Dear Fellow Investors,
Cuts to Negative Gearing Stink
I get it. I get what Bill Shorten and the Labor Party are trying to achieve by cutting negative gearing…but it stinks for 6 reasons.
First, for those of you who might not know…Labor proposes to:
- Eliminate negative gearing to all residential investment properties other than new housing from the 1st of July 2017.
- Stop investors from claiming losses on secondhand properties against their wage income after that date.
- All investment properties purchased prior to this date will be “grandfathered” (meaning any current tax arrangement with your investment property will remain).
- Reduce the capital gains discount on all investment properties from 50% to 25%.
Stinky Reason #1 – How much will the budget be improved?
The latest data from the ATO shows that in the year 2012/13 property investors “negatively geared” or reduced their taxable income by approx $5.5 Bn. That’s $5.5Bn that the Government could have taxed (not necessarily collected).
Firstly, this data, the most recent available, was based upon a period when the RBA cash rate was higher than it is now.
Interest rates on borrowing have dropped since that time – meaning the losses investors can now claim will be reduced.
Back then, the outstanding rate of interest was close to 5.5%. It’s now close to 4.5%. That’s a drop of 18.2%.
I can currently get a 5-year fixed rate of 4.59% from NAB and there are many others…
If you reduce the amount investors have claimed in interest by 18% – there goes those negative gearing losses even allowing for CPI increases of other deductibles.
In order to get Labor’s forecast of $32Bn in savings over 10 years, Treasury must have predicted some significant increase in interest rates from years 6-10 right?
But let’s face it….Treasury can get it wrong – remember its forecast for iron ore prices? It was totally optimistic.
Stinky Reason #2 – Negatively Gearing new property only is risky business…
“Roll Up Roll Up”…I can hear the spruiker cry…
By allowing only new properties to be negatively geared….you are creating a “green light” situation for every spruiker to come out of hiding and promote new property to unsuspecting mum and dad investors.
Selling new property is far less regulated and commissions are rife. Time and time again I get offers to sell property to my database and receive a 10% commission on the purchase price. But I don’t.
Whilst I’d love the 10% my father lost all his super from the dodgy side of the property market and the last thing I’d want is for someone else to go through that experience.
Tip – Have you noticed spuikers generally only sell new property?
That said, not all people selling new stock are bad – currently most are good…but this type of policy might attract less scrupulous spruikers after a quick buck or two.
Stinky Reason #3 – The Reverse effect
I get it – Labor’s policy aims to increase home affordability particularly for first home buyers.
Yes. Australia is expensive on the world stage – BUT could stopping negative gearing actually inflate prices?
How? Well the first thing I thought when the policy was released was “no point selling any properties I currently negatively gear – I’m hanging on!”
According to those ABS stats I previously mentioned – there’s close to 3 Million properties that might not be sold if everyone thinks like me!
Now, I’m no Warren Buffet but I do remember one thing from economics…price is a factor of supply and demand and if you take away the supply….prices tend to head north.
Stinky Reason #4 – The elephant in the room
This stinky reason is a surprising one, and in all my research I haven’t seen any mention of it.
Whilst the Government may, in the long term, claw back some revenue if this policy is implemented, if property transactions decline, the States are going to be significantly impacted by way of stamp duty collection.
If investors hold onto stock…the building industry won’t be able to magically increase supply to make up the difference.
And if you have far less transactions, you have far less real estate agents, conveyancers, buyers agents, brokers etc paying income tax.
Stinky Reason #5 – Slippery Slope
Labor has also proposes to cut negative gearing on new share investments. This leads to a whole bunch of questions such as:
- By shares are we talking listed only or unlisted?
- How are super funds treated? Family trusts?
And back to property…
- What if I buy a commercial or industrial building? If bought in my own name it appears I can still negatively gear it. However, if that same building is part of a listed trust, then I guess I can’t. Please explain??
- Is “property” treated as land + building and plant and equipment separated? Because that’s how the CGT calculation is calculated.
I could go on…
Stinky Reason #6 – The Renovators
“New property” is not all about starting from scratch.
Don’t underestimate the amount of people who like buying and upgrading property. This has a multiplier effect in that money is being injected back into the economy through the employment of trades and the purchasing of goods and services etc.
Final Point:
Now I’m not going buy into the debate over whether negative gearing is for the “rich” or for the working class. I would’ve thought it was pretty obvious that those with higher incomes benefit more from negative gearing.
And I don’t buy the argument, from the Real Estate Institute of NSW, that rents will suddenly go up because negative gearing is taken away. Rent is a factor of supply and demand – not what it costs an individual to hold a property.
What I worry about is the risk/reward ratio. I think at this point of the economic cycle (China’s downturn, mining slump, drop in commodity prices and a property boom in most major capital cities around the world)… this policy is potentially playing with fire for very little reward.
I agree there are certain elements that need to be fixed to make the system fairer and here’s my thoughts on that.
Regards
Tyron Hyde
CEO AAIQS
PS – If you think I’m writing this article as a staunch Liberal Voter…you are wrong. I was brought up to vote Labor. In fact, my father ran for the seat of Lowe in 1975 against Billy McMahon! I’m currently politically agnostic (my father would be turning in his grave) – but times have changed!
About Tyron Hyde
Tyron Hyde is the CEO of Washington Brown Quantity Surveyors. He is regarded as one of the industry's leading experts in property tax depreciation, is regularly quoted in the media & asked to speak at conferences.
Learn why more Property Investors Choose Washington Brown to prepare their depreciation reports.