The Negative Gearing Poll

[pahoffm]

Beautiful post there TOT. Couldn't've described it any better.

BTW, Keating withdrew the deductability of Negative Gearing in the mid to late 80s. The withdrawal lasted only a short time before it was repealed. At the time, the media announced that repealing the withdrawal had saved the Hawke government.

Personally, I remember it had more to do with 'big name' backers withdrawing all financial support for the Labour Party until Negative Gearing was reinstated.

In my experience, Negative Gearing is a good investment for the long term. You need to remember that property runs in a 'biblical' 14 year cycle - seven years of drought (falling and low property prices), seven years of plenty (property value rises). As long as you have the working capital to support the losses during the seven years of drought.

 

[martyshire]

You need to remember that property runs in a 'biblical' 14 year cycle - seven years of drought (falling and low property prices), seven years of plenty (property value rises)...

Australian property only, eh Phantom...?

 

[martyshire]

First time I've seen the NG issue in the paper for a while...

http://theage.domain.com.au/real-estate-news/acoss-cut-negative-gearing-to-help-poor-20120814-245gh.html

 

[poppa x]

Some people never learn.
Let's cut negative gearing, but in the same article its says...........

The Hawke government scrapped negative gearing in the mid-1980s but the policy was reinstated after investors fled the housing market, leading to a shortfall in rental accommodation.

 

[KnightersRevenge]

Some people never learn.
Let's cut negative gearing, but in the same article its says...........

The Hawke government scrapped negative gearing in the mid-1980s but the policy was reinstated after investors fled the housing market, leading to a shortfall in rental accommodation.

How long was it off the books? What chance was the market given to reset itself in the absence of NG?

 

[martyshire]

Some people never learn.
Let's cut negative gearing, but in the same article its says...........

The Hawke government scrapped negative gearing in the mid-1980s but the policy was reinstated after investors fled the housing market, leading to a shortfall in rental accommodation.

You're right, this line seems to suggest that removing NG would be bad for society so it goes against the rest of the article. The author did a bad job of framing the quotes from ACOSS and making a coherent story out of it.

What is more insightful IMO is the comments thread, where the pros and cons are thrashed out. There is clearly contention as to whether Hawke scrapping NG actually lead to a shortfall of rental accommodation or it was a combination of other factors.

I was too young at the time to remember the context of policy changes back in the 80s or the results of these, but it makes no sense to me that removing NG would hurt renters. Surely it would give them a choice between renting and buying where currently they have no choice.

 

[Giardiasis]

A distortion of the market, and should be repealed with stamp duties etc.

 

[Sintiger]

The tax deductibility of the cost of borrowing for an investment is not just limited to property for individuals it is in all parts of our economy. Companies deduct interest on borrowings to run their businesses and as individuals we can deduct borrowing costs for just about any investment except the home we live in.

Why pick on property? You are either against tax deductibility for borrowing costs or you are not.

The availability of credit to invest in businesses and many other forms of investment is the life blood of our economy. A Government making a judgement about the merits of one type of investment against another is not wise imo.

 

[KnightersRevenge]

The tax deductibility of the cost of borrowing for an investment is not just limited to property for individuals it is in all parts of our economy. Companies deduct interest on borrowings to run their businesses and as individuals we can deduct borrowing costs for just about any investment except the home we live in.

Why pick on property? You are either against tax deductibility for borrowing costs or you are not.

The availability of credit to invest in businesses and many other forms of investment is the life blood of our economy. A Government making a judgement about the merits of one type of investment against another is not wise imo.

But isn't there a question about providing that deduction because in carrying on a business you are providing jobs and products or services which benefit the community and the economy and drive further investment and opportunities. Suburban rental property really doesn't do that. Why give you a tax benefit for that?

 

[Sintiger]

But isn't there a question about providing that deduction because in carrying on a business you are providing jobs and products or services which benefit the community and the economy and drive further investment and opportunities. Suburban rental property really doesn't do that. Why give you a tax benefit for that?

The question is where do you draw the line ? Does a family trust borrowing money for investments in the stock market add to employment? That's tax deductible as well. I could argue that negative gearing on property adds to activity in the building industry and therefore is beneficial to employment as well.
Better to not draw a line because everything else is subjective. We have one now ( the family home) which if we have one is the only one that can be policed to some extent.
What about if I form a company for the sole purpose of investing in rental property and borrow money to do that. Why should my business be treated any differently to someone who has borrowed money for another business purpose. Ban negative gearing for individuals and I will just form a company to do it.

 

[KnightersRevenge]

The question is where do you draw the line ? Does a family trust borrowing money for investments in the stock market add to employment? That's tax deductible as well. I could argue that negative gearing on property adds to activity in the building industry and therefore is beneficial to employment as well.
Better to not draw a line because everything else is subjective. We have one now ( the family home) which if we have one is the only one that can be policed to some extent.
What about if I form a company for the sole purpose of investing in rental property and borrow money to do that. Why should my business be treated any differently to someone who has borrowed money for another business purpose. Ban negative gearing for individuals and I will just form a company to do it.

Look there is a slippery slope argument for almost anything. There are people who seem to rank tax avoidance above savings, I don't get it. Seems to me if you are worried about how much tax you pay you already have too much money.

 

[Sintiger]

Look there is a slippery slope argument for almost anything. There are people who seem to rank tax avoidance above savings, I don't get it. Seems to me if you are worried about how much tax you pay you already have too much money.

I am not arguing ethically or morally one way or another but simply stating that change to details which destroys overall principals is very difficult.

Businesses borrow money to operate and small business is a massive employer in this country. There is a large difference in my mind between making the tax laws work for you acting 100% legally and tax avoidance/ tax evasion. There is nothing wrong with borrowing money for a legitimate business venture and deducting the cost of that venture (including the borrowing costs) as that is both legal and within the spirit of the current law.

 

[KnightersRevenge]

I am not arguing ethically or morally one way or another but simply stating that change to details which destroys overall principals is very difficult.

Businesses borrow money to operate and small business is a massive employer in this country. There is a large difference in my mind between making the tax laws work for you acting 100% legally and tax avoidance/ tax evasion. There is nothing wrong with borrowing money for a legitimate business venture and deducting the cost of that venture (including the borrowing costs) as that is both legal and within the spirit of the current law.

Fair enough, didn't mean to take a moral stance on it, just an observation of some people's militant avoidance, legal or otherwise, of tax. You have made the point for operating an ongoing concern which I think is quite different from buying an investment property. That doesn't seem to me a fuzzy or difficult distinction to make. I would suggest that CGT be looked at as well.

 

[Sintiger]

Fair enough, didn't mean to take a moral stance on it, just an observation of some people's militant avoidance, legal or otherwise, of tax. You have made the point for operating an ongoing concern which I think is quite different from buying an investment property. That doesn't seem to me a fuzzy or difficult distinction to make. I would suggest that CGT be looked at as well.

yeah, the inconsistency in the law is that individuals can borrow money for the sole purpose of making a capital gain , get 100% deductibility for the interest but get 50% tax relief on the capital gain.

 

[Big Cat Lover]

Look there is a slippery slope argument for almost anything. There are people who seem to rank tax avoidance above savings, I don't get it. Seems to me if you are worried about how much tax you pay you already have too much money.

I've read some outrageous stuff on PRE but this may take the cake

 

[KnightersRevenge]

I've read some outrageous stuff on PRE but this may take the cake

Only speaking as I find. The only people I have ever met who complain about the amount of tax they pay are those with enough dough to have the problem. I have never met a PAYG or PAYE earner who talks about their tax position down the pub. But I've met a couple of developers and trust fund kids who are thinking about their inheritance who have plenty to say about it.

 

[Willo]

Look there is a slippery slope argument for almost anything. There are people who seem to rank tax avoidance above savings, I don't get it. Seems to me if you are worried about how much tax you pay you already have too much money.

You must be kidding

Only speaking as I find. The only people I have ever met who complain about the amount of tax they pay are those with enough dough to have the problem. I have never met a PAYG or PAYE earner who talks about their tax position down the pub. But I've met a couple of developers and trust fund kids who are thinking about their inheritance who have plenty to say about it.

I dunno what pub you drink at mate, but that's certainly not my experience.
We're not rich bastards, developers or trust fund kids, just work long and hard for a quid, and me and plenty of mates and acquaintances aren't one bloody bit happy with the amount of tax we pay. Especially when governments (of all persuasions, state and federal) find ways of absolutely wasting it and dole bludgers, in some cases generations of them can spend 20 years plus with their hands out.

 

[KnightersRevenge]

You must be kidding
I dunno what pub you drink at mate, but that's certainly not my experience.
We're not rich bastards, developers or trust fund kids, just work long and hard for a quid, and me and plenty of mates and acquaintances aren't one bloody bit happy with the amount of tax we pay. Especially when governments (of all persuasions, state and federal) find ways of absolutely wasting it and dole bludgers, in some cases generations of them can spend 20 years plus with their hands out.

We are talking about negative gearing, so called "middle class welfare" so we are talking about people finding creative if legal ways of reducing their tax bill. I've never had a conversation about tax down the pub, perhaps I'm special. But to put it in context I am probably a borderline socialist so I will always think that there are very good reasons to pay tax and I will always feel that people who can afford to find ways out of paying it are actually sticking the average punter with the bill.

 

[Tiger Rob]

I think much of the negatives towards it come from ignorance of how it works.

The loss a property makes comes off of a persons total taxable income. I.e. a proerty loses $5000 per year and your in the 30% tax bracket you get $1500 off of your total tax. You don't pay $5000 less tax. It still costs you $3500 of your own money to finance the property.

This is an important point. YOU ONLY PAY LESS TAX IF YOUR LOSING MUCH MORE OF YOU OWN MONEY FIRST!

Now, anybody who wants to pay $1500 less tax by spending $5000 of their own money is investing for all the wrong reasons and is an idiot.

 

[Big Cat Lover]

I think much of the negatives towards it come from ignorance of how it works.

The loss a property makes comes off of a persons total taxable income. I.e. a proerty loses $5000 per year and your in the 30% tax bracket you get $1500 off of your total tax. You don't pay $5000 less tax. It still costs you $3500 of your own money to finance the property.

This is an important point. YOU ONLY PAY LESS TAX IF YOUR LOSING MUCH MORE OF YOU OWN MONEY FIRST!

Now, anybody who wants to pay $1500 less tax by spending $5000 of their own money is investing for all the wrong reasons and is an idiot.

The $5000 loss is not necessarily a cash loss though TR. Depeciation/Building Allowances etc come into play and some may be paying P&I off any loan. The annual cash cost may in fact be significantly less in your example above.

Many people conveniently choose to ignore the risk investors are taking when complaining about the advantages of negative gearing.