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.
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?