To me, there is a very simple and straight-forward nexus between negative-gearing and the investments that are linked to it.
It is a fundamental right in our society to save money to provide for our future. For most of us, the lion's share of our income does not belong to us. It is used to meet our tax liabilities, our rent, our mortgage repayments, our gas, our electricity, the school fees for our children, our insurances, the food we eat and the clothes on our backs and on the backs of our families.
Once we meet these obligations, we may be lucky enough to have a smaller portion of our income left over. The question is, what do we do with this money?
Do we regard all of this as our discretionary spending? Do we simply use it to go to the footy, the movies, place a few bets, join a golf club, take a holiday, buy another pair of Nikes, drink a few cocktails, go out to dinner, buy a designer dress and a pair of Manolo Blahniks and paint the town red? You know, do all the fun things, consume it all. Why not, we can always hold out our hand for government assistance in retirement.
Saving money for the future is no fun. It is even less likely to occur if it is not encouraged or rewarded. It would also be beneficial for future Governments if there were a few self-funded retirees out there to lessen the load. It may be useful to reward those who choose to save.
When someone buys an asset and negatively gears it, they are using some of their income (read discretionary spending capacity) to help fund the investment. They make a loss on the investment, which is offset somewhat, by the tax break that they receive each year. Nonetheless, it is still a loss, even after the tax break. They may well make a loss on this investment for years.
So why would anyone bother entering into such as arrangement? After all, it means they have fewer funds to spend as they please.
The short answer is that they are hoping to sell the investment at a future date for a capital gain, one which is large enough to compensate them for all the losses made along the way and reward them with a profit. This is where it gets messy. Our government, in its wisdom, chosen to tax this capital gain through its Capital Gains Tax regime.
So, there we have the justification for allowing deductability of negative gearing. If you tax the reward (the Capital Gain), it is only fair that you allow a deduction for any expenses incurred along the way. To do otherwise, is double-dipping.
The real driver of property prices is not negative gearing. The real driver is the Capital Gains Tax exemption on the family home. As long as there is only one way to purchase a growth asset that attracts no CGT liability, Aussie house prices will continue their spectacular rise.
Perhaps a better solution would be to alter CGT and turn it into a Speculative Gains Tax which dissipates to zero once an asset has been held for say 10 or 15 years, and include the family home under its umbrella?
