Negative Gearing Special Edition – Ralphs Newsletter
Labour to cut negative gearing
Also in the news is the new policy annouced at the NSW ALP conference that Labour intends to allow negative gearing on new properties only and grandfather existing arrangements.
Read one of many articles about this by clicking here
Personally, I’d have no problem with this. It won’t affect me and won’t affect the club strategy, which has always been to buy new for a variety of reasons, including the negative gearing advantages.
I’m not sure the headlines about it being a big election issue risk are justified. It is a policy that is fair, unlike many other proposals that suggest retroactive changes or which disadvantage large sections of the population, usually those least able to afford it.
CGT is also on the table for labour with a cut in the concession rate from 50% down to 25%. This would also be grandfathered for existing assets.
I’m sure there will be plenty of commentary around these proposals in the weeks and months to come before the election.
And indeed there was !
Over the past several days, I’ve read a huge number of articles, both for and against, including a number of rather silly pieces from people who ought to know better.
Seems to me that some are talking nonsense, just to get their names in the press and having to take ever more absurd positions in order to do it.
I thought it might be useful to the debate, for my readers at least, to try and receive a balanced view of the arguments.
So what is negative gearing ?
As with shares, or any other investment plan, any expenses made in relation to an income generating asset, can be offset against income.
That is how big business manages to pay zero or very little tax in many cases.
Michael West, business commentator for Fairfax, has been railing against this for years with articles like this one that show Shell, on revenues of $20 Billion, paying zero company tax for the past few years.
A concrete example for property would be the Beeleigh property that I highlighted in my last newsletter.
A concrete example
Assuming that a buyer wanted to borrow all of the money for the purchase of a $335K property, plus the stamp duty, solicitor and bank fees, he or she would need about $357,600.
This would be using a Line of Credit based on equity in their own home, plus an investment loan.
The interest on that loan would be $16,986 for a full year, and the income from the rent a conservative $16,307
On top of that there are the annual expenses such as Council and water rates, Strata fees, Insurance and management fees. Another $5,600, so the loss before negative gearing would be $6,315.
Not many people would think that was a good way to invest. Luckily, the ATO rules say that the expenses incurred on earning that $16,307 income can be used to offset the losses.
They say that the interest on the loan, plus depreciation on the property, plus the annual expense can be used to offset the income, so the total claimed is $32,186 (for a person on a $75,000 income)
That $32,186 deductions is taken off the $75,000 ordinary taxable income which now drops to $59,121 and is then taxed.
This person then pays a total tax bill of $11,831 instead of the $17,422 they would have paid without owning the property.
At the end of the year when they do their tax, they get a cheque from the ATO for $5,591.
If you offset that cheque from the original pre-tax loss of $6,315, you end up with a total loss for the year of $724 which means in this scenario, this property is negatively geared by that amount or $14 per week.
The reason that people like me are prepared to accept an annual loss of $724 is in the expectation of making some capital growth over time.
The capital growth expectations for this property if it would double in around 12 years,would be in the region of $543 per week or $339K in total.
One of the arguments put forward by those opposed to negative gearing are those that look only at the forgone tax revenue of, in this example, $5,591 per annum.
I would argue that if this is a new property, the amount of tax collected from those involved in the construction and subsequent management would far outweigh the tax forgone. It also provides a new dwelling which will act to keep price rises and rents down for those not able or willing to buy and could be used for social housing which local authorities are now no longer prepared to fund.
Just think of all the people involved in building a new house, all of whom will pay income tax, plus various stamp duties, land tax etc along the way:
Developer, real estate agent, various trades needed to build the property, various suppliers involved in providing the construction materials and fixtures and fittings, truck drivers involved in the delivery to site, various council and professional people involved in designing and managing the construction and then managing the property once built. Various tradespeople to maintain the property and agents to manage the tenant and bank staff to process the rent – the list just goes on and on.
I’ve heard it said that this line-up of people would equate to the equivalent of seven full time jobs over the life of the property.
So to the current arguments in the news.
First off the block was Labour who last weekend announced their new policy, which they say they have been working on for 12 months or more, and was announced at the NSW Labour conference.
As it is pretty much the first concrete proposal from either party for some time, it got a lot of press and several days later, still getting a lot of air-time.
Basically, the Labour position is that they will limit negative gearing to new property only and in terms of CGT, will increase the tax take by restricting it to a 25% discount on profits rather than the current 50%.
They have sensibly grandfathered both proposals with a start date of July 2017, assuming that they win the upcoming election.
For me as a current investor with 8 properties, it will make no difference to my plans. I will continue to claim the various deductions against my gross income and if I sell, I’ll pay no more extra tax.
For my readers, if you buy in the next 17 months, there will be no changes for you either.
If you buy after that time and are buying new, again, no change, however if you eventually sell, then the CGT take will be higher.
I watched the Q&A program on ABC TV on Monday night and Lenore Taylor was arguing with new Liberal front bencher Steve Ciobo about the purpose of negative gearing.
The liberals are finding it hard to suddenly change tack on this issue, as can be seen from this exchange (my emphasis) a few months earlier with an ABC reporter during an interview. Click here to read the transcript found on his web-site.
Rafael Epstein: Do you think the Coalition will ever contemplate changes to negative gearing or the capital gains around real estate?
Steven Ciobo: I don’t think that any side of politics, in terms of the serious major parties as the Labor Party or the Coalition, would look at it. The reason being because the negative gearing isn’t just about property. Negative gearing is a term that applies in, basically, most developed countries. It’s not a fundamentally unique aspect of Australian housing market, it applies in market around the world. They don’t use the term, negative gearing, but it’s the exact same principle. What’s more what we know about the ability to have a deduction on income earning assets is that it actually increases the supply of housing stock.
Rafael Epstein: It’s not part of the problem, negative gearing, it’s part of the solution?
Steven Ciobo: Absolutely and frankly I think that those who make the suggestion that in some way abolishing negative gearing would suddenly solve the problem, are absolutely kidding themselves.
The Liberal argument against it seems to be that it doesn’t raise enough income for the damage it might cause. Steve Ciobo again last night (ABC 7.30 – Link hrere):
….. will thoroughly distort the market and will result, I think, in people that are reselling homes and apartments having their market decimated
I’ve seen no justification for this scaremongering.
Another new minister, Scott Ryan (ABC Report – Link here) claimed it was an unfair policy:
“I think we need to be careful to not say everyone who has got into the system now, you can keep your gains but we’re going to legislate to stop other people getting into it from a particular date,” he said.
“I think there’s a fairness question about that.”
By grandfathering the scheme to existing owners and giving 17 months notice of the change is about as fair as you can get.
In this story from the Australian Financial review (AFR).
Both Prime Minister Malcolm Turnbull and Treasurer Scott Morrison said on Monday that Labor’s policy, which would restrict negative gearing to new homes only from July 1, 2017, would distort the housing market.
Mr Morrison, who bases his assertion on his one of his pre-political careers as head of policy and research for the Property Council of Australia, who unsurprisingly agree.
They want both sides of politics to leave it alone and will be mounting a scare campaign based on their assertion that it won’t encourage enough people to invest in new housing and that things are working well in terms of the economy at present.
Labours policy modelling estimates the switch of focus to new property would create 25,000 construction jobs (all paying tax)
Research by Labor think-tank the McKell Institute estimates it would create 25,000 construction jobs a year and take the pressure off house prices by keeping cashed-up investors away from existing housing stock.
“The answer to housing affordability, which is at crisis levels, is to have more houses and apartments being built,” Mr Bowen told the ABC’s Insiders program.
“The proponents of the current arrangement say negative gearing increases housing supply. It doesn’t. It’s a falsehood, 93 per cent goes into existing properties and that means, in effect, if that’s your policy objective you’ve got a failure rate of 93 per cent
Read more at this link.
Unsurprisingly, the property development industry group Urban Taskforce is singing from the same hymn-sheet as the Property Council. They want negative gearing left alone. In this article, they warn that the proposed changes are:
…..likely to result in increases in new property prices as more investors compete for only new housing
and
This can only lead to less supply of rental properties with a consequent jump in rental fees
I can see that there could be an initial rise in prices as developers raise their prices in response to a surge in demand, but this will fall back once supply and demand equalise over time. If the rent return is not there due to oversupply issues, people will not invest.
The various people suggesting major rises in rents, including Joe Hockey earlier in the year, are basing their claims on the period when Paul Keating abolished negative gearing in 1985 only to re-instate it a few years later.
“If you abolish negative gearing on investment properties, there’s a strong argument that rents would increase”
There is a very good explanation from the ABC FactCheck team from May last year here which basically says no case to answer.
Another vocal critic has been Domain Group chief economist Andrew Wilson who has suggested there would be a surge of people into the existing market before the cut-off date forcing prices up. Read about it here.
I would think that there would be some that do this, but the flip-side is that come July 2017 and no more negative gearing, prices for those properties would fall back to where they were, or even lower due to reduced demand, so you’d have to be pretty dim to take that bet.
The housing industry lobby group the Housing Industry Association (HIA) has also come out against the Labour proposals with most of the same arguments already canvassed. Their spin in this article is that ‘ordinary’ people saving for retirement will be hurt most, citing ATO figures which show :
….. that 79% of tax payers with a rental property declare a taxable income of less than $100,000.
“In fact, seven out of 10 tax payers with a rental property earn less than $80,000.
Michael Janda on The Drum on the ABC exposed this red-herring back in 2014 in this article and found that:
The very reason that many housing investors fall below the $80,000 threshold is because they have used negative gearing to slash their tax bill.
A couple of other investment ‘guru’s, who unsurprisingly advocate older properties are also against the Labour plan as outlined in this piece.
Investor and Sydney buyers’ agent Rich Harvey, CEO of propertybuyer.com.au, said the problem with the Labor proposal was that it would skew the investment market towards buying buying brand new homes, which is “not necessarily the best investment strategy”.
“It’s really hard to find good quality developments that stack up from an investment perspective,” he said. “For our business, it would be a very negative thing because 90-95 per cent of our clients invest in established property.
Investment adviser, Margaret Lomas, who owns a “a lot of investment property” which she acquired negatively geared (over time the properties have become neutral or positively geared) said negative gearing should not be tampered with because it would reduce the ability of ordinary baby boomers – not the rich – to create retirement income.
“Brand new properties come at a premium, but existing property is affordable and achievable. To create just enough wealth to cover what an aged pension otherwise would, these average mums and dads need to buy around six properties and keep them for 15 years. That’s hardly people getting rich off tax breaks,” she said.
Professional investor Nathan Birch, who recently acquired his 200th investment properties, and has amassed a positively geared portfolio worth more than $40 million, called Labor’s planned changes to negative gearing a stunt that would backfire on them at this year’s Federal Election.
“Investors will have to come up with the extra cash flow so the whole market will raise their rents to make up the shortfall. I will advise my clients to raise their rent and I will do the same,” he said.
He conceded the changes would put the brakes on some property markets and stop prices from exploding. But, he said, investors would just shift to more “cash-flow positive” markets like Queensland instead.
Some ex-politicians think the proposal has merit. Jeff Kennet, former Liberal premier of Victoria is one, saying in the AFR here
“I’m very disappointed at the way in which my side of politics are arguing against what I think is an eminently supportable concept that’s been put forward by the Labor Party in terms of negative gearing,”
The Grattan Institute has also come out in favour of the proposal with a good piece in The Conversation here debunking three of the key arguments put forward by the Liberals and other opponents.
and a similar piece here by Michael Janda in The Drum tackling the three main arguments with similar conclusions.
and finally in this piece in the SMH, Peter Martin takes aim at the argument that it is battlers who will be hit hardest
To add my two cents worth, I don’t believe that your taxable income and therefore the negative gearing benefits are any longer the main factor, it is the banks new rules on assessing your ability to pay back the loan that determines if they will give you any money in the first instance.
Most major bank calculators no longer take the negative gearing benefits into account, so this argument is pretty much academic anyway.
I had hoped to also give the Liberals policy in this area but at his Press Club speech yesterday, Treasurer Morrisson was not giving anything away.
The current rumours are that they are looking at either a cap on the amount that can be claimed, or limiting the number of properties that can be geared.
We will see.
Wealth & Property Expo 2016
Only a few days to go, but still seats available if you would like to attend.
Our dedicated conference web-site is up and running – check-out all the details here.
This year’s key-note speaker is Bernard Salt, who is described as a highly respected media commentator who has accurately forecast major shifts in our social structure.
Other confirmed presenters will be Kevin Young himself, of course and also Clifford Bennett, who was well appreciated last year.
The Gold Coast Mayor, Mr Tom Tate will bring us up-to-date with plans for the area and why Keving Young is expecting some good growth over the next couple of years. Old favourites like Amanada Gore, Wendy Priestly and Troy Gunesekera are also on the card.
The conference location this year is the RACV Royal Pines Resort and if you are into golf, you might like to pamper yourself and saty on-site in luxury accommodation and play a few holes.
Special conference packages available. Maybe bring your partner and he/she can play golf while you attend the conference. Or bring the kids, and enjoy the attractions on the Gold Coast before or after the conference.
March 3rd-6th 2016.
We also have a new promotional video for the conference that you can watch here.
Friends of Royal seminar invite
With my Friends of the Royal National Park hat on (I’m treasurer of the Friends group), I’d like to invite you to an afternnon seminar that we are running next month at Sutherland, in Sydney.
The date is Sunday afternoon, 20th March from 1.00pm.
You can go to our Website to book and for more details, or our check-out our Facebook page via this link.
The seminar has a world-class lineup of speakers from well-known organisations including Bush Heritage, BirdLife Australia, Australian Wildlife Consevancy, Environmental Water Trust, Wildlife Land Trust and others.
There is an associated expo with information from other organisations such as Save Our Flora, Bushcare, Wilding Australia and several others.
The cost is just $20 which includes a nice afternoon tea.
You can also call me for more info.
Rooty Hill- Property Investment Information Day
The date will be Sunday afternoon, 17th April from 1.00pm until 5.00pm
There will be an entry fee of just $15 to cover the hall hire and will include afternoon tea.
The venue is the Rooty Hill RSL & Resort at 33 Railway Street, Rooty Hill , NSW 2766
Every property on our stock-list will be up on the wall for you to read about. Our mentors will be available to run cash-flow reports using your inputs so you’ll understand how holding such an asset would affect you. Brokers will be on-hand to discuss your finance options.
At the same time, there will be on-going presentations on a variety of subjects including:
How our Researchers can save you months/years in searching for the ‘right’ property
Current Hotspots
Landlord Insurance
Recordkeeping
Interest Rates
Depreciation Reports and Accounting
Space is limited, so contact me to get you registered.
