tag:blogger.com,1999:blog-4815867514277794362.post6052666767957484733..comments2024-03-08T06:18:28.125+11:00Comments on Bronte Capital: A comment on negative gearing in the Australian property marketJohn Hemptonhttp://www.blogger.com/profile/03766274392122783128noreply@blogger.comBlogger20125tag:blogger.com,1999:blog-4815867514277794362.post-29479995414755200112018-07-16T22:17:43.438+10:002018-07-16T22:17:43.438+10:00Isnt the whole scheme with negative gearing the fa...Isnt the whole scheme with negative gearing the fact that the depreciation is accelerated resulting in a tax loss, despite being cashflow positive with the tax refund. As the depreciation tax benefits reduces over time, you then buy more properties to keep the depreciation tax benefits rolling. Rinse and repeat to build an empire of properties booking tax losses with positive cashflow. Its the great australian ponzi scheme.<br /><br />And finally house prices are falling!!!Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-73821003338227025062016-04-27T10:53:18.527+10:002016-04-27T10:53:18.527+10:00Hello John,
I don't think there is a problem ...Hello John,<br /><br />I don't think there is a problem with negative gearing per se. Deducting legitimate business expenses (including interest expense) from business income is valid. Also, not discriminating against income from various sources is valid.<br /><br />Whereas this is permitted for property investments - even a single investment - this isn't permitted for people who run small businesses in addition to their normal jobs. These losses are quarantined till certain thresholds are met.<br /><br />Such deductions for low volume transactions, irrespective of the capital at risk isn't permitted for investments in the stock market. These people are classified as Share Investors and get the 50% capital gains discount for long term holdings. When they use their quarantined losses sometime in the future to reduce their long term capital gains, they are only allowed to use half those losses if they utilize the 50% discount.<br /><br />If one has high enough number of transactions in the stock market, they can get classified as a share trader. In this case, they will be able to claim their share trading losses immediately - subject to thresholds applicable to those earning a wage _and_ running a small business - but they are not allowed to get the long term capital gains discount.<br /><br />So, here's my point -<br /><br />By being able to deduct current losses - including from depreciation that reduces the cost base - at the marginal tax rate; and by being taxed on the capital gains at the long term discount capital gains tax rate, the declared loss to reduce tax is at least twice as much as the declared gains that are taxed when the property is sold.<br /><br />This is how it becomes a tax concession. Property investors get to have their cake and eat it too.<br /><br />Regards,<br />NeerajMarshttps://www.blogger.com/profile/14606149803462521899noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-40998481240111133032016-03-10T15:00:00.279+11:002016-03-10T15:00:00.279+11:00Here's one inconsistency in the negative geari...Here's one inconsistency in the negative gearing argument I have never understood: If I start a real business - the type of risk taking activity that this country needs - and my company loses $100k in its first year of operation, then I cannot offset this loss against my wage income.<br /><br />If I buy a property and lose $100k in the first year following the purchase, then I can offset this loss against my wage income.<br /><br />Thoughts?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-67507416164583768222016-03-10T10:36:23.081+11:002016-03-10T10:36:23.081+11:00If you want to combine income from wages and incom...If you want to combine income from wages and income from capital, you should also include the profit you make when you sell the property with your wages for that year.<br /><br />Otherwise, if the profit from capital is compartmentalized from wages then so should the cost of holding that capital position.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-4363017378148881142016-03-09T09:50:46.281+11:002016-03-09T09:50:46.281+11:00Oh John how silly of you. EVERYONE knows that prop...Oh John how silly of you. EVERYONE knows that property prices ALWAYS go UP, therefore any losses you make on your interest payments and other expenses against your rent will be made up with the capital gain you make on the property. The ability to match these losses against other income, including your salary, is just cream on the cake. Hmm, I wonder what might happen if interest rates rose faster than rent (and thus increased losses) and property values FELL? Unthinkable of course, right?Rick Steelehttps://www.blogger.com/profile/00154057353573147872noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-5613107003352300772016-03-08T23:55:56.285+11:002016-03-08T23:55:56.285+11:00John, a few points/questions:
What AT thinks is i...John, a few points/questions:<br /><br />What AT thinks is irrelevant, as it's a political decision, not factual.<br /><br />NG could be ok, if you can deduce ANY costs (yes, I mean any. For me to be able to do my job, I need food, I need housing, to function reasonably mentally I need my loving family etc..) from your income. <br /><br />If you say that mortgage interest is deductible, but (say) paying for upskilling course/etc. isn't, then there's clearly a tax incentive to do something but not something else. Whether you call it tax concession technically doesn't matter - from practical perspective you have different treatment of costs and incomes. Either you quarantine, or you don't.<br /><br />In your example, yes, landlord is out of pocket now. But surely, he has carried tax loss that he can offset against income from the property going forwards? If that's the case, well, what's the problem? <br /><br />If it's not the case, and loss cannot be offset, that means your business risks increased - but it doesn't matter whether the reason for your asset underperforming is that a tenant trashed the house, or that you can rent it only for 600 when your costs are 700. Ultimately, you'd need to adjust the rent for the risk. Right now, there's little (apparent) incentive to adjust the rent for the risk, because if you expect that the main income will be from the leveraged value of your house, you may as well keep it unrented and avoid the hassle, while deducting the interest from your main income.<br /><br />Or you can establish an LTD, and have the tax loss carry-over, problem solved.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-50766111097565419232016-03-08T22:10:26.744+11:002016-03-08T22:10:26.744+11:00Labor will grandfather existing negative gearing o...Labor will grandfather existing negative gearing on established residential property for ten years; post July 1 2017 negative gearing will not be applicable to established residential properties, rather restricted to new builds.<br /><br />Indeed, Labor's policy perpetuates the negative gearing tradition so beloved by Australian property investors - restricted to new builds.<br /><br />Much argument surrounds the question whether or not excising the established residential market from NG investors will tip a bubbly property market into decline - 93% of property investment is established residential and 2 of every 3 investor mortgages are interest only.<br /><br />A real and present danger.3d1khttps://www.blogger.com/profile/03146341906389811250noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-84044215712526394532016-03-08T21:06:45.965+11:002016-03-08T21:06:45.965+11:00Your reasonaing would have been far more cogent wi...Your reasonaing would have been far more cogent without the analogy of two businesses. Its simply not a relevant comparison, as has been pointed out. Property is not a business, end of analysis. "If you do not allow losses to be taken against profits then you introduce an incentive against risk taking" - this is precisely the relevant point. You do not want such an incentive for real estate. End of reasoning, exactly why negative gearing is a stupid idea. Its a name game, call it what you like, a tax allowance, a concession against an alternatively taxable gain, a non concession that results in paying less tax than you may otherwise pay, whats the point of labelling it? It makes no policy sense whatsoever.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-4876174835075879042016-03-08T18:30:32.985+11:002016-03-08T18:30:32.985+11:00john, re how does labor deal with positively geare...john, re how does labor deal with positively geared properties that might become negatively geared in future - i would suggest they just set a date, and anything bought before that date is eligible for negative gearing concessions (if negatively geared), anything bought after that date is not. seems simple to me?<br /><br />i think the counter of your point about the general public *perceiving* negative gearing is a concession when it really isn't is that if this perceived concession is removed they will perceive they have lost a concession and this may trigger (irrational) market activity to the detriment of future demand and/or values.<br /><br />i am keen to hear your detailed thoughts on this issue - the stuff in the AFR and 60mins is just a tease.danhttps://www.blogger.com/profile/10510526813241992292noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-85791694246746280992016-03-08T15:37:24.672+11:002016-03-08T15:37:24.672+11:00"...negative gearing has been in part respons..."...negative gearing has been in part responsible for pushing house prices in Australia to ridiculous levels."<br /><br /><br />You said it John, and I, amongst many, many others, completely agree with you. Would you now care to explain why the tax concession that isn't a tax concession should be set up so that the young are being almost totally priced out of the "own and occupy" market ? Is this the Australia we all want to live in ?<br /><br />And also:<br />"But they [the Labor Party] do plan to ban negative gearing prospectively."<br /><br />Shouldn't you explain, maybe just for any foreigners reading, that the Labor Party actually intend to end ("ban" ?) negative gearing only for existing properties, but retain it unaltered for new builds. On the basis that this just might increase the total stock of houses while hopefully decreasing the price of existing houses so as to let the young back into the market.<br /><br />ThanksGrueBleennoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-89491025115559728332016-03-08T15:03:44.714+11:002016-03-08T15:03:44.714+11:00I would love for a hedge fund manager to buy say 5...I would love for a hedge fund manager to buy say 50 properties in Sydney (and this would cost at least $50m given the prices in Sydney) then list it on the Aussie Stock Exchange. It would then be priced against other property trusts like offices, shopping centres, or warehouses and from that point of view, there is no doubt that it is overvalued. If the stock could then be shorted then would this then become a new proxy for property prices?<br /><br />Would really really like someone to give this a go...Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-2614986249515662452016-03-08T13:31:00.247+11:002016-03-08T13:31:00.247+11:00John,
You may want to change "...you can ded...John,<br /><br />You may want to change "...you can deduct losses that you might make in renting a house..." to say "...losses you might make in owning and renting out an investment property ...", otherwise that sentence could be read to mean that people can deduct their personal rent.<br /><br />S<br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-1352996079675729882016-03-08T13:21:06.866+11:002016-03-08T13:21:06.866+11:00The issue is that the level of mortgage debt/gdp i...The issue is that the level of mortgage debt/gdp is highest in Australia, hence hedge fund interest in shorting banks. Professor Steve Keen has produced much research to show that property price rises track credit growth closely and he maintains that it is a causal relationship (I know he hasn't been so good at predicting when the debt bubble will burst!!). Given that my concern is for my 20-something daughter trying to get a foothold in the property market without becoming a mortgage slave for life, it would be good if property investment in the residential sector became a yield play and not continue to be a spec frenzy. Can we have policy for this?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-1478415066231040652016-03-08T04:14:14.168+11:002016-03-08T04:14:14.168+11:00In the example the person takes a $5000 loss and t...In the example the person takes a $5000 loss and thinks twice about speculating in housing on such slim margin, allowing such tenants to stay in the future, and might now purchase insurance or retain some earnings as a buffer for such eventualities. <br /><br />There is no problem here. <br /><br /><br /><br /><br /><br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-63253264265186977462016-03-07T23:18:32.558+11:002016-03-07T23:18:32.558+11:00Although "as in the UK" is an interestin...Although "as in the UK" is an interesting comparison to make, since the UK has a very similar rental market and house price problem to Australia, despite having basically no negative gearing at all.<br /><br />(I don't think the UK authorities have ever given any justification at all for successively and selectively tightening the quarantine of rental profit and loss, other than that they wanted the tax and it seemed quite inelastic. They've basically used it as a way to monetise the British middle class's distrust of all other forms of saving)Dan Daviesnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-5261990657522052452016-03-07T19:58:06.175+11:002016-03-07T19:58:06.175+11:00Owning real estate as a business is the question. ...Owning real estate as a business is the question. Neg hearing for real operating business sure, but for owning property. As in UK, massive missallocation of capital in low productivity investment. Lionelhttps://www.blogger.com/profile/07690700400970856076noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-51328281907596295562016-03-07T19:56:13.857+11:002016-03-07T19:56:13.857+11:00John,
The current policy discussion is terrible b...John,<br /><br />The current policy discussion is terrible because it has been mixed with politics.<br /><br />Yet it cannot be ignored that deducting short term losses at twice the tax rate as the related earnings is a tax concession. The rort is not negative gearing, but the combination with the CGT discount.<br /><br />The Henry Report screamed this from the roof tops (negative tax rates over the life of highly geared property investments). People's behaviour didn't change until the CGT discount was reintroduced. The problem is with the CGT discount. <br /><br />Would love to read your thoughts on changing CGT discount (rather than being able to claim deductions, which is fundamental to our income tax).<br /><br />Best<br /><br />J<br />Anonymoushttps://www.blogger.com/profile/16336481990725868751noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-35682746746479173402016-03-07T15:26:14.751+11:002016-03-07T15:26:14.751+11:00I don't this is why people have an issue with ...I don't this is why people have an issue with negative gearing, even though your comments are spot on the mark.<br /><br />I think most people don't believe buy to let should be considered a business venture at all and be entitled to interest cost deduction because (btw I'm not saying I agree):<br /><br />a) It doesn't provide anything productive to the economy; and most importantly<br />b) It's not a business venture because many perceive THERE IS NO RISK. This makes negative gearing haters get so annoyed because so many have made money from it, and what makes negative gearing supporters think it's a tax concession.<br /><br />Any rational person knows there is risk. But most people in Australia haven't experienced a sustained downturn in housing prices, therefore if it has a minimal perceived chance of happening and negative gearing is a tax concession. It is NOT a concession if you think prices can go both ways, but it is if you believe that the government is giving you a freebie to get on a trend that only goes one-way...up.Peterhttps://www.blogger.com/profile/17688408677774289256noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-8410428534357321262016-03-07T14:44:25.493+11:002016-03-07T14:44:25.493+11:00Thanks John. This is good. I think the other point...Thanks John. This is good. I think the other point is for most properties negative gearing is tax-deferral only i.e. if you assume inflation eventually will take the rentals past the costs. Where they don't (say if you bought in a mining town and the property halved on value) and then you sell, your bigger loss is the CGT (capital gains tax loss) will be quarantined (only used against other capital gains). Secondly, given where rates are now, abolishing it will not have much revenue benefit, as most properties are positively geared (as recent time passed depreciation falls away sharply and rents rise and interest rates fall). Abolishing it will have an effect on supply, which is the ultimate determinant of affordability. Lastly, only PAYG taxpayers will be affected (as someone with a successful business can simply distribute to the loss making property entity). All this hoo ha will not change much in terms of revenue. Tim Lambnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-21527203702595551062016-03-07T14:40:03.832+11:002016-03-07T14:40:03.832+11:00Meanwhile, back in the jungle: http://www.macrobu...Meanwhile, back in the jungle: http://www.macrobusiness.com.au/2016/03/a-new-salvo-in-the-negative-gearing-scare-campaign/CrocodileChuckhttps://www.blogger.com/profile/10762442097044797842noreply@blogger.com