Negative Gearing reform back on the table

 
  RTT_Rules Oliver Bullied, CME

Location: Dubai UAE
I see the govt has given up on GST changes and now looking at Negative Gearing, again!

My understanding Negative Gearing on the property market is about $3B cost to the govt of which 10% is only used on new property. We have a strong culture to buy investment property with the intent it looses money, this is foreign to the much of the world.

My thoughts,
- I'd put an immediate band on Negative gearing on new loans for existing properties
- Costs can however be deferred until the property makes a profit
- Existing loans remain protected and can be used for Negative gearing for up to 15 years.
- New properties are unaffected for the first 15 years or until the property is sold.
- CGT remains, paying 50% of the profit at your marginal rate is not a bad deal. Does not apply to owner occupier.
- If the property is refurbished/redeveloped to the value exceeding 50% of its previous price, it can attract Negative gearing for 10yrs.

I don't believe we will see a significant shift in rents if at all. People will just move and existing rents are protected as no changes to those properties.

It will have a slight impact only on reducing house prices as not enough properties are negatively geared and none of these are affected for 15 years by which time they should be profitable.
This should peg Negative Gearing costs to govt and steadily reduce over coming years and eliminate what is effectively subsidised middle housing.

Oh and I don't buy this crap about bracket creep eating into incomes and something must be done with GST or other. Why not simply raise the brackets? Link them to CPI?

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  Aaron The Ghost of George Stephenson

Location: University of Adelaide SA
Forget the why not, why would you link income brackets to CPI?! - that's crazy!
  RTT_Rules Oliver Bullied, CME

Location: Dubai UAE
Let's say you a fixed income worker who stays at same pay grade and hours and never get promoted or does OT.

With CPI and fixed brackets your tax rates will increase over time. The tax brackets should be indexed to CPI such that there are no changes in payable tax with time.
  Bogong Chief Commissioner

Location: Essendon Aerodrome circa 1980
Exactly. Income tax bracket creep is a way of increasing tax revenue when the government is too afraid of scare campaigns to more obviously raise taxes, or if they have the guts to try and change the tax laws, those tax changes are blocked by a hostile senate.

In recent years BOTH parties have been blocked from changing taxes by a hostile senate, but bracket creep guarantees a slight increase in the governments tax take every year if they can't get it any other way. It also gives them a chance to announce "income tax cuts" in pre-election budgets, even if those cuts just return the percentage of peoples wages that the government takes back to the level it was 3 years earlier.
  woodford Chief Commissioner

Forget the why not, why would you link income brackets to CPI?! - that's crazy!
Aaron

Why?

You have not given any arguments to back what is just an opinion, this makes it impossible to judge if the opinion has any merit.

woodford
  don_dunstan Dr Beeching

Location: Adelaide proud
Hello Shane, thanks for an interesting post. I'm in two minds about negative gearing; on the one hand it probably does have a small impact on producing more rental property where it's needed. On the other hand, I think that Labor and the Greens are probably right that it's keeping cheaper entry point property too expensive for new entrants. I think Shorten has read the mood of the electorate correctly here that now is the time to consider the wind-back of some of the entitlements; rental growth is at record lows presently so a policy change could help rental markets like Perth and Darwin where there's presently an oversupply of rental property.

The thing that I think we need to most discourage is the gambling on capital gains - hence I think all capital gains need some kind of tax, even outside the present seven year rule. We need to stop that 'strike it rich' mentality and divert investment to actual, productive enterprise rather than encourage gambling on capital gains with land/property.
  Groundrelay Chief Commissioner

Location: Surrounded by Trolls!
The government will find it increasingly difficult to raise revenue and the cost of providing services will continue to increase.

In that context providing government support to someone in a financial position to use negative gearing is just crazy. Someone has to make up that forgone revenue Shocked
  Donald Chief Commissioner

Location: Donald. Duck country.
My job requires me to live in business supplied housing, and pay rent.  

I am not "rich", but am purchasing a house (market value of $200,000 - cheap country housing!!) and using negative gearing to reduce my tax.    

Choice of paying tax on money sitting in a bank account for when I finish work so I can live somewhere
OR
purchase and supply a house for someone else to rent and reduce my tax.  

No choice really!

Negative gearing restrictions should come in on second and subsequent properties.
  qredge Deputy Commissioner

Location: Marsden Qld
With bracket creep it means that you pay rise that goes into the next bracket is all that is taxed at the higher rate-all the rest is the same. So if you are on 32.5% -and your $1000 rise puts you $200 into the next bracket of over $80000 then you pay 37% on that extra $200 instead of 32.5% or $9 extra increase over your last tax rate
If they upped the GST to 15% instead then you would have paid $50 extra  (5% Of $1000) No wonder the Government wants the increase
  qredge Deputy Commissioner

Location: Marsden Qld
With bracket creep it means that you pay rise that goes into the next bracket is all that is taxed at the higher rate-all the rest is the same. So if you are on 32.5% -and your $1000 rise puts you $200 into the next bracket of over $80000 then you pay 37% on that extra $200 instead of 32.5% or $9 extra increase over your last tax rate
If they upped the GST to 15% instead then you would have paid $50 extra  (5% Of $1000) No wonder the Government wants the increase
  don_dunstan Dr Beeching

Location: Adelaide proud
Negative gearing restrictions should come in on second and subsequent properties.
Donald
There was a lot of trotting out of the 'low income earners, teachers and nurses'  line this week but the reality is that many very wealthy people use multiple properties to write their incomes down to nothing. As you say, the solution would be to restrict this to a maximum of two properties.

I am not "rich", but am purchasing a house (market value of $200,000 - cheap country housing!!) and using negative gearing to reduce my tax.
Donald
Two hundred grand would buy you a mansion with a swimming pool in a lot of those Mallee towns wouldn't it?
  Donald Chief Commissioner

Location: Donald. Duck country.
Two hundred grand would buy you a mansion with a swimming pool in a lot of those Mallee towns wouldn't it?
don_dunstan
Could buy a couple of towns in fact.
  RTT_Rules Oliver Bullied, CME

Location: Dubai UAE
Donald,  
The house you bought to rent was pre-existing. Someone was either going to buy to live or buy to rent out. It has not increased stock levels from previous ownership to yours. Therefore you having negative geared it is not increasing the supply of properties.

You say max of 1 houses should negative geares because it suits you. If you couldn't negative gear then you may not have bought thus reducing you from the market which has a negative impact on price. Perhaps if negative gearing was stopped prices would drop to be more affordable to some buys forced to rent.

After all if $2B of govt money is removed , then either rents goes go up. Unlikely as renters generally get best they can afford.  Or properties prices reduced as this will impact of Rate of Return.

Money may go towards shares and other non property investments.

(For record I am doing same and similar valued property in Brisbane).
  Groundrelay Chief Commissioner

Location: Surrounded by Trolls!
Negative gearing restrictions should come in on second and subsequent properties.
There was a lot of trotting out of the 'low income earners, teachers and nurses'  line this week but the reality is that many very wealthy people use multiple properties to write their incomes down to nothing...
don_dunstan
Mostly benefits the top 10% of income earners. For every tax payer that receives this benefit ten don't.
The governments role is to provide services (including national security!!!) and in our 'fair go' society, look after the less well off. That costs money. It's not there to fund the relatively advantaged so they become wealthier, especially when revenues aren't what they used to be.
  don_dunstan Dr Beeching

Location: Adelaide proud
It's not there to fund the relatively advantaged so they become wealthier, especially when revenues aren't what they used to be.
Groundrelay
Malcolm was looking very much like the Member for Goldman Sachs this week; protecting the interests of the very wealthy at the expense of everyone else.
  donttellmywife Chief Commissioner

Location: Antofagasta
With bracket creep it means that you pay rise that goes into the next bracket is all that is taxed at the higher rate-all the rest is the same. So if you are on 32.5% -and your $1000 rise puts you $200 into the next bracket of over $80000 then you pay 37% on that extra $200 instead of 32.5% or $9 extra increase over your last tax rate
If they upped the GST to 15% instead then you would have paid $50 extra  (5% Of $1000) No wonder the Government wants the increase
qredge
You've looked at the additional revenue to the taxman from the $200 that is over the margin before income tax, and compared that to the GST take from $1000 after income tax.  That apple is not an orange.
  RTT_Rules Oliver Bullied, CME

Location: Dubai UAE
With bracket creep it means that you pay rise that goes into the next bracket is all that is taxed at the higher rate-all the rest is the same. So if you are on 32.5% -and your $1000 rise puts you $200 into the next bracket of over $80000 then you pay 37% on that extra $200 instead of 32.5% or $9 extra increase over your last tax rate
If they upped the GST to 15% instead then you would have paid $50 extra  (5% Of $1000) No wonder the Government wants the increase
qredge
Yes but.....
1) They did say increase GST as a means to reduce income and corporate tax
2) They would need to fund increases in govt welfare to off-set the increase
3) overall the Fed govt will need more money over time. Even if the budget was balanced today and they made no new taxes or changes, overtime the feds would fall into deficit as the welfare/health bill continues to rise. Currently nearly 20% of revenue, 30 years ago it was 10%.

Whether we like it or not, based on the current budget, we are not paying enough tax or at least the current system isn't sustainable. Reducing Negative Gearing to new properties which aids the increase of supply and ultimately has a huge impact on housing costs, both rental and occupiers would save the Govt up to $2B a year eventually and I only propose this be done but preventing new loans being negative geared not existing but this grandfather clause would expire by 2030 or earlier if the loan was cancelled/house sold.
  2353 Chief Train Controller

Location: Brisvegas
The Government's argument that this proposal would affect 'mums and dads' is also a bit disingenuous.  The claim is that may with a taxable income of around $80,000 would be affected.  Taxable income is the income AFTER all deductions (such as negative gearing) have been taken from actual income.
  RTT_Rules Oliver Bullied, CME

Location: Dubai UAE
The Government's argument that this proposal would affect 'mums and dads' is also a bit disingenuous.  The claim is that may with a taxable income of around $80,000 would be affected.  Taxable income is the income AFTER all deductions (such as negative gearing) have been taken from actual income.
2353
Agree
Current income tax brackets

18k to 32k -> 19c
32k to 80k -> 32.5c
80k to 180k -> 37c
>180k is 42c

Negative gearing obviously is more beneficial to the higher income earners as the benefit is greater and a property of same price and rent for a person in 32.5c bracket may not be viable compared to someone paying 42c

However I would have also thought the higher bracket earners are those who can most afford to carry the cost of any changes to Negative Gearing and that the typical govt tag of "Mum's and Dad's" reference doesn't really apply to those on 37c and above tax brackets (especially if there are two incomes in that bracket) as 2353 rightly pointed out, its after all deductions, not starting income.

As I said before, a phased shutdown of negative gearing to existing property needs to happen and the market will absorb without a crash.
  donttellmywife Chief Commissioner

Location: Antofagasta
My job requires me to live in business supplied housing, and pay rent.  

I am not "rich", but am purchasing a house (market value of $200,000 - cheap country housing!!) and using negative gearing to reduce my tax.    

Choice of paying tax on money sitting in a bank account for when I finish work so I can live somewhere
OR
purchase and supply a house for someone else to rent and reduce my tax.  

No choice really!
Donald


Without want to pick on you specifically... there are plenty of other choices.  One of the latent issues we have as a country is the amount of our capital tied up in real estate, rather than other more productive forms of investment.

Remember this every time some Australian business or asset gets sold off to international buyers - the fundamental reason it is being sold to someone overseas is that people here, collectively, aren't willing to buy them - those with any spare capital have instead sunk it into buying houses.


Negative gearing restrictions should come in on second and subsequent properties.
So we all rent our home so we can still buy an investment property?  That isn't going to help.

An investment decision should not be primarily determined by the tax implications the specific investment has on other earnings, but that is pretty much what is happening at wide scale in Australia today.  

If I was glorious leader I'd be quarantining losses from capital investments, such that they are treated separately from PAYG style income.  I'd also consider ditching the 50% CGT discount and moving back to indexation.
  don_dunstan Dr Beeching

Location: Adelaide proud
... those with any spare capital have instead sunk it into buying houses.
donttellmywife
This is precisely my problem with the current tax arrangements, that it promotes speculation in real-estate at the expense of nearly every other productive activity - particularly business investment. Negative gearing actually wasn't used to a significant extent until generous CGT discounts introduced by Howard got the smart money rushing into property - not because of the profits to be made from renting houses out but because capital gains get very favourable tax treatment. Even then you could get around that by moving into the property for six months prior to selling and avoid CGT altogether.
  RTT_Rules Oliver Bullied, CME

Location: Dubai UAE
Australian housing prices were in a slump during the first half the of 90's, Sydney being the longest after the '89 crash not returning to positive terrain until around 94 to 96 depending on where you lived. Prices didn't increase a great deal until around 2002 when things started to move. In '94 I tried to get my first loan, I earned more than the cost pa of the house, but my deposit was just 20%, bank talked me out of getting extra finance as not recommened due to more price increase rates exposing both parties should there be a default. They didn't want to add my GF of 4 years income as a Teacher as part of the deal. I was told 1 Mortgage funded by 1 income. Parents loaned me the extra to cover fees and bought anyway. Interest rate 10.5%.

Getting a loan in '98 to buy 4ac block and that was a challenge, both my wife and I earned 250% of the property price, we had 20% and wanted to use finance in above house to cover the fees and charges, no, price had gone down wouldn't give mortgage insurance on rural block. I sold my car to buy it.

4 years later to buy house in Brisbane, they through money at us, no problem using two incomes. 4 years later than that I had friends on 150k combined being offered the 750k in finance.

I doubt very much it was Howard, rather changing in banking practices making money easier to get but also easy to pull money back out and buy again or finance an upgrade, they are more flexible and lower interest rates.

Most people I think buy investment houses to keep for long term and if smart sell them at a time of low income. Like retired to minimise CGT. As you said many move in and solve that problem. I know more than a few who bought their "costly dream" home, but rented out, living in cheaper accommodation, upgraded the house along the way under "repairs" and negative gearing to fund it all. 10years later when the loan is reduced and they can afford it, they move in. Should this be allowed? I think not.

Agree on that the very high housing prices is sucking money out of the economy, money we basically do not get back until we die for many of us.
  donttellmywife Chief Commissioner

Location: Antofagasta
...Even then you could get around that by moving into the property for six months prior to selling and avoid CGT altogether.
don_dunstan
Legally I don't think that is right - the general principle is that making a property that you've been earning income from your main residence triggers a capital gains event at the time that you move in (or perhaps when the house is eventually sold, CGT is assessable on the gain from initial purchase through to an estimate of market value at the time you eventually move in).
  apw5910 Chief Commissioner

Location: Location: Location.
...Even then you could get around that by moving into the property for six months prior to selling and avoid CGT altogether.
Legally I don't think that is right - the general principle is that making a property that you've been earning income from your main residence triggers a capital gains event at the time that you move in (or perhaps when the house is eventually sold, CGT is assessable on the gain from initial purchase through to an estimate of market value at the time you eventually move in).
donttellmywife
There was a bit on the news last night that just letting a room in your house AirBnB style would have the Tax Office looking into your affairs, with CGT events being triggered.

Incidentally, if you were eg a professional model maker working from home, would this also trigger a CGT event when you sold the residence?
  donttellmywife Chief Commissioner

Location: Antofagasta
Incidentally, if you were eg a professional model maker working from home, would this also trigger a CGT event when you sold the residence?
apw5910
I am not a tax person, but potentially, yes, if the area was exclusively dedicated to that professional activity and wasn't readily adaptable for other private uses - the same criteria that would allow you to claim interest on a loan for the effective purchase of that area.

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