I reckon the RBA’s dig at negative gearing opens up new chapter. Is it the beginning of the end?
The RBA dropped bombs last week. Everyone’s all excited about what they said, but take a step back here and look at what they’re doing. This is a new game.
And until last week I thought negative gearing was part of the furniture. Now I’m not so sure. It will survive this government. But the next? Suddenly it’s looking like its neck’s on the chopping block.
And suddenly, the RBA’s got balls.
And so there’s two things that are interesting. First is that in their submission to the government’s Housing Ownership inquiry, which follows hot on the heels of the previous government’s Housing Affordability inquiry, and which nobody thought would produce anything of interest because that was the point, the RBA has decided to single out negative gearing.
They reckon it’s time we had a good hard look at it.
Why now? Negative gearing’s been around for 25 years. It’s partner in crime, the capital gains tax concession has been around since 1999… what do we know now that we didn’t know 18 months ago?
For some reason, they decided now was a good time to give it a kick.
And when you take a look at what they say, a lot of it directly contradicts some very public comments the PM and the Treasurer have been making. Who uses it. What affect it has. How much it costs.
And normally, the RBA is very careful to stay the hell out of political minefields like this. But not now.
Why?
I imagine Abbott’s pissed. He doesn’t need the RBA dropping bombs like this. He doesn’t need the RBA’s economic credibility trampling all over his public statements. If this was China, someone at the RBA would be shot. Probably several people.
And so if anyone doubted the independence of the RBA, this is the proof you need. In the government’s eyes the RBA is way off message. In the RBAs eyes, politicians are deceitful idiots who deserve to be spanked from time to time.
And it makes you wonder about Abbott’s relationship with his public service, or how long people think he’ll be sticking around. It’s not often you see the organs of government hang the PM out to dry like this.
Anyway, here’s what the RBA actually said about negative gearing, with my comments.
Australia’s taxation system is… relatively generous to small investors in buy-to-let property compared with some other countries, because investors can deduct losses from their investments against wage income as well as other property income, and because capital gains are taxed at concessional rates…
I’m not sure about that. In the US you can claim mortgage expenses on you PPR. So who are we comparing ourselves with? Anyway, let’s move on…
Tax data show that the share of the population aged 15 years and over with an investment property grew steadily through the 1990s and early 2000s, before broadly stabilising in the late 2000s at around 10 per cent. Over the same period, the share of these investments that were geared increased steadily before levelling off at a little over 80 per cent. The share of investors that declared a net rental loss was just under two thirds in 2012/13, having increased from around half in the late 1990s…
I find this one kind of interesting. I think what it shows is how the deregulation of the finance sector allowed more and more people to borrow, and to borrow and invest in property. But this was kind of a one off thing. Once the changes were made, the ratios levelled out…
Since the early 2000s there have been some notable changes in the distribution of investment and gearing across age groups. In particular, the share of property investors that are aged 60 years and over has increased significantly
No surprises here. Property investment is an older person’s game. Because the longer you’ve been here the more time you’ve had to accumulate wealth. It’s only a problem if we think that young people are locked out, and I don’t reckon that’s true, personally.
Tax data also show that the incidence of property investment and the incidence of geared property investment both increase with income (Graph 27)…
While the incidence of property investment increases with the level of income, the Household, Income and Labour Dynamics in Australia (HILDA) Survey also suggests that most investor households are in the top two income quintiles. These households hold nearly 80 per cent of all investor housing debt (Graph 28)…
So the top 40% of income earners hold 80% of housing debt. This is really going to smack Abbott in the gooleys. He and Hockey have been going out of their way to paint negative gearing as a common tool of folk finance. That it’s a game for policemen and hair-dressers and so on.
The implications of this chart are awkward. If it’s mostly for middle-income earners, then that can only be true if the great majority of them negative gear. But it seems unlikely. Given higher income earners hold the most mortgage debt, they’re much more likely to be negatively geared.
And so for the Bank, that raises the question, ‘is it just a tax-dodge for the rich?’
The Bank believes that there is a case for reviewing negative gearing, but not in isolation. Its interaction with other aspects of the tax system should be taken into account. The ability to deduct legitimate expenses incurred in the course of earning income is an important principle in Australia’s taxation system, and interest payments are no exception to this. To the extent that negative gearing induces landlords to accept a lower rental yield than otherwise (at least while continued capital gains are expected), it may be helpful for housing affordability for tenants.
The RBA gives some important ground here, acknowledging that if we’re helping landlords deduct their expenses, then that can encourage them to provide more housing. That’s a good thing… However…
…the switch in 1999 from calculating CGT at the full marginal rate on the real gain to calculating it as half the taxpayer’s marginal rate on the nominal gain resulted in capital gain-producing assets being more attractive than income-producing assets for some combinations of tax rates, gross returns and inflation. This effect is amplified if the asset can be purchased with leverage, because the interest deductions are calculated at the full marginal rate while the subsequent capital gains are taxed at half the marginal rate.
That is, some people are using the negative gearing / capital gains discount tango as a tax doge.
And if that’s true, in an era of budget emergencies, then it must be time to take a look at it.
Abbott must be fuming.
Has the game changed? Reckon negative gearing can survive?
Cranky says
If negative gearing is “no good” for houses then surely the same conclusion applies to any other investment vehicle such as leveraged shares? I believe this is the case and therefore the stock market should be outraged because logically they should be next in the firing line for negative geared loans…
Solmon52 says
Can be argued both ways. Most share companies pay the tax for you so you are not paying direct but that means you claim it as a tax paid. When paul keeting tried to scrap neg gearing he could see the long term effect. Lower housing prices. Lower mortgage loans. But realestate agents and politicians heavily in debt with grandfather clause negative gearing thew it out of the senate.
If and if we had of stopped foreigners from buying established housing houses would be cheaper. More builders would be building houses for you to buy at affordable prices. More people would own their home. The govt would be paying less is social housing. Win win for the govt. No need for first home owners grants or assistance in stamp duty as the would be cheaper. Instead they could make the land and infrastructure cheaper as new land would be off limits to second home buyers unless they had already sold.
Kyle says
The point made about shares is not the tax paid on company profit or dividends, but that you can claim the interest paid on a margin loan as a tax deduction, similar to claiming the interest on a house mortgage. If we are to remove one, then it would be hard to justify keeping the other.
Foreigners are only allowed to buy newly constructed dwellings.
Aussie tax says
News reports today that foreign buyers are buying more established homes than new.
Richard says
Do not forget if we restrict foreign buyers of anything of ours, they can also restrict our buying theirs as a matter of payback. What goes in must come out.
Glenda says
Yes. I’m surprised more people don’t pick up on this point. Tax concessions for investment loans (which allow negative gearing) are also available for shares. How could they logically remove one and not the other?
Ben says
The RBA will continue to say whatever it needs to to dampen investor demand for residential real estate to try to keep a lid on house prices, because it can’t increase interest rates without destroying the economy.
Rob Barton says
In last week’s UK budget the chancellor has just limited tax relief for interest repayments to 20%, a measure to be phased in over the next 4 years. I can see something similar happening here. http://experienceinvest.com/budget-2015-what-does-it-mean-for-uk-property-investors/
Charles says
I have my own home. Negative gearing and cgt concession has killed young people’s simple home dream. I will vote for the greens as they are willing to abolish negative gearing.
Richard says
The state of our economy has nothing to do with negative gearing or its associated CGT. It is the way the Abbott government spending our collective wealth which is the problem here. Keating tried to abolish NG but its unintended after effects convinced him, it was a bad move.
So both Abbott and Hockey think they have the answer when it has been proven time and again that that is not the right move?
Don’t politicians ever learn from the lessons of history and our Australian lot call themselves intelligent and clever.
Joe Hockey wanted to abolish the Age of Entitlement for Australians except for his kind, fellow politicians which he and Abbott consider Uber Australians and are above the law that govern ordinary Australians. Continuing Entitlements for politicians who are one of the biggest drain on our commonwealth and of course their predilection for placing the priority of importance on the acquisition of war toys over and above the welfare of citizens. Not to mention Abbott’s habit of going to other countries, sees their problems and handing out our dollars out wily nily to show what a great and generous world class statesman he is.
Well, well, well, if the electorate is stupid enough to return Abbott and his cohort the next time around, then we deserve the financial pain that they are going to cane us with.
Stuart says
Well said (the first half anyway) – this is the point that gets overlooked: abolishing property deductions has been done before (Hawke/Keating Labor gov in the 80’s) and failed (rents skyrocketed) so they had to re-introduce it.
Not sure about the Abbott comments – I know Tony Abbott-bashing is a national sport, but do you really think Bill Shorten is a better option? Who is more likely to remove property deductions – as another comment said, this is fundamental principle of business income. And “Abbott’s habit of going to other countries” [they all do – remember ‘Kevin 707’?] “handing out our dollars willy nilly”? Not sure what that’s about. He’s reduced foreign aid.
Richard says
Yes, he has reduced Foreign aid but has been recorded to hand out untied aid in terms of money to countries he visited that has a problem. As to how much he has given in this manner, try to find out from Treasury records if they are open to the public.
Bashing Abbott a national sport? That may be so for other people but I give credit where credit is due and brickbats where its deserved.
Are you implying that everything Abbott did so far in government is positive, constructive and good for the country and the people?
If so, please explain.
Stuart says
No, of course not but does that automatically mean the other lot is a better option? And as for the “financial pain they are going to cane us with” – seriously? The financial pain was inflicted by Labor in terms of the debt they racked up and it’s now up to the Libs to fix it. Remember, Labor started with a massive surplus in 2007 as well. They blew that and then some.
Richard says
I don’t know if Labor will be the better alternative. Let’s face it, most politicians are in it for themselves, despite what they say.
As for Labor blewing the healthy budget which they inherited is a matter for judgment. Would Australia be better able to withstand the GFC caused by our big brother if they did not do what they did?
Again, this is better left for economists better able to judge.
Ian 415 says
Not sure what path you are taking Jon – you seem to have gone off the rails. First your rant about Greece a few days back was totally wrong and now this rubbish. The Greeks wanted money from the EU but didn’t like the repayment plan – ie they didn’t want to pay it back or get their economy in order. Well “hello” – try telling your bank that. Now – you are putting your spin on something (which is what the media normally does) and representing it incorrectly. Your heading is absolute crap. The RBA are not saying F you to anyone – and neither are they saying that negative gearing should be abolished – they said they ” believe that there is a case for reviewing negative gearing, but not in isolation”. It is about looking at the whole situation (negative gearing, capital gains tax etc). A review does not mean anything will be changed – it just means that it will be looked at and analysed. Also, Abbott has said it will not be changed. A Labor Govt has traditionally spent the money that previous liberal Govts have saved. Jon – I prefer your articles that are about life skills, investment strategies, having a positive attitude and helping people with wealth creation – I am not interested in your political opinion or the rubbish you are now dishing up to us. That is not why I read your blogs.
Tom says
Ian,
Ever hear of GFC?
Wake up!!! Get Real!!!
Theo says
I’m in my late 20’s and it is my belief that every adult over the age of 40 against negative gearing is one of the following:
– a parent with children that cannot (in their opinion) get into the housing market in the inner suburbs.
– a renter who has never considered property ownership in their younger adult days and now realise they’re in trouble.
– looking for a blame game to help them sleep at night.
Please if young adults of all generations grew up and ‘found themselves’ sooner there would be no such ‘housing crisis’ and media bashing of negative gearing.
Wake up people, they saying ‘stay in school’ applies and so does ‘grow up.’
I’m no rich kid, or property tycoon but negative gearing is helping middle income earners try to get ahead. Scrapping it would result in Australia pushing for an upper and lower class .. no middle class. Wake up people!!!!
Sean Chew says
The principle of deducting legitimate expenses in the course of earning income is fundamental to taxation and should not be disrupted. The argument follows then why should capital gains realised through real estate be given special treatment, as happened in 1999? In the United States, capital gains tax can be deferred if the realised gain is redeployed to another real estate investment within a given period, which I think is a year. Also they can claim mortgage expenses on their PPRs against income. New Zealanders pay no stamp duty but then they have to pay GST on their transactions. So there are many options available that should be considered all together, not just focus on negative gearing as if that alone will resolve the housing affordability issue.
Macca says
I always find it amusing how the people who most passionately defend negative gearing are the same ones who complain the loudest that big government and subsidies to loss making enterprises are bad. Don’t interfere with the free market unless its to write off my losses against tax! Hilarious. Of course its a complete rort. And one side effect of the surge in prices driven by NG is that we now have to make serious provision to help our kids get on the otherwise out of reach ladder, so in reality a big chuck of the equity we’ve amassed is a wealth mirage.
Aussie tax says
Except it’s not a subsidy. It’s called a special name, and the investors go into the game expecting to make a loss (due to the rate of rent they can charge in the marketplace), but the principal of deducting costs of doing business are basic in terms of tax law. If anything is ‘subsidised’, it is rent.
Hugh says
Prior to 1985 you were only taxed on selling a property if it was not your permanent place of residence and you had held it for less than one year. The nett profit was added to your taxable income for that tax year. CGT was a Labor introduced tax in 1985, after they swore blind in 1982 they would never introduce it! Initially it was based on the selling price minus the original price of the property increased to accommodate inflation to the date of sale. This became cumbersome, so the Liberals said when they returned to government they would only assess CGT on short term speculators up to 5 years, anything held longer would be free of CGT. But when the Liberals got back in they only introduced the 50% concession on properties held more than 1 year. So, if held long enough, where inflation totals more than 50%, property owners will actually pay MORE in tax when selling than they would have under the original plan. Never trust a politician……..
Dymphna Bohalt hates negative gearing, spending $1 to get 40c refund in tax while waiting and hoping to get a capital gain in the end. Multiple negatively geared properties make day to day living hard, and further bank loans difficult. And does each year’s tax refund from negative gearing get added back on to the amount of tax payable when selling the property?
Glenda says
Where is there any proof that negative gearing is the cause of house price growth above inflation?
Rose says
Highly amusing, the naïve outlook of some. Voting for a party because of ONE policy you don’t agree on is so outrageous its funny. Then there is the similarly naïve that believe getting rid of negative gearing is helping people pay less rent, even funnier, I’m in stitches. Of course lets not forget the extraordinary naïve that believe removing negative gearing is going to fix the economy that the last government (Labor and Greens) did their best to trample where ever they could. In which fantasy lands are you living in. I want to relocate there.
Please can someone come up with a government that understands that if the real issue of tax reform (personal income tax) was looked at – there would be no need for these extra offshoots “like negative gearing” to even happen. At present Negative Gearing is just a form of business just like companies whose expenses come off their income before calculating tax. Oh and of course don’t forget that businesses actually carry over their losses. What is the difference between the investor utilizing “negative gearing” and the small business utilizing expenses to offset against profit? Other than the investor still pays CGT when they sell….
I know of several investors and they are investing for the future because they are working towards their retirement, within the law, and because they know they will not get the opportunity to reap the $$ from a pension that most enjoy now. Get over yourselves.
Bill says
The tax system in our beautiful country is complex and cumbersome and we as nation need to address this issue. It is difficult for Australia to compete in the international market place, and especially with Asian and other low labour cost countries. Jon is quite correct, negative gearing is a rort that allows higher income earners to reduce the tax we pay. Property investing should not be compared with a genuine profitable business, land and property ownership is not a productive venture. Building construction and maintenance are legitimate commercial enterprises which make a valid contribution to the national economy, mere ownership of rental property does not, especially when the sole purpose of that ownership is to reduce tax. The favourable tax treatment “investors” enjoy skews the economy and does indeed make it harder for those starting out and buying their first home to get onto the property ladder.
Singapore has a tax system that Australia should take guidance from.
What is the benefit to Australia if we overtax higher income earners only to allow them subsidies and concessions? All that is achieved is a cumbersome bureaucracy and unending work for accountants, it is a very wasteful system.
The Rudd/Gillard government was very wasteful and inefficient but increasing taxation is not a real solution to a budget deficit, we need to reduce costs and expenditure and increase efficiency, then we need to reduce taxes, especially income tax. The government should not bite the hand that feeds it.
the ram says
It’s all swings and roundabouts. Ever thought all this baloney and discussion is about diverting attention. The govt is slowing investment by having banks reign in their books and increasing the deposits needed by investors. The impacts of this is that Australian investors will be significantly slowed down and the pressure on the market place will diminish somewhat. This will in turn help the government in stabilising claimable losses and reduce the amount claimed as a loss as the deposit is larger, so interest repayments are smaller.
In my opinion, by smashing aussie investors with these changes the market will in turn become less hot, and our overseas investors will be flooding the aussie property market and going on the biggest buying spree ever, less competition, their greater buying power and the country gets sold off to foreigners.
What will then happen in the short term is that property prices will drop, as supply becomes larger and the aussie investor segment has been reduced. Foreigners cant live here, so all these properties will be up for rent, rents will diminish, yeilds will drop , investors will stop buying, developers will make less money (especially with a falling aussie dollar – building materials will increase comparatively reducing developer margins), developers will go into other non property related ventures, housing development will come to a crawl and then the merry go round will start again in 5- 10 years, there will be an even bigger housing shortage and house prices and rents will soar again. In the meantime, Australia, which really has nothing at the moment in terms of employment, manufacturing etc will have injected so much money from other nations into this flailing economy that it can keep maintaining some standards – property at the moment (and sadly our farms) seems to be Australia’s main export game.
jds686868 says
So are we going to remove negative gearing and capital gains tax concessions on shares as well? Only seems logical as the share market is over valued as well.
Graeme says
Very few investors are claiming negative gearing at the moment anyway because interest rates are very close to the rental yield. So I think you will find that the only difference will be less Aussies investing and more foreigners… because thanks to the Aussie dollar being at about 75c foreigners are getting a 25% discount by buying in Australia. Maybe the RBA could focus their attention on our dollar compared top the rest of the world.
Tom says
Graeme,
The RBA complains about the value of the AUD. It should be about $0.70USD
With all the major countries using QE to devalue their currencies, is what we need a good dose of QE or inflation of our own?
Andrew W says
Good article Jon,
I suspect the Treasury plan will be to allow the debate on negative gearing to flame up, allowing the Government of the day to ‘solve’ the issue by announcing no change to negative gearing BUT an end to the discount on capital gains tax.
Supporting arguments would be the ‘simplification’ of tax structures and an ‘equitable and fair’ treatment of gains from trading vs capital stock.
Will it result in investors exiting residential property markets? I think not. While investors may have to pay full rate capital gains, the opportunity will remain to ‘time shift’ the realisation of those gains from the high marginal tax years of your life to a post-retirement lower marginal tax period. So the benefit of residential property investment as a store of wealth will remain attractive to high income individuals planning for perhaps 30 years of post-wage and salary life.