people who can afford to spend when tax rates are favourable.

  • 

    HeWhoKnows on 22/01/2023 - 21:51

    -1

    Chalk and cheese but I agree with the argument

    CGT applies for any asset held for longer than 12 months
    If the asset is sold at a profit within 12 months then the full amount of the profit is assessable as income tax!

    For the many of you that havent been around for long, originally the idea was to only tax the "real" capital which is the amount over the inflation rate.
    The calculations starting getting complicated after a few years as was keeping track of the inflation rates so Johnny Howard simplied the calculation to 50% of the gain. So when you talk about this being fair or not please take this into consideration.

    Interest earned on bank accounts should also be offset against inflation to determine the "real" income earned over and above the inflation rate.
    This was deiscussed as a tax reform many years ago.
    But of course no bank pays interest above the inflation rate so interest on savings accounts would never be taxable.
    This is not a good scenario for the government tax coffers
    But is any form of tax fair?

• 

  Ryk on 12/01/2023 - 22:11

  why even declare the income? just take cash.

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