This election is all about distractions, one of which is the confected outrage about keeping or abolishing negative gearing. Well, it was a week or two ago.
Negative gearing, you will recall, simply allows investors to deduct their losses against their personal taxable income. For property investors, if the rent they receive is less than the mortgage interest paid and maintenance costs incurred, then the resulting shortfall, or ‘loss’, can be used to reduce their gross taxable income. The net result is that your tax ends up reduced.
Given all the current talk, you may be forgiven for thinking negative gearing applies only to property investors. But it applies to shares and businesses, too. It’s long been a part of taxation law, and negative gearing of property, as we now know it, has been around for over 40 years.
Those advocating abolition of property negative gearing claim it is an outrageous tax rort, benefiting the rich. The high-income earner can afford expensive investment property with correspondingly increased taxable ‘losses’. It is true negative gearing is disproportionately used by people with high incomes.
But not by as many of them as you might expect. Only 18% of those with incomes in excess of $80,000 use negative gearing, and the average negatively geared ‘loss’ is $8722. That’s a handy gross taxable deduction, but hardly a huge incentive for high-income earners to reduce their tax substantially in this plodding fashion.
Ever different from us, the rich must be doing their tax minimisation in other ways. Think, instead, of companies, trusts, and self-managed super funds.
The reality, though, is that historically low interest rates have eroded the tax minimising benefits of negative gearing.
Maybe it’s the averagely paid mums and dads who predominately use negative gearing, if they can. Before negative gearing reduces their income, 33% of people who use negative gearing have a total income of less than $52,000, and the majority 67% have a taxable income of less than $82,000.
Is it any coincidence that the full-time male income earner on $82,000 a year might want to reduce his taxable income below the $80,000 tax threshold? Negative gearing is a practical response to tax ‘bracket creep’.
The Grattan Institute insists it’s the rich who are predominantly rorting negative gearing, pointing out that 10% of the top income earners claim 50% of the tax benefits. On the other hand, they don’t highlight that those top 10% still pay 50% of the nation’s tax.
The debate about negative gearing is a minefield of fact, half fact, and fiction.
A fictive illustration, if negative gearing is so successful that it must encourage multiple property ownership. And many of us have been led to believe it, yet only 1% of negative gearers own more than one property. Not so many property barons after all. It’s more akin to a cottage industry.
Is this tax minimisation costing the country billions? Yes, thirteen billion annually. But in 2014, those rental losses were $2 billion less than claimed in the previous year by a staggering 2.03 million taxpayers who own an investment property. Interestingly, a significant 38% of them were ‘positively’ geared, meaning they were actually paying additional personal income tax.
Owning a rental property is not unlike owning your own business. Like any business, it can either flop, or flip a profit. Many property investors, having paid off their bank mortgage, now rely on the rental income to top up their wages or superannuation payments. The Tax Office has always had the ability to challenge any ‘business’ if it shows no real prospect of becoming profitable; in other words, it is a tax sham. Accordingly, you can’t negatively gear losses perpetually.
And remember, for any businesses, a real loss is possible (no tenant in your property, for example). With negative gearing, the financial impact of any real loss is magnified. Choose your property investment and tenant wisely.
Surely, these two million negative gearers are inflating property prices. It is certainly a fact that our housing is unaffordable. Compared to other countries, our housing is expensive. For the price of a new urban fringe dwelling, you could purchase two sea-view apartments in Nice, France.
But then, these other countries, particularly in Europe and parts of the USA, do not have the long love affair Australians have, and will continue to have, with owning real estate.
Perhaps it’s a colonial cultural legacy, following easy dispossession of the Aboriginal owners. Or it’s a hangover anxiety from the early landless or tenant settlers in this country. Yet at 70%, our home ownership rate is one of the highest in the world. We have an insatiable urge for it – from chunky glossy real estate newspaper sections, and relentless renovating TV shows, to dominating the conversation at dinner parties. We are hooked on real estate.
Has negative gearing reduced the availability of housing? Ironically, negatively-geared property was introduced to increase housing supply, State governments being reluctant to build sufficient public housing. Today, only 7% of lending is for investor new housing, and that building is principally urban fringe or CBD high-rise. The ready supply of both, or perceived over-supply, particularly of CBD apartments, means limited or no capital growth for an investor.
Housing availability is not the same as housing affordability. Urban fringe land is expensive for a variety of reasons , and so too are the costs of providing high-density CBD apartments. Heavily reliant on property taxes, State governments are not clamouring for the abolition of negative gearing, nor are they making much more land available for housing than is currently available. State governments, too, have a love affair with the current buoyant real estate market.
Influence of supply & demand
Really, it’s supply and demand. And current demand is for middle suburbia. There, the limited and built-upon land with good public amenities is desired, and demand exceeds supply. Middle suburban owners want to keep it that way, and are notoriously hostile to sharing with others through high-density subdivision. It’s middle-belt middle-class demand which is driving high prices.
Negative gearing alone is not driving up house prices in middle suburbia. Instead, it’s a combination of population growth. Melbourne has 100,000 new arrivals annually, many of them foreign migrants, and a huge inflow of foreign money seeking the security of Australian real estate, especially from Asia. And let’s not forget enticingly low interest rates.
Late arriving are investors seeing their life wealth in superannuation funds eroded by low bank deposit rates and a share market only half-recovered from the GFC, and mugged by mismanagement and eye-wateringly high fees charged by the largely unregulated financial services industry. They now want some of the property love, observing that property has been kind to owners, well, since the end of the Second World War. And you are never too late or too old to play the property game. Bad timing though: the banks have tightened investment lending.
Party policies compared
The Labor and Liberal parties have different policy positions on negative gearing. Why else would it be a distraction? Labor wants to abolish negative gearing, except for new properties, while ‘grandfathering’ those who already own negatively geared property. Mysteriously, this is supposed to increase the number of houses while decreasing the cost of housing.
The Liberals are recalcitrant, saying there will be no changes to negative gearing as we know it. They say Labor’s policy will result in a dramatic drop in house prices. If our homes were suddenly worth a lot less than they are now, just imagine for a moment the people’s revolution that would result.
The reality is that, with existing significant demand factors, house prices in middle suburbia are unlikely to fall. Investors are not the bulk of the purchasers, but actual home owners.
If existing housing is no longer able to be negatively geared, then it is conceivable that rents will increase. Landlords will opt out of property, or expect improved rental yield – roughly the equivalent of depositing their money in a bank.
Negative gearing is a generous tax concession, better here than in other countries where it is quarantined to rental property or properties which comprise investors’ ‘business’ portfolio. No bonus write-off of those business losses against personal income. We might consider adopting such a change.
Mr Howard introduced the 50% Capital Gains Tax allowance in 1999, but the RBA considers it too generous by the RBA, the Grattan Institute, and independent economists like Saul Eslake. According to a study by John Daley and Danielle Wood at the Grattan Institute, halving the capital gains tax allowance to 25% would save $3.7 billion a year. This concession could be indexed to the rate of inflation, as it once was.
To maintain our living standards and pay down our national debt, we are being told the tax take must be increased. So why not a capital gains tax on all property, including the family home? Why should it be exempt? Fear of another people’s revolution?
With an election full of daily distractions and mindless mantras (‘Jobs and Growth’, ‘We’ll put people first’), it is gob-smacking that there is nothing much being proposed about global warming and ending the bi-partisan brutality inflicted on the Manus and Nauru refugees.
Neither major party really wants us to be distracted by such ‘real’ issues.