So tonight is budget night.
That special night of the year where families huddle together against the chilly autumn air, put on some popcorn or some hot chocolate, and laugh the night away to the sweet sounds of a treasurer explaining how he managed to cock things up in such an epic way, and what he’s going to do about it.
My bet is that Wayne Swan must feel like he’s living through hell right now.
It started on the weekend with a horror interview with the grand old Gandalf of Australian media, Laurie Oakes. It started badly, and ended with Swanny bent over the fence and copping a right old kicking.
Gandalf: “Would you agree that last year’s budget makes for hilarious reading? Why would people believe you after that fiasco?”
or…
Gandalf: “Do you believe, as Greg Combet does, that Labor should be confident of winning the election?”
Froddo: “I believe that.”
Gandalf: “What’s he been smoking? Have you been smoking the same thing?”
We could maybe put some of Gandalf’s merry antics down to being a bit long in the tooth, or being only a few more live crosses away from retirement. But it also reflects a widely held view in the media that there’s no way in the wide universe that Swan will still be treasurer come September, and so we can ditch the niceties and have a bit of fun.
And so that’s the alligator pit that Swanny will be lobbing his budget into tonight.
Poor bastard.
Even if his budget was a cracker – the best in a generation – he knows that he’ll be on a hiding to nothing. The media is going to tear him to pieces.
Thing is though, the budget is probably an absolute stinker.
Labor’s been trying to manage expectations lately, getting people used to the idea that they’ve somehow misplaced a mountain of money. First it was $12 billion. Then it was $17 billion. There’s even talk of a $22 billion black hole.
What is this, Price is Right?
There’s been a colossal collapse in revenues. That’s the official line. The truth of it is that the revenue predictions from last year’s hilarious budget were wildly optimistic.
It was a tax big, spend big budget.
The spend big happened. The tax big didn’t.
And so now Swanny and co are desperately trying to cut back on spending areas that won’t make people riot, let alone unhappy, in an election year, and sucking every last drop out of the tax system that they can.
And this has made a few people in the property industry nervous. There’s been chatter lately that a review of negative gearing might be on the cards.
To point, on the 9th of May, the Real Estate Institute of Australia even issued a press release warning Swanny to keep his hands off negative gearing, so things must be getting serious.
Swanny wouldn’t be the first treasurer to cast an envious eye over negative gearing. Check out these facts:
According to the latest ATO publication, negative gearing was worth a cool $13.2 billion in 2010-11.
That’d put a fair dent in the deficit.
Apparently 1 in 10 Australian tax-payers are negatively geared, with negative gearers losing $10,947 on average in 2010-11. That’s a lot of people and a lot of money.
And it’s not some rich man’s tax dodge either. 72 percent of negative gearers earn less than $80,000 a year.
And so it’s this pervasiveness that protects negative gearing. If it was just a loop hole for high-income earners, it’d be easy to muster the support needed to shut it down.
But it’s not. It’s mum’s and dads and aussie battlers in Labor heartlands – just doing what they can to get ahead.
If you ask me, the real value of negative gearing was that it turned Australia into a nation of investors, and made a generation of Australians get proactive about their own wealth-creation plans.
But those investors would feel pretty gypped if the negative gearing rug was pulled out from under them now – especially when there’s such a widely held perception (probably true) that the richer you are, the more tax-dodges you have available to you.
Why crack down on the mums and dads who are just doing what they can and playing by the rules?
Trouble is though, apart from encouraging people into property investment, which I say is a good thing, negative gearing doesn’t do that much, and it’s difficult to avoid the charge that it’s just dressed-up middle-class welfare.
(Note that this is on Joe Hockey’s hit list. Maybe it’s the Liberals who are gunning for it..?)
Tin reply, the argument that gets trotted out is that negative gearing encourages investors to increase housing supply, which keeps rents down, especially for low-income earners.
This would be true if investors only bought new houses. But for the past twenty years, around 90 percent of investors have only bought existing houses, so the pressure is on price, not on supply.
And apologists like REIA like to remind us how the Hawke government removed negative gearing in July 1985, and investors “went on strike” and rents soared.
The government got so scared that they brought it back in September 1987.
But there’s a bit of myth-making happening here. It is true that rents did rise, and in a big way in some cities like Sydney and Perth. However, between those two years, while rents rose in four capitals, they fell in the other four. Nationally rents increased 2.7 percent per annum, which is about normal.
So it’s a long bow to draw to say that investors went on strike and “rents soared”.
Confused?
You should be. This is exactly the trouble – negative gearing is widely misunderstood. Arguments for and against are being made based on cherry-picked statistics, one shoe does not fit all.
I don’t think that any changes to negative gearing would have that much impact in and of themselves. But the potential hit to confidence, just as people are finally waking up to the fact that there’s no bogeyman under the bed, could be catastrophic.
It would be an incredibly reckless and dangerous move.
And to avoid giving people a fatal dose of the heebie-jeebies, you’d need an incredibly effective information campaign, with a supportive media industry backing you up.
Which, is exactly what Swanny doesn’t have.
So sorry Swanny. Forget it. Negative gearing’s off the cards. What else have you got?
We’ll find out tonight.
John says
Someone’s had a stroke of brilliance & Swanny’s gone for the Disability Tax because NO-ONE can say they don’t want to support those who are genuinely in need. All Swanny’s done is increased taxes / said it’s for the disabled / and put the money that used to be spent on disabled in to balancing the deficit. He’ll run with that for ALL it’s worth to deflect attention from the real issue & Tony can’t say he doesn’t want to be taxed to support the REAL Aussie battlers.
Margaret says
I would like to attend but I live in Tasmania
ronnie naidoo says
I did rather Labor win the election than the Libs. I am a property investor and will sell up very quickly if this does happen. Tony A and Joe H have no monetary sense to change things around.
Bob Andersen says
…and it’s an even bigger story when you realise that negative gearing pertains to other income producing asset classes as well as property – e.g. shares etc. The Lord of the Rings made it to a trilogy but it looks like Labor will be cut down after two (terms). Bob A
Danny says
Labour spends and liberals save what the f#*# hows that good goverment. Remember when liberals were in they made budgets that we can all be proud of and everyone got on, now labours in and they have stuffed up the budget every time we are not that stupid when labour looses in september it will take years and years till they get back in. We can only hope.
ronnie naidoo says
You forget abouy who makes the big decisions and changes
adam says
as an accountant i can safely say that most of the negative gearing people that exists is by people taking advantage of the tax system and the australian public either by
* claiming their own primary place of residence as a negative geared investment using trusts (which is wrong)
* or they maintain interest only loans to maximise tax deductions – this merely means they are paying twice as much to the banks as they would be to the government and again we miss out as a nation.
* commercial investors refuses to lower rents and who take advantage of negative gearing to lower their tax bill because they dont want to devalue their properties are also not helping anyone. the abundance of vacant shopfronts is testamount to a dramatic shift of consumers refusing to pay the massive overheads in australia for things like rent.
any true investor wants to make a profit not a loss to avoid tax. Ask warren buffett what he thinks of negative gearing and then re-write this article.
adam says
further – negative gearing is a great incentive to get people to invest in rental properties but does need to be tweaked to make sure the vibe is right! a cap on the value of interest deductions allowed per year, or on the value of properties allowed to be negatively geared could work (similar to luxury car tax), and forcing people onto P&I loans by disallowing interest deductions on interest only loans would benefit australia a lot more
Peter Hatch says
It’s time to have a rethink on what governments are for. In the end individuals are better guardians. Of their own budgets.
Just one thought on welfare why don’t we run a negative income tax through the tax dept declare a poverty level say 30,000 and all those who don’t meet it we make it up . End of all welfare programmes and welfare depts.
Kenneth Mant Nath says
Australia is not separate from the global great recession of 2008 and on, and antidote the world has adopted: financial repression. Australia and Wayne Swan is merely adhereing to this line, and Laurie Oakes and his ilk are either not aware or don’t understand.(Warren) Mosler’s Law sort of sums it up briefly: ‘There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with’.
Dr J Donnellan says
I wonder if Mosler’s Law holds in a situation where the word’s population is ageing rapidly and the Dependence Ratio is rising so fast the deficits being racked up will NEVER be able to be repaid. Anyway – if you invest in negative cash-flowed property I would say you deserve everything you get. I mean – why bother?
Les Parker says
Negative gearing puts Mum & Dad investors into the housing market which to me does absolutely nothing for the country. Instead of using this system, why don’t they put their efforts and cash into empowering other people to become entrepreneurs and build our economy the way it should be then everyone will benefit. I live temporarily in Vietnam and while I do not believe in communism but the people here are more free than over regulated western societies. The thing I like about here is that there is no Government handouts. People here work for a living or starve…simple. Yet they are free to become what ever the like to be including property investors. The tax payers don’t prop up their shortfalls. Too much money in housing takes the cash out of the working economy and that;s what negative gearing promotes. It’s selfish and foolish. The banks get richer again.
moneybags says
Why not adopt the capital gains tax methodology …. interest expenses can only be offset against other investment income just like capital losses can only be offset against capital gains ?
Mike from Mandurah says
Negative gearing on houses for rent at 5% fixed finance for 5 years on a 300K – $350 price is hard to negative gear, which is great as you only get a portion of your losses back anyway (plenty of rentable homes in Mandurah at these prices)
Jeff says
However you personally feel about negative gearing it would be hard to argue that it will have a negative impact on the building industry if it was taken away.
That would make it very hard for butter fingers swan to defend.
Charlie says
Negative gearing simply drains so much money out of the government & other industries. It is the real job killer. Should definitely be removed for the future people in Australia. I urge young talents migrate to Europe or North America, where life is much easier.
julie says
Charlie, are you blind. Australia is the lucky country and you should feel privileged to live in this great land ; all from Europe and Asia are wanting to come here so stop wingeing
Jason says
As correctly pointed out we risk a dangerous precedent being set if the right to claim losses against one investment class is not applied to all investment classes. The ability to profit immediately on property is obviously not as apparent as paper-based assets such as equities and stocks. However, the long-term growth trend of property allows everyday working Australians to park funds combined with leverage in a non-volatile asset class with the rightful expectation of both capital and rental growth – factors which will eventually turn those losses into profits (and more tax) and improve one’s wealth position.
Whilst it makes absolutely no sense to invest in any asset just to reduce your tax bill, it makes perfect sense to allow deductions for people that are investing in assets that will eventually turn a profit/income. It’s the same reason why we have start-up assistance programs, grants and deductions for business as they are not expected to turn massive profits in their formative years.
We must not forget that housing both directly and indirectly feeds so many sub-economies and industries, also noting that the more profits a bank makes means the more taxes and dividends they pay to government coffers and your superannuation funds.
In my view, the $13billion negative-gearing tax bill is a small price compared to what we may face should investment in housing be non-deductible. This is by way of decreased tax revenue (stamp-duty, GST, council rates, land tax) and a gradual rise in unemployment in the areas of finance, banking, construction, manufacturing, services and real-estate.
ronnie naidoo says
I started of in property about 5 years ago. All of my properties then were geared negatively. Initially, because of a lack of capital, this worked in my favour. Currently all of my properties are positively geared, through rental increases and the lowering of interest rates. Therefore, for new investors negative gearing makes sense. Imagine the bill to taxpayers, if the government was solely responsible for providing all housing to the homeless and disadvantaged.
Frank says
What everyone needs to remember is that most investors in property are in it for the long term capital gain. While the days of 100% value increase over 7 to 10 years are probably gone, at least in the short term, a steady rise in market value should continue. Negative gearing provides a bit of an incentive for people on average incomes to get into the market – wealthy investors are not that concerned by it.
Malcolm says
Investors in rental property who never themselves occupy face the full weight of capital gains tax. Unless they need to liquidate, CGT in itself is an incentive to hold the property thereby tending to sustain the pool of private rental accommodation.
Removing the negative gearing incentive for those who are geared inevitably means that the landlord net returns decrease and that in conditions of effective rental accommodation shortage either higher rents will be demanded or fewer investors will choose to enter or remain in the market.
The risk of catastrophic costs caused by rent defaulting, irresponsible or malicious tenants combined with Tribunals aggressively administering overtly anti-landlord legislation is significant in the private rental property sector. Inevitably, an increase in demand for public housing caused by withdrawal from private rental investment translates to a direct cost transfer to government revenue and the taxpayer.
In the context of the above, the opportunity cost of revenue transferred to highly subsidised housing including the factors elucidated in Jason’s14 May 2149 hrs. comments ultimate paragraph, what is the likely social benefit cost outcome?
snk says
Wake up people, both governments are there for short term politics to feed their self interest. I Don’t see the politicians hold back on their 15% pay raise, or the top ups to their super fund during negative growth funded by tax payers, I don’t see cut backs on expensive accommodation and travel. If we have a 17 to 22 billion black hole the politicians should lead by example and freeze pay increases and cost cut within there own legally bent government first. What Australia needs is a smarter and more efficient government who knows how to manage spending and not waist tax paid dollars and is not their for self interest but for the people of Australia who will look at the look term for the benefit of this country.
Bernie says
If you negatively gear just to pay less tax you’ve stuffed it unless your income stays consistently high throughout your working life(reality is for most it declines as you hit twilight of working years). Odds are if you hang on to a negatively geared property too long for the average 72%er you’ve gone about it the hard way.Everyone’s circumstance is different at different times. You all get used to the AFL rule changes.
moneybags says
“Whilst it makes absolutely no sense to invest in any asset just to reduce your tax bill”
Not to reduce your tax bill no but to reduce your income definitely ! Centrelink have got a bit wiser over the years and the tax scales improved but when I first started working my boss drew on the equity every year to max up the loan.
Between pushing him down a tax bracket and the middle class welfare he got back then meant he received $1.03 for every extra dollar in interest he paid !
There are still cases when earning more money costs you …. and possibly your kids.