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Malcolm doth protest too much

What happened to the adult conversation we were going to have with everything on the table? If anything proves we are going to an early election it is Malcolm Turnbull’s reaction to Labor’s proposed negative gearing and capital gains tax changes.

Malcolm has hit the airwaves saying home owners across the country will see the value of the family home “smashed” under Labor’s “very blunt, very crude” negative gearing policy warning “this should put concern into the minds of every single house owner”.

He suggested that 30% of potential buyers, the investors, would be removed from the market for existing properties. This implies that investors are only interested in loss making ventures to avoid paying tax – a situation that was brought about when John Howard cut the headline rate of capital gains tax to half the income tax rate in 1999, making negative gearing much more attractive. As Scott Ludlum put it, “Australia suddenly became a nation of losers.”

“Normally investors would not be interested in an investment that is expected to run at a loss, but many are happy to purchase property where the rental income doesn’t cover the interest payments, because they expect to make large capital gains in the future from selling it, which are subject to the massive discount.”

“In the financial year before the discount was introduced, property investors actually reported a net rental income of $219 million, but in 2000-­2001 they reported almost half a billion dollars in losses, with the amount climbing over 10 years.”

Considering the demand for housing in Sydney, it is hard to imagine the house prices going down too much, but even if there was a small adjustment, if the price of your home goes down, so does the price of the next home you buy. All home owners have been through these cycles before.

If the investors who are relying on tax deductions are removed from the market then it opens it up to first home buyers, an issue that has been of growing concern. Of course, the market is not closed to those who wish to invest to make a profit, only those who were looking to reduce their income to avoid paying tax.

Mr Turnbull would have us believe that this will preclude first time investors from taking advantage of the concessions we have enjoyed. This attitude implies we can never change anything. It makes no sense. John Howard let people put $1 million into superannuation in one year. What if we all insisted on that perk being continued?

The grandfathering clause means current investors will not be disadvantaged and there is time for people to consider their investment options. It may also help reduce risky borrowing where people overextend.

Restricting negative gearing to new properties will stimulate construction, providing construction jobs and increasing supply. The assertion that it would increase rents is not justifiable. If more people are able to become home owners they will no longer have to rent. If there is increased supply combined with increased home ownership it is difficult to see how this would force up rents.

Malcolm said he would respect the intelligence of voters but, when given the opportunity, he has reverted to spin, classifying the reduction of the capital gains tax concession as a tax increase. What rot Malcolm!

Currently, you only pay tax on half of what you earn from capital gains. Labor is proposing that you pay tax on 75% of your capital gains. It is NOT a tax rate increase at all. Why should this income be treated more favourably than income earned through labour?

Malcolm is desperately trying to say Labor’s proposed changes will hurt mums and dads but this is pure spin. The ones who will be most affected are those who are trying to minimise their tax through rental losses and reduced rates for capital gains.

A quick look at the Pecuniary Register for Members of Parliament gives an indication of why they would fight this. Data compiled by Deakin University researchers suggests MPs could own more than 500 properties in total, worth several hundred million dollars. These investments range from holiday apartment rentals to more complex arrangements including trusts, with a mix of investments negatively and positively geared.

Two of the biggest property owners in federal parliament are Nationals MPs David Gillespie and Barry O’Sullivan, who owns 42 properties.

Mr Gillespie has declared an interest in 18 properties, including 15 units in Port Macquarie, in his electorate, although he said just one was negatively geared.

Labor is to be applauded for a policy that addresses so many issues. The Coalition’s reversion to attack mode shows they know it. Scott Morrison’s address to the National Press Club was an absolute fizzer which shows they have no plan, not a good look when threatening an imminent election.

When asked about the Coalition’s plan, Mr Turnbull said “We are not going to run our tax reform agenda in a political way, what we are looking at is a whole range of measures across the board. But I can tell you the big difference between our approach and Bill Shorten’s is that we will think the consequences through.”

But will they give us time to think through their policy assuming they eventually come up with one? Current rumour has them announcing an election the day after the Budget is due to be handed down. Will Scott squib it? We shall see.

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  1. Carol Taylor

    What Malcolm has failed to admit is that the price of housing is only likely to go down in inner Sydney and inner Melbourne due to churning as existing properties under Labor maintain their negative gearing status as do all new constructions. At worst these inner investment properties will stagnate in price due to lack of purchasers or (heaven forbid), they are sold to owner/occupiers.

    This is just from memory, but way back when..the aim of negative gearing was to increase the stock of housing, to stimulate jobs and growth and so was for new housing construction only. Then *someone* got into John Howard’s ear and it was changed to apply to ‘all housing’. Currently negatively geared ‘new housing’ is minimal.

    The only people that Labor’s policy is going to hurt is the uber wealthy actively involved in ‘churning’ their investment properties – buy, rent, sell, buy, rent, sell and reap the massive tax benefits along the way.

  2. Kaye Lee

    It just astonishes me that no-one ever pulls Malcolm up when he says investors will be removed from the market. Can’t you buy something that makes a profit?

    These guys whole lives are built around tax evasion. They cannot bring themselves to pay tax like workers do. How many of those investor’s taxable income will suddenly be over the $80,000 mark if they can’t have their tax dodges?

  3. Wally

    Kaye Lee

    “The assertion that it would increase rents is not justifiable.”

    Likelihood of rent increases depends on the gearing model employed and at this stage I have not found any credible information to advise the full details. If the changes (for established properties) are the same as those in the Hawke era rent is unlikely to increase because the tax deduction for interest etc. are still allowed but losses accumulate to offset against future rental income but if these deductions are abolished altogether rents would need to increase to justify the investment.

    Eventually a negative geared property generates income so tax becomes payable on the rental income. Under the Hawke government changes the tax deduction for expenses didn’t change just the timing of when the tax deduction could be claimed, now or in the future. The changes put stress on cash flow forcing many investors out of the market and in particular it affects investors with lower income, rich investors won’t care. Long term if changes result in less rental properties extra demand for rental property will increase rent and regardless of how the investment market reacts to the changes the affect will take 4-5 years.

    Welcome the decrease in non taxable portion of the sale price for capital gains tax to 25%, personally I would leave everything as it is and apply capital gains to 100% of the profit on sale and stop the avoidance by depositing the proceeds from sale into superannuation.

  4. Kaye Lee

    I agree that the capital gains deduction is the biggie but I don’t agree with the rest of what you say must follow.

    The changes seem simple – no change for current investors, negative gearing only on new properties from a set date.

    “f these deductions are abolished altogether rents would need to increase to justify the investment.”

    As it will only apply to new investments, they can weigh up whether the rental return is profitable. They would still get a 25% discount on capital gains. No-one is forced to buy investment properties and no current investors would be affected so there is no reason for THEm to put up rents. There might be a flurry of buying in the short term to take advantage of existing rules – that could lead to lower rents as it really is a demand/supply thing. Who can tell how the market will react but there is no reason for existing rents to go up and new properties can still be negatively geared so supply will increase.

    “Eventually a negative geared property generates income”

    Not necessarily if you pay interest only.

    ” The changes put stress on cash flow forcing many investors out of the market”

    I would suggest they were overextended. Is that the sort of risky behaviour we want to encourage? It is those people who get us in trouble when interest rates go up or regulations change because they are sailing too close to the wind. Work, save, and gamble with money you can afford to lose is my advice.

  5. Kaye Lee

    “But independent modelling shows there will be “significant” long-term savings from Labor’s proposal to quarantine negative gearing to new housing investments from July 2017, eventually raising between $3.5 to $3.9 billion a year.

    It also shows Labor’s proposal to cut the capital gains tax discount from 50 per cent to 25 per cent would raise about $2 billion a year in the long term.

    It shows the vast majority of savings would be at the expense of the top 10 per cent of earners who negatively gear their properties.
    It also estimates that by restricting negative gearing to new housing, the policy would “increase the share of investment housing devoted to newly built housing” by 10 to 20 per cent.

    It does not say house prices would drop.

    “Our modelling shows that negative gearing benefits high-income families with 52.6 per cent of the benefit going to the top 20 per cent of incomes,” the paper says.

    “Only 5.2 per cent of benefits go to the bottom 20 per cent of incomes. This result is mostly driven by high-income families being more likely to negatively gear, having larger negatively geared deductions, and a progressive tax system that magnifies the gains for higher income persons.

    The soon to be released modelling was done by the Australian National University’s Centre for Social Research and Methods.
    It was not commissioned by any political party, organisation or individual.”

    http://www.smh.com.au/federal-politics/political-news/independent-modelling-backs-labors-negative-gearing-policy-20160219-gmyl8o.html

  6. Glenn K

    As i pointed out in another article reply, the ALP are taking the initiative away from the LNP and starting to lead the policy debate. Well done. This more than anything I suspect will scare the LNP into calling an early election. Let’s hope the voters see through the scream scare tatics from the msm

  7. DC

    There is a whole industry created out of the desire of people to avoid paying their fair share of tax. If only governmennts raised revenue primarily by taxing carbon. That way the only way to avoid tax would be to live more sustainably, rather than having to pay an accountant or financial planner to hide your real income

  8. David (other)

    The impostor Turnbull’s facade has been pulled down and the exposure is not pretty. His smarmy, sickly, smirky grin has been replaced with a resort to singing from the Abbott song book.
    Now Labor have the upper hand, no heroics are required, steady as she goes. The quiet good feeling I have been experiencing since Bill Shortens brilliant speech in the House on the last sitting day 2 weeks ago, is becoming a rosy glow.
    It’s not a roaring fire but dammit it’s a good feeling, at last.

  9. Wally

    Kaye Lee

    “negative gearing only on new properties from a set date”

    I assume that a new investment in an established property after the set date would still be able to claim the interest paid, they just cannot offset it against other income sources but I cannot find anything to substantiate this. If my assumption is correct at some point in the future the tax deduction (accumulated losses) would still be claimed. This could be against rental income when rent > (interest + out goings) or be deducted from the profit at the time of sale. So the immediate increase in revenue is being offset against a the future deduction, so there is no real increase in tax revenue over the long term.

    By comparison my suggestion of paying tax on 100% of the capital gain is a real increase in revenue.

    I did not word this very well my meaning is lost – ” The changes put stress on cash flow forcing many investors out of the market”.

    I was not referring to existing investors I was referring to new middle class investors. As an example rural residents will purchase an inner city apartment for the kids to attend university and for them to retire. They rent the property in the interim periods to make it affordable and negative gearing can be the difference that makes it affordable. The same affordability issue applies to most middle income families and it can force them out of the market but shifting the time when tax deduction is applied has little if any impact on rich investors as the net tax position over time is unchanged.

  10. Kaye Lee

    Wally,

    From 1 July 2017 losses from new investments in shares and existing properties can still be used to offset investment income tax liabilities. These losses can also continue to be carried forward to offset the final capital gain on the investment.

    The CGT change will also not affect investments made by superannuation funds. The CGT discount will not change for small business assets. This will ensure that no small businesses are worse off under these changes.

    http://www.alp.org.au/negativegearing

    Tax reform should be designed to help the people who need it most – the ones to whom investing is a pipe dream.

    We need more affordable housing, we need to open up the market to first home buyers, we need greater supply and the construction jobs that go with it. Property investors have had a good run. We should be encouraging behaviour that benefits society, not just property investors. As to how much it will raise, several creditable organisations have verified it will be significant.

  11. Wally

    Kaye Lee

    Thanks for the link as an incentive to build new homes and create jobs etc. the proposed negative gearing changes would work but I still think the envisaged increase in revenue will peter out over 4-5 years and become a non event. To increase the CGT tax to 100% would yield more revenue in the long run without any unforseen negatives.

    “the capital gains tax discount subsidy is growing rapidly, with revenue foregone doubling from $4.2 billion in 2013-14 to $8.6b by 2018-19. The capital gains discount cost is growing, on average, at 8% per annum over the forward estimates. This rate of growth is greater than funding on research, universities, VET and schools.These tax subsidies are unaffordable, and to continue them will crowd out funding for important investments in that are required to grow our economy and jobs.”

    I do not disagree at all with any method of stopping the rich from getting richer but measures such as changes to negative gearing affect everyone. I would prefer to see a tax introduced that took 90% of income above the PM’s salary and reigning in of ludicrous executive salaries, no employee is worth a million dollars a year. Excluding bankers you cannot generate that much income on your own, particularly if you sit on your bum in an office.

    We need to tackle the real problem with housing affordability by increasing wages (as distinct from salaries) across the board. No measure is going to improve housing affordability as easily as people earning enough money to afford to buy a house even when/if interest rates rise to 10-12%. If housing was more affordable more average families would negative gear property and more houses would reduce prices and rents, our economy would improve as well.

  12. Kaye Lee

    Wally,

    There are homeless people. There are people who cannot pay their bills let alone save to buy a first home. For starters, wlefare payments should be increased by $50 a week (or more). This money would all be recycled through the economy, increased demand leading to more jobs, leading to less welfare.

    You can still buy an investment property – just lower your standards to one where the rent can cover your costs, or buy something new.

  13. Troy

    What unmitigated rot from Turnbull! We are experiencing the fastest population growth in the country here in Victoria and using the supply & demand principal, there will be an ever increasing demand for housing. As for house values falling, well the “investor” demand has artificially inflated the supposed value of housing putting house prices out of reach for first home buyers. At the first sign of an economic downturn, those investors will (as in the U.S.) disappear like rats deserting a sinking ship whle they wait for cheap pickings courtesy of defaults.

    House values will always rise organically, again due to the S&P principal. Such is the nature of every finite resource!

    The issue at stake though is the unsufficient new builds going on – except for appartment complexes. As for new houses, that seems to be the domain of couples who are willing to move to areas being developed in spite of the dearth of amenities and infrastructure (like public transport, schools and hospitals). The trade-off for a cheaper alternative to purchasing an existing metropolitan dwelling is the additional transport costs and logistical difficulties for the entire family which is the hallmark of building on the metropolitan fringe.

    I wonder how many of Malcom’s 7 investment properties are “new builds”. You already know the answer, don’t you!

  14. Wally

    Kaye Lee

    My initial response got gobbled up by our nations great Internet system so will try again without repeating all of what I just posted at 3.22pm on https://theaimn.com/49251-2/#comments

    Over a long term of ownership negative gearing gives less tax offsets than what can be offset if the loss accrues because you are paying interest on the losses, you are virtually paying interest on interest. All of the same deductions are allowed, the business model is identical the only difference is the point in time when the loss is offset against income and the obvious point that the loss is offset against income from a different source. So on that point should/would the income from one rental property be offset against a loss on a second property? This is still negative gearing it is just not being offset against a wage or salary which is the normal scenario.

    Then you must consider the situation where a company purchases a property to operate the business from, the costs are still offset against the companies income so it is still negative gearing but under the one entity. If this is still possible rich people will spend $2k on a company, redirect income to the company and claim the tax deduction.

    It is less complicated and will return more tax revenue if negative gearing is left alone and CGT levied at 100% without any concessions if profits are deposited in superannuation.

    I want everyone to have the same opportunities that I have enjoyed and capitalised on, money is not a big motivator for me but providing for my family was a priority and my reward was the achievement. I don’t need more than I already have but a lotto win so I could help my family and others would be excellent.

    Kaye I think we both want a better Australia for young people but our ideologies and methods differ albeit a very similar goal in mind.

  15. Kaye Lee

    I agree Wally. I have enjoyed the discussion 🙂

  16. Wally

    Likewise Kaye

  17. Kaye Lee

    Rossleigh,

    If we are voting on policies then Labor should win, But if we voted on policies they would have won last time. Sometimes I wish I could go back to blissful ignorance because watching self harm is truly depressing.

  18. Wally

    Policies and integrity historically seem to be more important to the Labor party and union movement than the LNP. I do not suggest Labor and unions are without scandals and/or corruption but they have always cared more about the effect policies have on the people.

    On 15 November 1938, 180 wharfies prevented pig iron being loaded onto ships bound for the Japanese war machine.

    Back in 1938, reports were making their way back to Australia of the brutalities carried out by the Japanese Imperial Army when Ted Roach, then-Branch Secretary for the Waterside Workers’ Federation, addressed the men at the labour pick up for the ship – the Dalfram. He told the men of the destination of the pig iron and the uses the Japanese would make of it: bombs – first against the Chinese and eventually against Australia.

    In protest, men walked off the ship declaring they refused to load pig iron for Japan to turn into weapons.

    The lockout lasted for nine weeks, during which Attorney-General and aspiring Prime Minister Robert Menzies went to Wollongong to try and end the gridlock.

    http://workinglife.org.au/2013/11/22/the-wharfies-who-stopped-pig-iron-bob/

  19. JeffJL

    @Wally. Had negatively geared properties been turning into positively geared properties then the landlords losses would have turned positive. The data indicated that the tax deductions claimed by negative gearers remained high and was not reducing.

    One tactic which I have been advised to use is as a property nears profitability to re-finance. Use the money you pull out to live on. It is tax free as it is not income. The debt of the property will again cause it to be negatively geared and you can continue to get a hand out from the government.

    The top negative gearers do not want their properties to become positively geared as they believe they are too highly taxed as it is.

  20. Wally

    JeffJL

    “The data indicated that the tax deductions claimed by negative gearers remained high and was not reducing”

    You raise an interesting point, negative gearing remains high when investors take out an interest only loan and increases in rental income are minimal. Maybe this is an aspect that should be looked at, enforcing a minimal decrease in debt each year could be effective.

    “One tactic which I have been advised to use is as a property nears profitability to re-finance. Use the money you pull out to live on. It is tax free as it is not income. The debt of the property will again cause it to be negatively geared and you can continue to get a hand out from the government.”

    Unless something has changed I am unaware of this is fraudulent and illegal. You can only claim a deduction on the interest incurred for money borrowed for expenditure on the property that falls within the guidelines and you can only claim a tax deduction for expenses directly related to the property maintenance. Capital purchases are not tax deductable but they are considered as an expense when calculating capital gains tax. You could not claim money borrowed that was not used to purchase, improve or maintain the house to calculate CGT either so eventually you would be caught out.

    “The top negative gearers do not want their properties to become positively geared as they believe they are too highly taxed as it is.”

    Negative gearing takes more money out of their pocket than they receive as a tax deduction, the general thought is to use tax savings to help make more profit than what it has cost them after tax savings are considered when the property sells. When they sell for a profit they pay CGT some of which results from using the tax savings as a form of leveraging, that is one of the reasons I believe CGT should be levied on 100% of the profit.

  21. markrussell

    I’m pleased Turnball has admitted that the present scheme makes housing less affordable for those who need it. I can’t support a policy which excludes young people from the housing market to give tax breaks to people with a second, third, fourth, fifth property.

  22. JeffJL

    Wally.
    Point 1. Have a limit of seven years to carry losses on a property (The same as other business losses [I think it is seven years]). If the loss was over seven years away, tough.
    Point 2. When you pull money out of real estate by re-financing, the bank does not ask what you are doing with the money. The just want to know if you can afford the new amount. The ATO only sees a loan against an investment property so the interest paid is tax deductible.
    Point 3. The loss can also be depreciation (i.e. not a cash flow out of your pocket). Thus a tax write off of 10k may only be 4k cash and 6k deductions. At a marginal tax rate of 49c/$ you reduce your taxable income by 10k, pay out 4k in cash but receive 5k in tax reductions. An on books loss of 10k but a benefit to you of 1k.
    Yes. Tax capital gains at 100%. I think Labour chose 75% so there was less heat when the LNP cried “Class Warfare”.

  23. Wally

    JeffJL

    Point 1. “Have a limit of seven years to carry losses on a property (The same as other business losses [I think it is seven years]).”

    No limit on time to offset accumulated business losses and I know this from my own companies situation.

    Point 2. “When you pull money out of real estate by re-financing, the bank does not ask what you are doing with the money.”

    You have to include full details of rental income on your tax return so an increase in interest paid would raise a red flag and from memory there are other parts of the return that would/could catch you out. What you suggest is taxation fraud and very hard to cover up or defend.

    Point 3. “The loss can also be depreciation (i.e. not a cash flow out of your pocket).”

    Strict rules on what can be depreciated but I cannot define exactly what they are but off the top of my head I think it is restricted to chattels and buildings (with limitations???) and you cannot depreciate the land. What can be depreciated is defined at the time of purchase (first return afterward), depreciation is deducted from the purchase price and increases profit when the property is sold so it would increase CGT payable. You cannot double dip, you can only claim any tax deduction once.

    “I think Labour chose 75% so there was less heat when the LNP cried “Class Warfare”

    Agree with that reasoning.

  24. JeffJL

    No time limit. Has that changed? Or is it only with shares? Or am I just an idiot who thinks they know what they are talking about?

  25. Wally

    JeffJL

    I think there is or was a time limit to apply a capital loss to offset a capital gain but not certain, maybe that is what you are thinking of.

    An idiot doesn’t ask questions or listen to suggestions (learn).

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