Negative gearing just became an election headache for the Coalition, but they’ve only got themselves to blame.
Back in July last year I made the following call:
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 now, with Labor’s announcement that they’re taking negative gearing reform to the election, it’s head really is going to be on the chopping block. It’s shaping as one of the key points of policy difference between team red-tie and team blue-tie.
As I wrote back then, you could get a sense that the mood was shifting in Australia. More and more people were taking shots at negative gearing.
… like the boffins at that hot-bed of Militant Marxism, the RBA.
As I noted back then, the RBA’s critique of negative gearing was totally off then-PM’s Abbott’s hymn sheet:
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 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.
I might go buy a lotto ticket.
Anyway, the point was that negative gearing was becoming increasingly isolated. Very few economists were willing to stick their neck out for it, and elements of the popular press were becoming openly hostile. Think Waleed Aly’s viral rant on The Project.
And so this gave Labor the cover they needed to make negative gearing an election issue. Where the people lead, our brave leaders will follow.
Here’s the key excerpt from Bill Shorten’s speech to the NSW ALP conference (my emphasis):
…if Labor wins the election, from July next year negative gearing would only be available on newly-constructed homes.
The changes under a Shorten government would not affect the tax arrangements for investment properties purchased before July 2017.
Under costings released from the Parliamentary Budget Office, the measures could save the budget $32.1 billion over 10 years once they come into force.
“We’re doing this because 30 years ago, houses cost around 3.2 times average income — today it’s 6.5 times average income,” Mr Shorten said.
“Labor will help level the playing field for first home buyers competing with investors and we will put the great Australian dream back within the reach of the working and middle-class Australians who have been priced out of the housing market for too long…
A Labor Government would also reduce capital gains discounts from 50 per cent to 25 per cent
“It cannot be rationally argued anything else but with a capital gains tax subsidy of 50 per cent, that the whole system is accessibly distorted and overly generous in favour of income from capital instead of income from earnings,” Mr Shorten said…
We will grandfather existing arrangements for those properties so that investors who have invested under the current tax law will not be disadvantaged by the change and a prospective change,” he said…
“Mum and dad investors who have a house or apartment that is negatively geared right now will keep the deductibility, but after 1 July 2017, negative gearing can only be accessed for new houses and to improve the efficiency and fairness of our tax system.”
Yep, that’s the leader of a major political party telling you that he wants to make your house worth less. (= more affordable.)
And he’s trying to right the wrongs faced by our poor battlers at the hands of greedy investors.
Sell it like a working class hero, Shorty.
But he does have the opportunity to sell it all the way to the next election, thanks to
… the Coalition.
The Coalition have only got themselves to blame for the wedge they’ve just found themselves in.
It all started with Hockey’s farewell / F’you speech last year, where he said it was time to review negative gearing.
… negative gearing should be skewed towards new housing so that there is an incentive to add to the housing stock rather than an incentive to speculate on existing property and we should never ever forget small business.”
Labor’s gone, “Thanks J-Ho. That’s a great idea.” Now their policy is for negative gearing to be restricted to new housing.
But Labor knew they had the cover they needed when the Coalition admitted that negative gearing was unfair. Well, not exactly. But they said they were looking to target high-end investors, by either capping the number of properties that can be geared, or limiting the annual amount that can be deducted.
But once they conceded that negative gearing was being used disproportionately by the wealthiest segments of the Australian population, (which actually is what the data says), then it’s open season on negative gearing. Now we’re just arguing about how we fix it.
Labor just has the boldest plan on the table. And in an era of budget emergencies, $32 billion goes a long way.
This will be a headache for Turnbull, and there will be pressure to match Labor here.
But either way, for negative gearing as we know it, its days are numbered.
What do you think?
Joe says
Yes i agree …The generous concessions with neg gearing need to end .Aussies have had it too good with this gravy train .
Tax reform is needed asap….Australia and the world is headed for recession and even contraction .The divide between the rich and poor is ever increasing…. upper echelons of society need to pay for a more equitable and sustainable future .
Ps i own 4 properties
D C says
Hi Joe , your last name isn’t Hockey by any chance
sunitho says
Hi DC,
What Joe is saying, whether he is Hockey or Footy!, is right1 Many countries allow
negative gearing on the interest they pay for their own home. Do you think Australia will allow that, to make it affordable to first home buyers???
And what happens when less people enter the market, then interest rates go up when the
historical cycle turns? There won’t be any houses for the renters who somebody said
would now afford to buy their own home !!!
Sunitho
frans says
Hi Joe, for what it’s worth about “Aussies” having had it too good; what’s wrong with Australia having done all the right things cf to all the other countries now struggling? So we need to get punished for good past policies? Do you know that many Western countries allow not only negative gearing on investment properties but also on their PPOR? They do call it sometimes differently and process it through a changed tax level but it’s principally the same as our neg gearing. Perhaps we should ADD the PPOR to the list?
Stuart says
Sorry, I disagree for two main reasons: government can’t provide all/enough rental housing so the bulk of it has to be provided by the private sector (i.e. property investors), and the second point is that a rental property is just like any other business where costs in producing income are deductible.
The ‘gravy train’ we’ve been on also includes stamp duty – i.e. a massive tax on buying a property which is NOT the case in other countries.
Why aren’t corporates who use creative accounting to pay no tax (or very little) being targeted instead of ‘upper echelons of society’?
David Tadman says
It may well be that rich own more properties but they can only live in 1. The rich will still invest in the most advantageous way for themselves. If they choose to continue providing housing for the unimaginative or unfortunate renters, like myself, They will simply choose to increase rents to a level that ensures there is no negative return. Negative gearing is effectively a tax subsidy that currently assists renters to lowers rents by making the investment attractive to those with capital. The poorest and neediest renters have to rent old rundown properties because a new property will rent way beyond their means. This policy is short-sighted because it will hit the needy more than the average to high income earner. It will not collect more net because the capital will just move to a new more lucrative tax sheltered market.
selva says
Negating Negative Gearing -> more tax and less individual savings and more dependence on age pension in years to come. Can we afford? And ‘Tax reform’ in the past was mostly bullshit and past time playground for politicians. The starting point is to truly control heavy wastage in public spending on health, education, refugee settlement, multicultural myths, political systems including the Local Government, etc. before expecting the general public to support any meaningless move.
Tim says
we said
Tim says
By the same token, what is Shorty going to do about stamp duty and transfer fee?
Tom says
That’s all State responsibility.
Better to get a curb on developers’ profits. At least those charges fund local Government.
Exorbitant profits don’t!!!
Rudolf says
Negative gearing???? and how is altering this going to drive the price of housing down?
If it did, would all of us not have a decrease in the value of our homes???? IE. would you & I and the normal home owner not end up loosing money, while the drive to positive gearing would increase rents????
I have never been in favour of any project which looses money while hoping for future capital gains.
As for the tax deductions it offers…why not…..it helps keep rents affordable…and since when did it become socially unacceptable to make a loss…there are many mum & dad businesses out there struggling to sometimes make a profit …are we going to attack them too for making a loss???
To me it sounds like just another jealous attack on those who are actually making Australia wealthier & greater…Lets stick the boots into the rich (you know them well as they are the ones who take all the risks and provide you with your jobs).
There are many simple ways to reduce the deficit without increasing taxes, but our pollies are too dumb to act properly as they can only see the next election.
Regards from an angry Rudolf
Jo says
Well considering most of the boots that do any damage are 99% stuck into the lower socio-economic class… I would think it high time the rich had to make some kind of sacrifice.
However, this doesn’t stick the boots into the rich. It sticks them into Mum and Dad investors.
Rudolf says
Too true…and the biggest employers combined are Australia’s small businesses….The Mums & Dads Businesses….In my post above I should have said sticking the boots into the “so called Rich”
Leo says
Mr. Shorten, how many investment properties do you own?
Changing negative gearing and grandfathering the change will only alter the future purchases of property. Everything in place now stays the same. Next year when I want to buy my first investment property, I will need to decide if I can afford to pay a loan at 95% LVR by charging excessive rent, or should I pay a larger deposit so the market rent covers the payment. I recently had this discussion with a banker. He would not allow the rent (only) to cover the payments. He explained (if something goes wrong with the tenant…) that I would need to have an alternative way to service the loan, i.e more income. I thought I might service the loan through tax rebates (negative gearing). My boss won’t give me a raise. I think I can’t afford to buy my first investment property. Some poor bugger is going to be living on the street because I now can’t afford to give him a place to live. Good on you Bill!
Brenton Carbins says
Not at all.
Because you can no longer get the loan, there are fewer buyers in the market. Fewer buyers means less cash, so the sale prices will be lower than they otherwise would. This is good news for many of the renters, as they’ll now be able to afford a property that would otherwise have been pushed out of their reach by your artificially increased spending power, based on the effect that negative gearing created.
It is not the renter that is the poor bugger, but the investor. But the investor was always living in an artificial reality.
It’s time we call came back down to earth, and housing prices with us.
Rudolf says
Dream on…there will never be less buyers (foreigners & pop growth), & prices will not drop or slow in growth, no matter what they do to -ve G. Our Aust. is a great place to invest in, _ve G or not.
Renters will still need to rent, and the lower socio economic people will always be that, so as rents go up = more govt rent assistance.
Originally negative gearing (& 50% capital gains discount) was instigated to bring investors into the housing rental markets (so the Govt, did not have to)….it was successful and many families had affordable rent which the Govt did not have to put money up for.
Now its “Thank you but we do not need you any more…so p*ss off investor”
I don’t -ve G, but I thank all those who take the risks and provide housing for the people who are not buyers or can not be buyers.
This attack on -ve G is just a popularity exercise to get the vote of those who can never or will never invest in anything.
It is just a play on the popular “Kick the wealthy” platform.
And NO, I am not a wealthy person, I just work hard, and do not -ve G anything.
I am just an ordinary everyday person sick an tired of the stupid child’s play in Canberra, and treated like an idiot by the pollies..
Regards ..an even angrier Rudolf
Susan says
Exactly!!
Don says
Rudolf states “Negative gearing???? and how is altering this going to drive the price of housing down?”
The answer to that is the higher annual cost factor to the purchaser will drive some to sell & others will not enter the market because it will not be viable for them. More houses on the market (supply) & less demand has always equaled lower prices. Yes ordinarily owned homes may get caught up a bit here as well, they are in the same market.
Tom says
The main effect will be felt in the more affluent suburbs, which have been the powerhouse for the urban price explosion.
Those wanting to take advantage of negative gearing to rob their fellow Australians of Government revenue can still do so, but not in the Status Symbol suburbs; unless it’s by infill.
It will bring a bit more stability to those better off communities.
Future purchases in those areas will continue, but for owner occupation, rather than short term, speculative, rental purposes. Prices won’t drop unless the whole nation goes belly up; they’ll just stagnate, because many people will still want to live in the more desirable suburbs, or convenient areas, while others will still have to live somewhere, and still have to pay to do so.
Maybe some rationality will be brought to the housing market, with prices rising with inflation?
susan says
Tom you sound like someone who claims their car and coffee on tax thus robbing fellow Australians of gov revenue. Correct me if wrong. Be honest.
Jo says
So essentially you are saying that the real first home buyers who are honestly struggling to buy a house will still be ‘robbed’ by investors, and first home buyers who are already quite wealthy and looking to buy in fancy suburbs will get a benefit?
If that is the scenario, I can’t see why we would want to accept all the negatives that will come with cutting negative gearing.
Steve says
If property values do take a dive under Labor’s proposal I would be worried about the stability of the property market. Property purchases have inbuilt equity arising from a 20% deposit (typically) from vendor funds. However, for new purchases this equity could be eroded leading to negative equity. If prices drop are the banks going to ask owners for margin calls to top up their equity like they do for loans on share portfolios? If they do, what will be the effect on property owners when many cannot comply? We have seen this happen to farmers who have been pursued by their banks leading to bankruptcy, suicides, depression and other negative outcomes. Is this going to be the norm now for residential property owners under the new Labor arrangements?
Dodge the System. says
Perhaps it’s the super industry that’s pushing the proposal. After all their returns are -ve at the moment. Some yrs ago I had a choice: stick $3,000pa into super or buy a $300k prop & -ve gear to the same amount. In super 3,000pa at 10% over 10 yrs would have grown to $55,600 while the prop doubled & is now +ve and contributing to my retirement income. And I’m saving the gov money – reduced gov pension.
Tom says
It seems that the probable outcome is a slower rise in prices, not a lowering of values.
With the impending worldwide recession, investors who may otherwise have committed to out-of-pocket supplementary payments, will be thanking their lucky stars.
If the proverbial doesn’t hit the fan as badly as predicted, and The Bloke’s life mooches on, speculating on rises in property values will certainly lose its lustre, helping keep prices down, allowing more young folk to move out of home.
Keating’s approach put a wrecking ball through the construction industry as well as the speculative gambling market. Shorten’s will only hit the latter.
From the ‘ethics’ side, how can the wealthy gamblers expect the pay-as-you-earn families to subsidise their distortion (extortion?) of the residential market, to the detriment of young families?
Do we really need to follow the Yanks into a world of Wealthy & Poor, with no Middle Class, where everybody feels obliged to arm himself to the teeth, to protect his possessions?
What sort of country do we really want?
Now is the time to decide and plan ahead, to advance Australia FAIR – (Fair Dinkum!!!)
XXXX says
How dare the hard working Australian save their hard earn dollars to purchase an investment property, only to be penalised for doing so. Aside from the high end investors, most investors are hard working mum’s and dad’s. Might as well move to Mt Druitt and have 15 kids, you will receive more benefits that way than working your butt off for it!
Want to tackle the house prices in future, how about cutting immigration. After all, it is supply – demand which dictates this.. Also, how about governments not spending money they don’t have, simple!
Labor want to create another generation of people who rely solely on the pension once retired..
Charles says
Support Labor if Coalition does not have a better match. Negative gearing has priced out so many people out of the home dream that they have to rely on government housing. NG & CGT concessions have been costing government $13B a year. Close these holes now to fix budget & cut overall tax for a fair system
sunitho says
Hi Charles,
Where Is the government housing so many people have to rely on ???!!!
sunitho says
Hi Charles, It’s Sunitho again! No, negative gearing hasn’t priced out people from their dream home! I have explained in simple English to so many people to buy their own home, but they just won’t understand or don’t want to! they earn enough! And when I talk about investing to home owners, 99 per cent say, they want to pay off their home first (which is next 20 years!). So, no,
negative gearing hasn’t priced out any people, in fact, the risk takers provide rental housing to those who do not want or can’t buy their own homes. Tell me, how much housing does the State or Federal government provide? They are knocking down old aged homes, old commission housing and selling them off to developers, and making a tidy sum off these very developments in stamp duties as well ! hear hear
Sunitho
Need a change says
The suggestion from the minister is taking out Negative Gearing and leave the investor nothing. As if our cashcow state government got any left for the real low income earner from Centrelink after their enormous high pay minister role. Or just pursue the more expats and become big part of other countries growth while Australia just follow (or copycat). Yes we have expensive house price, how about state-government-run-public transport, do-nothing-coucil rates and water bills, rocket-high electricity bill, empty-nutrients-commercialised basic food (rather feed the supply-oversea cattle than local hungry majority), monopolised-big-dog pharmaceutical items. This is just one of the diversion game where they can play tough and just talk big. We pay, they talk.
AndyK says
Removing negative gearing is just another revenue grab for the government and the end of one of the last wealth creation tools for Australians. It had nothing to do with making houses more affordable. Low interest rates and population have a much bigger impact on propert prices. This will not only hurt property investors but also the millions more home owners whose house is their primary place of residence. Australians’ wealth is so tied to property values that any decrease in their value with reduce spending and economic growth.
Julie says
Doesn’t this mean that investors now have to be more strategic regarding the properties they buy?? I have always thought negative gearing, i.e. paying money out of my pocket each week, is a strategy to avoid. I want to add money to my week’s income, not take it away… Maybe the people at the big end of town can juggle their tax figures by owning properties that are only slightly negatively geared so that their tax benefits make the deal viable. There are still positively geared property deals out there. Maybe not in our own areas but they’re still there and much easier than having to pay money out each week. Am I being naive here??
Susan says
I thought the gov wanted to give personal tax breaks. That is what neg gearing is . Not all people with invest prop actually have capital.!!!!!!!!!!
What about those who claim their coffee, holidays, car, mortgage before tax. As fatcat pollies and those with wellpaid jobs with perks do!! Why??? They are the ones who can afford ir. Rest of country pays for that! Young ones dont get same benefits atm. Have to wk for it to get a start like we did. We all make our investment strategies that suit us. Maybe means test negative gearing. Or wakeup Australia!!!!! actually ask big companies very nicely could they please pay some tax for ripping the guts out of the country. And while we are at it give farmers fuel subsidies like Gina gets. All no brainers to me. I should have been a policy maker!! Btw bought investment prop very cheap renovated to be nice for renters these houses were not deemed good enough for 1st home owners looking to live in dream home for 1st home. Also I make personal living sacrifices and rent a small apartment and contribute to my super now, neg gear so can get tax back to save for retirement so I can save the gov one more pension later. Question now why bother!!!!!
Rudolf says
Talk about Tax breaks…..there are lots (million??) of employees out there who are in tax brackets well below 15%…some on 0%, as their incomes are low or below the tax free threshold.
So why are these people paying 15% tax on their Super G Contribution and super earnings for the privilege of locking up the money up for decades ….I thought super was to be for retirement savings at preferential tax rates ….not so the Govt. could rip these people off.
SO, instead of attacking investors/risk takers supplying subsidized rents through -ve G, lets see some honesty from the Govt. & the ATO and stop stealing from the super contributions.
These discussions/issues are not singular. They all blend in together and have ripple effects on each other, a change in one can cause totally unexpected economical consequences elsewhere,
and unfortunately I believe that half the time our Pollies are not smart enough to understand the implications of what they propose.
You’re right….Why bother, …let’s all just get on the gravy train too, and see how long Australia then lasts.
David Tadman says
Just a thought on this issue.
The issues we face is that lower income earners will not have enough in their super when they retire. to fix the inequity you raised the ATO could refund, to their account, on a sliding scale the tax paid by members of a super fund based upon income so that the tax would more closely reflect say 50% of the tax they would have paid on earnings. this would take maximum tax from high income earners who naturally will have enough to live on in retirement and give maximum compounding growth to low income earners to better provide for their future.
Rudolf says
Hi David.
Very much along the lines of my thoughts….a superannuation tax equal to half the personal tax bracket, and retain a tiered co-contribution for the lower tax brackets…then the more you earn the more you pay…and who cares if someone puts in more than someone else…they will pay more tax to put it in & on earnings, and more gst tax when they spend it in retirement.
While on this subject…add one investment rule = super must invest 20% in Australian infrastructure, not to be drawn back as a lump sum. Then instead of the govt. borrowing from overseas to build infrastructure they have almost $1/4 trillion available at low interest rate (say 4% tax free for Super funds) and the money stays in Aust…..but it must be invested in income generating infrastructure eg toll roads, water supply & dams, ports, clean energy- hydro, wave, solar, wind, nuclear?? etc etc .
Then if the Super Rich use superann as a wealth creating vehicle, who cares, as 20% will be invested in Australia’s future for everybody.
Michelle says
My question is, will they be applying this regime to ALL investments (I.e. shares). And will the quarantined losses be able to be offset against other investment gains (like shares or interest on govt Bonds, term deposit, etc.). If not, then I see a huge shift in where people will be investing their money. Might be worthwhile looking at purchasing some blue chip shares before this becomes legislation if they are going to be bias towards housing investments…
Steve says
There is enormous, almost tragic irony here. Just when the resource boom has collapsed, and the economy is pinning its hopes on the property market to keep things afloat, politicians yet again conspire to torpedo economic growth. When the recession hits, they will be busy blaming each other while middle and low income earners go under. How much more expensive are new dwellings than existing ones. In a nutshell the price hike will be skewed, and the economy and you and I screwed. And yet the huge banks and financial corporations that caused this mess seven or so years ago are making billions and paying back very little into our economy. Isn’t it their turn to bale us out this time? Funny, politicians have grown quite silent about that aspect of the debt mix.