Negative gearing

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GUEST OBSERVER
Other than renting, the most common way to get a roof over your head is to buy a home and live in it. Another way is to buy a home and rent it out, and then rent a similar home (buy, rent, rent). Thanks to the perverse nature of negative gearing, the buy, rent, rent strategy can be cheaper than the most obvious path of home ownership. How?
Consider a first home buyer considering a modest two bedroom, two bathroom unit in Ashfield in Sydney’s inner west for A$600,000.
Assuming the buyer has enough to afford a 20% deposit and initial transaction costs (legal fees and stamp duty, etc.), she may consider buying and living in it, or buying and investing and then renting a similar unit. She is able to borrow 80% of the unit’s value paying interest of 5% p.a (A$24,000 a year). The annual maintenance costs are A$6,000 (or 1%), deductible depreciation expenses are also A$6,000. A similar unit rents for A$450 per week. Her marginal tax rate is 34.5%. What is the cost to buy and live compared with buy, rent, rent?
The first home buyer’s housing cost is A$30,000 per year if she buys and lives in the unit, and A$25,653 per year for buy, rent, rent. This means she saves A$4,347 or 0.72% of the unit price with buy, rent, rent.
The saving is solely due to the negative gearing tax savings effect. The mortgage interest, maintenance and depreciation deductions are tax deductible when investing, but cannot be deducted when living in the unit. Without negative gearing there would be no tax savings and the first home buyer would not consider such a convoluted strategy.
From the calculations, we can also see that the bigger the negative gearing tax savings, the better it is to buy, rent, rent. Buying homes with lower rent, higher maintenance costs and higher depreciation allowances (eg. new developments) and being at a higher marginal tax rate increases the incentives to do so. There is also little incentive to pay off principal in the unit as the negative gearing strategy may be done almost perpetually and any savings invested (or spent) elsewhere.
On the other hand, once the property is positively geared (when net rent exceeds cost of ownership) it no longer becomes cheaper than to buy and live. This can happen if the buyer chooses to pay off the mortgage, earns increased rent or reduces maintenance and depreciation deductions.
When it comes to selling, there may be capital gains tax on the rental property although your own home is capital gains tax exempt. Non-financial factors are that the home buyer may have a preference to live in their own home rather than to rent, despite the buy, rent, rent savings. This may be from the greater flexibility to customise your own home or not having to deal with real estate agents.
Of course, in the example renting still remains the cheapest option, though if home ownership is the goal then with the perversion of negative gearing, buy, rent, rent remains a cost effective choice.
The above scenario is just one of the many ways that negative gearing distorts housing decisions. Those on high marginal tax rates (i.e. high income earners) have incentive to invest in multiple homes. This leads to incentives to borrow excessively to invest as the negative gearing tax savings effectively reduces the ownership costs to investors compared with home owners.
Furthermore this pushes housing prices up due to the increased demand from negative gearing. Compare this to a home owner who requires only one home and is restricted in the amount that they may borrow as they do not earn rent on the home as income.
Another effect is that new homes which tend to be of higher quality are more desirable to investors as they tend to have higher maintenance costs and depreciation deductions which increases tax savings. Home owners on the other other hand are unable to deduct such costs thereby making ownership of new homes more costly than to investors.
The sooner that negative gearing is removed, the quicker simple buying and living can be the norm.
This article is for educational purposes only and does not constitute financial or taxation advice.
Adrian Lee is senior lecturer in Finance, University of Technology Sydney and author for The Conversation. He can be contacted <a href="https://theconversation.com/profiles/adrian-lee-94688" target="_blank">here</a>.
 
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jchancellor-FAypfDUnLy

Buy, rent, or do both: the perversion of negative gearing

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GUEST OBSERVER
The debate on negative gearing ahead of the budget and looming elections has only added to the confusion among property investors as the ultimate aim from buying property is to make money, not to lose.
It’s an outdated way of investing to focus solely on negative gearing to build a property portfolio.
To put things in perspective, Labor recently said if elected, it would restrict negative gearing deductions to only new property. The federal government opposes this, asserting that negative gearing should remain with caps being placed on its use.
All of this debate surrounding gearing and lending as the Budget looms has only highlighted the need for diversity in any property strategy. There are a lot of opportunities out there, people just need guidance.
It is important to tailor strategies on a case-by-case basis, rather than a blanket reliance on negative gearing and depreciation because any changes in circumstance, such as sudden unemployment, can turn the property into a burden.
The consulting firm says it employs a range of tactics on behalf of buyers, with opportunities including capital growth, high yield, cash-flow positive, add value, renovations, granny flats, developments and buying new or established properties in regional or capital cities.
We find this approach gives our clients the confidence to build a strong and balanced portfolio that is adaptable to changes and opportunities in the market. Regular portfolio stress checks are also important to ensure ultimate security.
In its first year, Crave has helped clients with property deals worth more than $55 million.
We just purchased a $325,000 property on behalf of a client, a corner block spanning over 790 square metres with rental return of $340 per week. They also have the opportunity to add a granny flat.
Another client recently landed a development block for $825,000, with similar properties now selling for $1 million.
Investors are also starting to look beyond local or usual purchase areas to areas that not only better suit their own financial situation but offer affordability and growth potential.
Now is the ideal time for home owners to check whether the impacts of recent government changes could increase the equity on their existing properties.
We are seeing a lot of opportunities being unlocked, with government rezoning key areas and adding infrastructure such as roads, transport and community facilities.
Debra Beck-Mewing is founder of consulting firm Crave Property Advisory and can be contacted <a href="https://www.craveproperty.com.au" target="_blank">here</a>.
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Negative gearing strategies outdated: Debra Beck-Mewing

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GUEST OBSERVER
Negative gearing was one of the federal election campaign’s fiercest battlegrounds.
While the Labor opposition claimed that the major beneficiaries of the tax policy were almost all in the very highest earnings bracket, the Coalition attacked any proposed changes, saying they would “smash” house prices and unfairly punish “mum and dad investors”.
The fact is, negative gearing can have surprising outcomes.
Using game theory, senior lecturer in mathematics Stephen Woodcock constructed four scenarios that demonstrate exactly who benefits from negative gearing.
You can watch a video explaining it <a href="https://www.youtube.com/watch?v=x2PTCQ2j1mQ" target="_blank">here</a>.
<h2>What happened</h2>
The game maximised the desirability of occupying the best house they could afford, whether this was by buying or renting.
The ultimate outcome was that richer players used negative gearing to keep purchasing multiple houses – forcing others to buy progressively inferior houses and/or rent from others. Some missed out completely and were forced to rent.
At the end of the game, one buyer owned all the houses, with all other players forced to rent from them.
And interestingly, in this game, negative gearing increased prices.
<h2>What does the future hold?</h2>
“It is easy to see how curious (and less than ideal) ownership patterns can arise when tax policies incentivise speculation in the property market. What is less clear is what can, or should, be done now,” says Dr Woodcock.
Dr Woodcock points out that both Sydney and Melbourne rank in the world’s five least affordable cities to buy a house. Despite record low interest rates, first home buyers are at the lowest level in years. First home owner grants have done little to help this and, arguably, have only served to increase prices further.
Instantly scrapping negative gearing would almost certainly cause a huge drop in prices, which would be manifestly unfair to people who made investment choices assuming that tax advantage would be available.
Labor’s proposed restriction of the benefit to newly built properties onlywould provide some relief. It has been argued, though, that this would encourage speculation in certain areas.
“A tax policy which avoids incentivising curious outcomes for society, yet retains basic fairness for existing investors would require subtle measures and crossbench support. Albeit by the narrowest of margins, the Coalition’s retention of power might mean that any such reforms are several years away.”
Interestingly, it was noted earlier this year that federal politicians – from both major parties – averaged more than two investment properties each.
Charis Palmer is deputy business editor, The Conversation and can be contacted <a href="https://theconversation.com/au/team#charis-palmer" target="_blank">here</a>.
Georgina Hall is editor, The Conversation and can be contacted <a href="https://theconversation.com/au/team#georgina-hall" target="_blank">here</a>.
Helen Westerman is business and economy editor, The Conversation.
Jenni Henderson is assistant editor, Business and Economy, The Conversation and can be contacted <a href="https://theconversation.com/au/team#jenni-henderson" target="_blank">here</a>.
Wes Mountain is deputy multimedia editor, The Conversation and can be contacted <a href="https://theconversation.com/au/team#wes-mountain" target="_blank">here</a>.
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Property 101: The curious incentives and consequences of negative gearing

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GUEST OBSERVER
Despite being widely described as a “tax rort for rich investors”, negative gearing is not a tax concession (a tax deduction as opposed to an exemption or rebate). It does, however, encourage over-investment and over-leveraging in Australia’s housing market, as the Financial System Inquiry Murray Report concluded.
Consequently, while not the only reason for increasing house prices and affordability issues in some locations, negative gearing has become a focal point in an election year for tax reform debate and a review of housing policy.
From Waleed Aly to the prime minister on his own blog, negative gearing is generating much talk without context.
<h2>Where does the idea come from?</h2>
Gearing describes the use of borrowing to finance an investment. When the interest costs of servicing that borrowing exceed the net income of the investment, it is said to be negatively geared.
The idea underlying negative gearing is relatively straightforward: when an individual (or business) incurs costs associated with generating income, those costs are tax-deductible from income.
As it is applied to investment properties in Australia, when interest costs of the mortgage exceed the net rental income of the property (that is, it is negatively geared) then the net loss on the investment property may be used by an individual to offset their ordinary wage income.
This is because, under the current rules in Australia, investment property losses are not “quarantined”. That is, the losses on an investment property are not only tax-deductible against the income from the investment property. As a result, the higher your total income, the greater the tax-minimisation benefit of negative gearing.
Quarantining losses is a major point of difference in the application of negative gearing in Australia to the rest of the world, and a key area that previous reforms in Australia have targeted.
<h2>International examples</h2>
Compared to the rest of the world, Australia’s negative gearing policy is one of the most generous to property investors.
Of OECD countries, New Zealand and Japan have the most similar treatment of negative gains to Australia. In these countries, negative gearing is allowed with relatively few restrictions.
On the other hand, the United Kingdom applies strict quarantining rules to loss-making properties. Investment property losses may be applied to the pool of income from investment properties and carried forward, but the losses may not be deducted against wages (i.e. non-passive income).
However, this summary should be treated with extreme caution. An international comparison of negative gearing treatment is incomplete without also examining the rules for capital gains and other housing market distinctions such as owner-occupier versus investment properties and new versus existing developments.
In the United States, while not a system to aspire to, even interest on owner-occupied housing is fully tax-deductible against ordinary income. By contrast, in Sweden, tax deductions from negative gearing of rental properties are permitted (although quarantined with income from other capital assets), but imputed rents from owner-occupied housing are taxed.
The net welfare gains are cumbersome to measure and entwined with government policy.
<h2>Previous attempts at reform</h2>
In 1984-85, major reform to negative gearing policy in Australia took place.
Prior to the Hawke government’s tax reforms, negative gearing rules quarantined investment property losses and allowed investors to carry these losses forward to offset future income when, or if, the property became positively geared.
In the space of six months, investment property losses quarantines were lifted (in order to boost the stock and affordability of rental housing) and then removed.
From property investors’ perspective, this final reform was severe: losses were quarantined on an asset-by-asset basis and could not be carried forward to offset future income.
Though this reform was not retrospective (that is, it would apply only to properties purchased after July 1985), it was largely criticised at the time and arguments that it caused rents to increase dramatically prevailed. While these analyses have been questioned in more recent debates, in September 1987 the reform was repealed and the system largely as it exists today was set.
The one major subsequent attempt at reform to negative gearing came in the 2010 Henry Tax Review. The primary recommendations for a “fairer” and more efficient housing market were for the removal, or reining in, of negative gearing. Specifically, negative gearing losses should be capped at 40 percent.
At the time of the report’s release, then-prime minster Julia Gillard chose to maintain the status quo with respect to negative gearing. Her response on ABC’s Q&amp;A shows that negative gearing is a bilaterally difficult topic.
<h2>Where are we now?</h2>
With calls for negative gearing reform from a range of voters, economists and advocacy groups such as ACOSS, why has no major political party achieved significant reforms to negative gearing?
There is the elephant in the room: the majority of Australian voters have a direct interest in the stability of the housing market.
Beyond that, the added confusion is the conflict between what negative gearing policy aims to achieve and the reality.
It is true that negative gearing distorts the housing market. It encourages over-investment and over-leveraging in Australia’s residential real estate sector. And this is exactly what it was intended to do.
But when combined with the existing progressive income tax structure, the relative benefit to low-income versus high-income earners is easily muddied.
For over 30 years, negative gearing has been untouched under the primary political motivation – that it increases the housing supply and, importantly, the stock of rental housing. It has taken this long to conclude that the stated aim does not appear to have been achieved. Finding a better alternative is not going to happen overnight, no matter how persuasively Waleed Aly puts the case against it.
<h2>So what are the reform options?</h2>
The Turnbull government has ruled out changes to negative gearing in the pre-election budget. The government has walked away from earlier suggestions of capping the losses that may be claimed from negative gearing, or restricting the number of negatively geared properties in an individual’s portfolio.
By contrast, Labor’s policy has been placed on a pedestal by proponents of reform. Labor proposes to restrict the tax benefits of negative gearing to new properties only. In theory this would redirect housing investment (which currently is concentrated in existing properties) to housing construction and help to boost supply.
Labor’s proposal would be a further distortion. Taken to its limit, offering incentives for investment in new properties also encourages speculative developments. The policy risks unoccupied housing investments and the resulting “ghost towns”, without improving housing affordability.
Complicating this analysis, however, is the complexity of the tax system and housing market policy. Negative gearing should not be analysed in isolation from capital gains (on which the Grattan Institute has published a comprehensive report) and other special treatments of housing such as stamp duty, land taxes and first-home-buyer exemptions. Rather than take a sledgehammer to the current policy, a good reform should encapsulate this spectrum of housing market distortions.
Danika Wright is lecturer in Finance, University of Sydney and author for The Conversation. She can be contacted <a href="https://theconversation.com/profiles/danika-wright-121868" target="_blank">here</a>.
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Negative gearing reform has chequered recent history

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GUEST OBSERVER
Like millions of Australians, I am an owner-occupier with a mortgage debt several multiples of our family’s annual household income.
Having bought in the last five years, I am on several Estate Agent’s email lists. This week past, I was accordingly surprised to receive an email from one of these Agents. The email concerned negative gearing, in 2016 a live election issue. It advocated against changing the existing policy, accordingly a vote for the incumbent government.
Australia is a democracy, and it is a privilege individuals and groups enjoy to be able to advocate for what policies they please. We are also a market economy, in which private interests are encouraged to pursue their private good within the limits of the Law.
Nevertheless, such direct advocacy by an Industry to its clients and everyone who will listen of one of the two major Parties' platforms is still novel or unusual. A precedent was set by the Mining Industry’s $22 million opposition to the Superprofit’s Tax.
Wise policy-making in a democracy or “common-wealth” should consider all the different interest groups affected, and different voices in the mix. It should orient itself towards a balanced, inclusive assessment of the general, as well as particular—and the medium and long-term, as well as short-term—good.
So let me put some considerations the email did not raise.
<h2>Some things the email did and did not raise</h2>
This email’s positive argument was familiar to anyone who follows the news cycle in Australia.  Negative Gearing is the ability of investors to claim any moneys lost on an investment property as reduced taxable income.
This effective subsidization of property investment may or may not have artificially inflated property prices by artificially boosting demand. This wasn’t mentioned.
Negative gearing may or may not place first home buyers aiming to own and occupy their little piece of Australia, against investors or consortiums buying 2nd, 3rd, or 4th properties, with much greater acquired wealth, economic capacity and even—with Negative Gearing—an artificial incentive to take on greater mortgages, but no intention to live on the property. This also was passed over.
But negative gearing stimulates property investment. And more investment properties means more rental properties. This keeps rental prices down. The beneficiaries of negative gearing are thus not only wealthy investors or developers, despite first appearances. The policy also benefits the (growing) 30 percent or so of Australians who presently rent: mostly the younger and least wealthy. It is an exercise in “equity”, as well as wealth creation.
Higher property prices also bring higher commission yields to Real Estate Agents. This was also not mentioned in my email.
<h2>The house prices (and unprecedented household debt) in the room</h2>
Also unmentioned were several relevant, larger pieces of economic information which affect how we should assess the wisdom of negative gearing, reintroduced by the ALP under Hawke-Keating in 1987.
By any accepted measure, the period of negative gearing in Australia has coincided with extraordinary rises in property prices. They have risen at disproportionate rates relative to the consumer price index. They have risen disproportionately relative to the median income.
In the year 1975 in which I, a Gen-Xer, was born, the average house price in Sydney was $28000.  To put things in perspective, the average Australian earned something just shy of $8000 in that turbulent year.
By early 2015, the median Australian income had become $72000, something like a tenfold increase, reasonably closely tracking the increase in the prices of most consumer goods.
House prices have however multiplied by something around thirty times in Sydney, Melbourne, Adelaide and Perth, and over twenty times in the other capitals.
In February of 2015, the average house price in Sydney came in at around $850000, well over ten times median annual income; Melbourne’s median house price (where we earn a bit less, to be fair) was about $615000.
As of August last year, Australian homes rated the third-least affordable of OECD countries. Only New Zealand, our neighbours across the ditch, and Canada, our commonwealth cousins North of our closest allies, have a higher house-price-to-income ratio.
The US itself suffered a grave financial crisis in 2007-2008 initially triggered by large numbers of defaults on household mortgages.
As of the turn of this year, some authorities suggest we have the second least affordable homes anywhere, following only Hong Kong.
So Australia is not alone in enjoying a property boom of historic proportions. Other countries have experienced broadly comparable rises in the price of property as against income and other consumer items.
Nevertheless, the rise of capital city house prices in the last four decades, as of last year,<a href="https://www.theguardian.com/business/2016/jan/15/how-australian-households-became-the-most-indebted-in-the-world"> </a>pushed Australia past Denmark as the most privately indebted nation, with a ratio of 123.08% debt to GDP. The International Monetary Fund (IMF), hardly crusted-on Labor voters anywhere, sent an economic team to Australia to examine “the risks posed by property speculation and record-high household debt as part of a broad health check-up of the sagging domestic economy.”
We Australians love a winner, and it is an Olympic year. But we should take no pride in the fact that, reaching the podium for a bronze in income-house-price ratios, we presently take the gold in private household debt.
<h2>X’s, Y’s, booms and boomers</h2>
Public debate around elections turns largely around budgets—what the government does with the money we provide the state in taxation, and who, how and what the government taxes or subsidizes. Less debate has turned over several recent elections on how Australia is now, after two decades of celebrated economic growth—and after a decade of being the economic envy of many another country globally—the most “negatively geared” population in the world.
But perhaps, since the ALP, Mr Turnbull and the Real Estate industry have made negative gearing an issue of public debate, now is the time we should be talking more—if not for our own sakes, then for those of the next generations. For the distribution of the household debt burden between different age and income groups is also not cause for celebration, alongside extant intergenerational data concerning who owns what in the lucky country.
Let me explain what I mean.
Since owning property requires greater wealth, everywhere the young and the less wealthy own less and, if this is possible (it hasn’t always been), lend more. The young have not had the time to accumulate wealth; the poor have had the time, but not the ability, opportunity or fortune.
There is nevertheless something historically exceptional about the present Australian situation. Anyone my age or younger, particularly those of us who teach and talk with Yers and “Nexters”, will know the frank resignation many young Australians feel about ever being able to own their own cut of the pie, except through aid from their parents.
As a Gen-Xer, I belong to the most indebted generation (35 to 44 year olds), when it comes to mortgages ($140000 average, as of 2011-12, including the growing proportions of us who do not own a house to be paying back). But my generation is followed by the Gen-Yers, 25 to 34 years (c$110000 average, for the same period). The Nexters must wait their turn.
In 1981<a href="https://grattan.edu.au/wp-content/uploads/2014/03/800_Renovating_Housing.pdf">,</a> more than 60 per cent of 25 to 34 year olds owned their own home in this country. By contrast, by 2011, only 48 per cent did so. The decline over the same period was 10 percentage points for those aged 35 to 44, from 75 percent to around 65 percent.
Home ownership rates stayed relatively stable only for Australians over 55 (born before 1960) in the decade of 2003-2013. In contrast to their children and grandchildren, the baby boomers remain the principal beneficiaries of the property boom.
<h2>We’re all in this together</h2>
Negative gearing is not solely responsible for this growing gap between income and house prices, Australia’s global leadership in household debt, and as such, the growing intergenerational wealth gap. The increased availability of credit, continually low interest rates, continuing population growth, and other factors have also contributed.
Illustrating all the old gags, economists disagree as to the effects of ending the regime of negative gearing in Australia. There will foreseeably be some decline in property investment, relative to other possible markets for capital. This may, in the shorter term, affect the availability of said properties to renters. Thus rental price increases are likely, at least in the short term.
But how steep the investment decline and how high the rental rise is debatable, should negative gearing be rolled back. Also debatable is how long these effects would last before the interconnected rental and ownership markets rebalance themselves.
Any such negative effects, that is, should be balanced against the effects removing negative gearing would have in moderating the rise and rise of Australian house prices relative to income. These are effects which will be relevant not only to Mr Turnbull’s “largest asset class”<a href="https://www.propertyobserver.com.au/https://www.abc.net.au/news/2016-05-13/real-estate-industry-attacks-labor's-negative-gearing-policy/7412458">,</a> in whose name he has called down havoc on Mr Shorten’s “reckless and dangerous experiment”. They will also have impacts for the next generations, increasingly a class or classes with a longer future and fewer assets.
Most Australian parents I wager would prefer that the around $100-200,000 their child will spend in renting in a capital city throughout their twenties would go to paying down a mortgage of their own in the suburbs, rather than paying down the mortgage on someone else’s investment—particularly an investment whose losses (above what their child’s rental outlays pay down) are deducted from the investor’s taxable income.
They would also rather that when their child and her/his partner wishes to bid at auction for their own small place in the housing market, they were not competing with investors who already have theirs; who have no intention of living in this new property; and who, to boot, intend to claim any costs unmet by rental income as the means to minimize their tax share.
So boomers too, who are also parents and grandparents, have compelling reasons to listen to more voices on this issue than the Real Estate lobby.
<h2>Future proofing</h2>
One of the stronger criticisms of electoral democracy is that, by focusing politicians on winning the next three-four year term, it blinds deliberation to longer term trends and problems. In complex economies like Australia’s, increasingly intertwined with global economic forces, many trends that shape the way we live, the prices of our goods and availability of our services develop over decades.
The property boom, relative to income, and accompanied by unprecedented private Australian debt, is not the product of Mr Turnbull’s term in government, nor of Mr Abbott’s, nor Rudd-Gillard-Rudd’s, or even Mr Howard’s economic miracles.
It takes courage to challenge such a three-decade policy with so many beneficiaries. “Whatsoever is new is unlooked for; and ever it mends some, and [im]pairs others”, someone said. For “what is settled by custom, though it be not good, yet at least it is fit.” But just as the institution of negative gearing has aided some, it has impaired the young, and solely-wage-earning Australians who typically earn less than others, but must be taxed on it all.
Just so, by scrapping negative gearing, we shall be impairing investors and Real Estate agents, but aiding the next generations of Australians. At worse, if rental prices do rise, this will provide an incentive for the young to enter the property market earlier, bucking existing inequitable trends.
Scrapping negative gearing may help avoid a more damaging “correction” in property prices that more bearish commentators have long been prophesying, and the IMF felt concerned enough about to come visiting down under.
For by scrapping negative gearing, make no mistake about it, any new government shall be making a small step towards reducing Australian house prices. This, and its effects on their commissions, is the red raw motive behind the Real Estate lobby’s wounded advocacy.
But looking forwards, at some point Australia is going to have to confront the growing wealth disparity between the generations, and the gap between what people earn and what they owe. While it is just that older people be rewarded for their labours, this consideration needs to be balanced against the right of younger generations to feel like they can and do own a stake in the commonwealth, rather than facing longer and longer periods of paying down others’ mortgages or world-leading mortgages of their own.
So a vote against negative gearing, no matter which Party proposes it, is a vote to minimize the increasingly huge debt burden the younger generations need to take on to own, if not their quarter-acre block, then a quarter of the land most middle-class Australians could comfortably afford two generations ago.
Just as the email said, this is urgently important.
Matthew Sharpe is associate professor in Philosophy, Deakin University and author for The Conversation. He can be contacted <a href="https://theconversation.com/profiles/matthew-sharpe-125260" target="_blank">here</a>.
 
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Negative gearing not solely responsible for growing gap between income and house prices

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GUEST OBSERVER
Average income earners largely are the people who do get to take advantage of negative gearing - nurses, policemen and women on an average wage, investing, for instance, in a property. Most of them hold only one property, which adds to the housing stock that’s available for people as well. – Assistant Treasurer and Small Business Minister Kelly O'Dwyer, speaking on ABC TV’s Insiders, October 25, 2015
Negative gearing is a tax break available for people who own at least one other property in addition to their primary place of residence. This tax break applies only if the costs associated with the investment, including interest payments and other expenses, are greater than the rental income. Any loss made on the property can be offset against other income, thus reducing personal tax.
<div class="grid-ten large-grid-nine grid-last content-body content entry-content instapaper_body">
It’s true many nurses and police officers and other middle-income (and even much lower) people have negatively geared properties. But are these occupations and incomes the typical beneficiaries of negative gearing?
<h2>Checking the data</h2>
When asked for a source to support her statement, a spokesperson for O'Dwyer sent the following statistics.
<blockquote>
• Taxation statistics show 66.5% of taxfilers who declare a net rental loss have a taxable income of A$80,000 or less.
• Those who use negative gearing include 22.6% of police officers, 19.2% of ambulance officers and paramedics, and 18.9% of train and tram drivers.
• Of the Australians who use negative gearing, the majority only hold one additional property.
• 73% of people with a rental property interest have only one property and 18% own two.
</blockquote>
A $80,000 per year is not a typical taxable income. Around 84% of non-investors have a taxable income below $80,000. This compares with the 66.5% of people with negative geared property.
It is true that a relatively high proportion of the listed occupations have negatively geared properties. While it may be the popular belief that these are low or middle income occupations, these are actually reasonably highly paid occupations. For example, 73% of train and tram operators earn more than A$80,000 per year.
In our analysis, we looked at the income distribution of people who negatively gear compared to that of people who do not invest in rental properties.
The data set we used is called the 2012–13 individuals sample file. To collect this data, the Australian Taxation Office (ATO) sampled 2% of all individual tax returns filed in 2012-13.
According to this ATO data set, there are 1.26 million (10%) taxpayers who negatively gear. Their average loss was A$8,930 per year. A further 700,000 with a rental investment are positively geared (meaning their rental income was greater than their costs). About 85% of taxpayers don’t have a rental investment.
<a href="/images/2015/11/23/image-20151115-10412-1h6jg2h.PNG" target="_blank">Click to enlarge</a>
<img src="/images/2015/11/23/image-20151115-10412-1h6jg2h.PNG" alt="">
 
The chart shows what statisticians call the “smoothed” probability distribution (which is a smoothed histogram of the income distribution) of taxable income for people with negatively geared properties and people without rental investment properties. Marked also on the chart are the median and top 10% (P90) income points for both people with negatively geared properties and those without property investments.
The median income for negatively geared investors is A$60,000 per year, compared with $40,000 for non-investors.
A similar gap (50%) exists at the top end of the income spectrum. The taxable incomes of the top 10% of earners with negatively geared investments is around $150,000 compared to $98,000 for non-investors.
The chart shows clearly that, typically, people with negatively geared properties have significantly higher incomes than people without property investments.
In an April 2015 analysis commissioned by GetUp! for the Australia Institute, NATSEM found that 34% of the tax benefits of negative gearing accrues to the richest top 10% of families, as this chart from the report shows.
<a href="/images/2015/11/23/image-20151119-19345-1kb57np.png" target="_blank">Click to enlarge</a>
<img src="/images/2015/11/23/image-20151119-19345-1kb57np.png" alt="">
Only around 20% of the tax benefits go to the bottom half of the income distribution.
High-income families invest more money than low-income families. The tax system benefits high-income earners more than low-income earners due to higher marginal tax rates amplifying the effectiveness of deductions.
<h2>The role of capital gains</h2>
Negatively gearing property implies that the investor is making a loss on their investment. As the chart below shows, the tax savings are greatest among those in the higher tax brackets. However, it remains the case that these investors continue to make an overall loss on their investment, even after accounting for tax deductions.
<a href="/images/2015/11/23/image-20151119-19348-1fbe7uh.png" target="_blank">Click to enlarge</a>
<img src="/images/2015/11/23/image-20151119-19348-1fbe7uh.png" alt="">
 
The success of negative gearing as an investment strategy is reliant upon capital gains. In a property upswing, this strategy can be highly successful with lucrative gains on often minimal equity investment. During a property downswing or period of limited price growth, these strategies are very poor investments.
A recent analysis by the Grattan Institute shows that while police and nurses do invest in property, it is the higher-income occupations, such as doctors and mining engineers, who are much more likely to invest.
<h2>Adding to the housing stock?</h2>
Property investment only improves housing affordability when the purchase adds to the stock of newly constructed dwellings in affordable housing.
According to CoreLogic RP Data, in 2014 there were just under 500,000 property transactions and ABS building completions data suggest only around a third of those were newly built dwellings. It therefore stands to reason that most property transactions each year are probably existing stock.
<h2>Verdict</h2>
O'Dwyer’s assertion is not supported by the data. <a href="https://www.ato.gov.au/About-ATO/Research-and-statistics/In-detail/Tax-statistics/Taxation-statistics-2012-13/?page=40" target="_blank">ATO data</a> shows that, typically, negatively geared investors have higher incomes than people without rental investments.
The same data shows that negatively geared investors have typical incomes around 50% higher than non-investors – even after deducting their losses from negative gearing.
The top 10% of the income distribution for negatively geared investors earn around 50% more than non-investors. Incomes for this top 10% are around $150,000 per year, compared with $98,000 for non-investors, according to the ATO.
Ben Phillips is principal research fellow, National Centre for Social and Economic Modelling (NATSEM), University of Canberra. Cukkoo Joseph is research assistant, University of Canberra. Both are authors for The Conversation and can be contacted <a href="https://theconversation.com/profiles/ben-phillips-98866" target="_blank">here</a>.
Review
While I agree with everything in the above FactCheck, I would go further in criticising Kelly O'Dwyer’s statement, particularly the reference to investors adding to the housing stock.
The figure cited above for the ratio of housing purchases for new housing stock includes owner occupiers.
The impact on housing stock is tiny, but the effect on housing affordability of all those investors bidding up the prices of existing housing is likely to be substantial. 
Warwick Smith is research economist, University of Melbourne and author for The Conversation. He can be contacted <a href="https://theconversation.com/profiles/warwick-smith-95344" target="_blank">here</a>. 
</div>
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Are average earners in Australia the main beneficiaries of negative gearing?

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GUEST OBSERVER
The Federal Opposition’s new negative gearing policy has been met with mixed responses from the property industry and the wider public, however  has warned against implementing major reform without a full understanding of all the variables at play.
I welcome ideas aimed at promoting affordability, especially for first home buyers, as well as initiatives with the potential to create jobs down the housing industry supply chain but restricting negative gearing to new properties and grandfathering tax treatment for existing investments raises questions - the answers to which are not yet clear.
While new supply has had an impact on the rental market, including in Sydney, where rental growth for apartments has stalled, vacancy rates still remain extremely low across the board.
Greater stability in rents has been a welcome relief to tenants, for so long subjected to hike after hike, yet Labor’s policy could potentially reverse the situation and exacerbate renters’ pain all over again.
Firstly, owners of existing properties who are already using a negative gearing strategy will be reluctant to sell, knowing they will not be able to access the same tax treatment any longer unless they buy something new.
But this would be problematic, as prices for new stock would naturally inflate as demand is heightened among those investors looking to access negative gearing. As such the strength of investment may soften further.
This could lead to a scenario where vacancy rates drop even further, on top of the most recent tightening trend, putting renewed pressure on rents and jeopardising the ability of tenants to accumulate a deposit for their first home.
We see too many what-ifs associated with this policy at this stage so caution seems to be the most appropriate approach.
Labor’s negative gearing policy, designed to unlock flow-on economic benefits associated with supporting new supply, will nonetheless have a variety of other impacts perhaps not yet fully explored with the appropriate modelling.
No major reform should be implemented without comprehensive and detailed modelling, and the various unknowns with this Labor policy seem to warrant further investigation.
History is clear on the importance of comprehensive planning. For instance, when the vendor exit duty tax was introduced some years ago, without the appropriate consideration and number-crunching, it had a significantly detrimental impact.
The vendor exit duty stalled economic activity and failed to reward those who had taken the intiative to invest for their future security.
This is the reason most people invest in property in the first place, so we should ensure we don’t make the same mistake again with negative gearing.
 
 Leanne Pilkington is managing director, Laing+Simmons and can be contacted <a href="https://lsre.com.au/home" target="_blank">here.</a>
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Negative gearing policy raises prickly questions: Leanne Pilkington

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GUEST OBSERVER
The issue of negative gearing has roared to the centre of our national political debate.
Last weekend Labor leader Bill Shorten announced major changes to negative gearing and to capital gains tax. The Parliamentary Budget Office estimates that Labor’s policy could raise $32 billion over 10 years.
These are risky changes for our industry and for the economy given they come at a time when growth is so delicately poised.
Major changes to negative gearing and capital gains tax would have far-reaching effects throughout the economy. If enacted, Labor’s policy will distort the market, hit rents, hurt jobs and make it so much harder for families to plan their economic futures – all this without any modelling of its impact on rents, construction levels, jobs or state budgets.
However, it is not only the Opposition that is being tempted by the possibility of big new tax licks.
As yet, we do not have clarity over the Turnbull Government’s position on property taxes. While some frontbenchers and backbenchers have expressed support for the existing system of negative gearing, the Government’s position appears to be fluid.
That’s why the Property Council is putting the case to politicians of all political backgrounds not to damage an industry that supports 1.1 million jobs throughout the economy and generates one ninth of our national income.
Two million Australians own an investment property. Property has always been part of the ‘Australian dream’ and it has been a proven means for Australians on middle incomes to build their wealth.
Playing around with negative gearing policy doesn’t make sense and it’s sure not worth the economic risk.
 
Ken Morrison is the Chief Executive of the Property Council of Australia and can be contacted <a href="https://www.propertycouncil.com.au" target="_blank">here.</a>
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Negative gearing changes not worth the risk: PCA's Ken Morrison

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<h4><a href="https://theconversation.cmail20.com/t/r-l-vkiihjl-qitldhiii-yh/" target="_blank"></a></h4>
GUEST OBSERVER
Much of the current tax debate is mangled by poor analysis and misconceptions. Let’s consider three topics: “bracket creep”; corporate tax rates; and negative gearing.
<h4><a href="https://theconversation.cmail20.com/t/r-l-vkiihjl-qitldhiii-yh/" target="_blank"></a></h4>
The fact that inflation, more precisely wages growth, pushes individuals into higher marginal tax brackets has been advanced as the rationale for a variety of tax proposals. But the unacknowledged elephant in the room is the simple, rational, response to bracket creep – index the tax scales.
<h4><a href="https://theconversation.cmail20.com/t/r-l-vkiihjl-qitldhiii-yh/" target="_blank"></a></h4>
That is, if inflation was 5% over the past year and the 37% marginal tax rate previously started at an income threshold of $80,000, that threshold would be increased to $84,000 (that is, an increase of 5%).
<h4><a href="https://theconversation.cmail20.com/t/r-l-vkiihjl-qitldhiii-yh/" target="_blank"></a></h4>
It is legislatively and administratively simple. A low inflation environment makes this the ideal time to implement such a beneficial change which can counter profligacy of future governments, should high inflation return and induce higher tax revenues from bracket creep.
<h4><a href="https://theconversation.cmail20.com/t/r-l-vkiihjl-qitldhiii-yh/" target="_blank"></a></h4>
That one is simple. The real issues in the corporate tax rate debate, where many advocate lowering the rate, are more subtle – and missed by most of those advocates. Under our dividend imputation tax system, company tax payments are offset by lower investor tax payments when earnings are paid out as franked dividends to Australian investors. For such investors, lowering the company tax rate has (subject to a few caveats) no effect on their after tax returns from investment.
<h4><a href="https://theconversation.cmail20.com/t/r-l-vkiihjl-qitldhiii-yh/" target="_blank"></a></h4>
Who would benefit? Foreign-owned companies for one, for which the after-tax returns from Australian operations are increased (assuming they haven’t structured affairs to avoid tax anyway). That might induce more of them to establish or expand operations in Australia – although it should be stressed that our corporate tax rate, while above that of some Asian neighbours, is below that of a number of advanced countries. So arguments that our corporate tax rate is “uncompetitive” do not obviously cut the mustard.
<h4><a href="https://theconversation.cmail20.com/t/r-l-vkiihjl-qitldhiii-yh/" target="_blank"></a></h4>
Other beneficiaries would include private Australian companies owned by wealthy individuals on (hopefully) high marginal tax rates. For them, there are significant tax benefits from retaining earnings in the company rather than paying franked dividends.
<h4><a href="https://theconversation.cmail20.com/t/r-l-vkiihjl-qitldhiii-yh/" target="_blank"></a></h4>
Doing so avoids the extra tax payable at the personal level (after allowing for franking credits) due to their marginal tax rate exceeding the company rate. Instead retention of earnings (and franking credits) generates capital gains which may eventually be taxed at the concessional capital gains tax rate. So lowering the company tax rate would benefit these wealthy individuals (and does nothing for small private companies struggling to make a taxable profit).
<h4><a href="https://theconversation.cmail20.com/t/r-l-vkiihjl-qitldhiii-yh/" target="_blank"></a></h4>
A third set of beneficiaries might be Australian companies – but the source of any such presumed benefit is subtle. A benefit would arise if the cost of equity capital was reduced through a lower company tax rate.
<h4><a href="https://theconversation.cmail20.com/t/r-l-vkiihjl-qitldhiii-yh/" target="_blank"></a></h4>
As explained above, there is unlikely to be any such effect from a change in the required rate of return of Australian investors. Foreign investors might lower their required rates of return, but that is, at least, debatable.
<h4><a href="https://theconversation.cmail20.com/t/r-l-vkiihjl-qitldhiii-yh/" target="_blank"></a></h4>
Of course, one doesn’t need to lower the company tax rate to achieve this – a rebate of tax on dividends paid to foreign investors would achieve the same outcome. And the political resistance that would undoubtedly occur in response to such a proposal should indicate that relying on this argument for reducing company tax is untenable. And remember, our company tax rate is in the middle of the pack for advanced economies.
<h4><a href="https://theconversation.cmail20.com/t/r-l-vkiihjl-qitldhiii-yh/" target="_blank"></a></h4>
Finally, negative gearing. There is nothing wrong with negative gearing itself (although fraught with risk due to leverage). The problem is that there are undesirable tax benefits associated with it, arising from claiming current tax deductions for interest paid on financing an investment on which tax on returns will be deferred and at a concessional rate.
<h4><a href="https://theconversation.cmail20.com/t/r-l-vkiihjl-qitldhiii-yh/" target="_blank"></a></h4>
The solution? Removing concessional capital gains tax (or at least returning to full taxation of real capital gains) is part of the solution. But it is only part – because deferring tax payments until realisation of the asset sale implies a lower effective tax rate.
<h4><a href="https://theconversation.cmail20.com/t/r-l-vkiihjl-qitldhiii-yh/" target="_blank"></a></h4>
It would not be feasible to tax capital gains as they accrue, given the adverse cash flow consequences for investors. However, we could use a variant of the tax treatment of companies with carry forward tax losses, which are compounded up at the government bond rate to keep their real value until usable.
<h4><a href="https://theconversation.cmail20.com/t/r-l-vkiihjl-qitldhiii-yh/" target="_blank"></a></h4>
Quarantining currently deductible interest costs on negative gearing to offsetting income earned on the investment, plus carry forward of additional unused interest costs is one way to go. When the investment is eventually sold, or when income exceeds interest expense, those accumulated unused costs could be claimed for tax purposes.
<h4><a href="https://theconversation.cmail20.com/t/r-l-vkiihjl-qitldhiii-yh/" target="_blank"></a></h4>
This is not administratively complex, would be fairer for other taxpayers who ultimately pay for the concessions, and might reduce incentives for excessively leveraged investments.
Kevin Davis is research director of Australian Centre for Financial Studies and professor of Finance at Melbourne and Monash Universities, Australian Centre for Financial Studies and author for The Conversation.
He can be contacted <a href="https://theconversation.com/profiles/kevin-davis-3497" target="_blank">here</a>.
 
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Property 101: Understanding bracket creep, negative gearing and corporate taxation

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GUEST OBSERVER
More Australians than ever before owned a rental property and those relying upon negative gearing dropped, according to the latest ATO Taxation statistics release.
The 2013-14 year ATO taxation return statistics show a drop to 1.257 million people (or 62 percent) declaring a net rental loss out of the 2.03 million persons that own an investment property.
The total amount of net rental loss declined from $12.04 billion to $10.97 billion which shows that more rentals across Australia were being positively geared than ever before.
There is a year on year decrease in the loss made by a rental with lower interest rates supporting this outcome. 
In the past 12 months, Australia has seen a substantial rise in the number of individuals with a rental interest, which is mainly due to the increase of middle Australia into the residential market.
In terms of additional investors, the numbers of individuals with a rental interest and a taxable income between $37,000- $80,000 has increased by 8,872 over the year, with those in this taxable income bracket hitting 707,282 individuals with a net rental interest.
The largest volume increase in overall investors came through an additional 42,362 individuals in the $80,001- $180,000 taxable income bracket. Middle Australia is clearly buying into residential property and this is the largest increase in net rental interest over the year. This taxable income group makes up 34.7 percent of all individuals with a net rental interest.
<a href="/images/2016/03/23/Screen%20Shot%202016-03-22%20at%2012.00.10%20PM.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/03/23/Screen%20Shot%202016-03-22%20at%2012.00.10%20PM.png" alt="" width="727" height="312">
In 2013-14 there was also a:
• 12.9 percent increase or a 9,029 additional individuals in the $180,001- $250,000 taxable income bracket with a net rental interest.
• 10.3 percent increase or a 5,023 additional individuals in the $250,001- $500,000 taxable income bracket with a net rental interest.
• 12.4 percent increase or a 1,431 additional individuals in the $500,001- $1,000,000 taxable income bracket with a net rental interest.
• 18.5 percent increase or an additional 729 individuals in the over $1,000,000 taxable income bracket with a net rental interest.
<a href="/images/2016/03/23/Screen%20Shot%202016-03-22%20at%2012.13.08%20PM.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/03/23/Screen%20Shot%202016-03-22%20at%2012.13.08%20PM.png" alt="">
There has been a clear growth in the number of lower to middle income earners that have joined the investment ranks over the past several years with those earning over $80,000 growing the largest in terms over the 12 month period.
Although the percentage increases in net rental interest at the higher taxable income ranges are the largest, their actual additional numbers are quite small compared to the lower taxable income brackets. The scale of investment in these higher taxable income brackets would be expected to be much greater than at the lower end.
<a href="/images/2016/03/23/Screen%20Shot%202016-03-22%20at%2012.15.00%20PM.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/03/23/Screen%20Shot%202016-03-22%20at%2012.15.00%20PM.png" alt="">
Total property investors increased by almost 67,000 persons over the year to surpass the 2 million mark for the first time. With an eye on retirement, 29,600 of these additional new investors were aged between 40-59.
In particular, low interest rates have seen Rent Interest deductions decline by around $1.08 billion on the previous year which reduces the number of investors making an annual loss on a property.
Also contributing to the positive gearing position, there was an increase in the total Gross Rental Return from all properties by around $2.19 billion compared to the previous year.
By age, younger investors are still the most likely to rely upon negative gearing with 82 percent of all property investors aged between 18-29 declaring a net rental loss.
All age groups except those over 70 saw a decline in the net rental loss with positively geared investment increasing across the age groups as investors get closer to retirement.
Some 13 percent of all persons across the country earning a taxable income under $80,000 had a rental property, whereas 26 percent of those earning over $80,000 per year had a rental interest. The likelihood of owning a rental increases as wages increase with 40 per cent of all those earning $500,000 -$1 million having a rental interest.
In vast numbers those earning in the lower tax brackets make up the largest proportion with a rental interest.
By income, 767,000 those declaring a taxable income under $80,000 made up 61 per cent of total net rent losses, with an average Net Rent Loss of $7,351 in the year.
Other Rental Deductions, which include deductable expenses on rental properties such as repairs, maintenance, cleaners, tradeswork, insurances and other costs paid out by investors to maintain a property, climbed by almost $1.4 billion from $16.99 billion to $18.38 billion over the year. 
Over the past 20 years the Other Rental Deduction category which reduces taxable income has grown from $4 billion to $18 billion per year, so there is clearly a shift in investment patterns around the repairs and maintenance which is beneficial for tenants, jobs and the economy.
<a href="/images/2016/03/23/Screen%20Shot%202016-03-22%20at%2012.16.22%20PM.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/03/23/Screen%20Shot%202016-03-22%20at%2012.16.22%20PM.png" alt="">
The rise in Other Rental Deductions shows that despite average Net Rental Losses declining, there is an increasing propensity from all investors to plough some of the gains from lower interest rates back into the property. With the negative gearing concession being a motivating factor, the increase in Other Rental Deductions provides incentive to maintain the rental yield by putting money back into keeping the tenant happy in a more competitive rental market.
With average rents starting to flatten in 2013-14 as growth that corresponded to rapidly rising property values in the previous decade subsides in parts of the country, the Other Rental Deduction investment is clearly supporting and sustaining the yield.
This increase in Other Rental Deductions by way of investment in Australian property stock would be a supporting boost for the base level trades and maintenance services on upkeep and would have provided a significant boost to jobs across these areas.
What generally has been overlooked when considering the ATO Taxation statistics in previous years is the increasing value to the economy for the trades, cleaners, gardeners, plasterers, chippies, sparkies, plumbers and others that come from the property investor that pays out when things break, need repair or maintained.  
What hasn’t been factored into account is that there has been strong growth in the numbers of those small handy trades that comprise a significant part of the property and construction workforce.
<a href="/images/2016/03/23/Screen%20Shot%202016-03-22%20at%2012.17.38%20PM.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/03/23/Screen%20Shot%202016-03-22%20at%2012.17.38%20PM.png" alt="">
The increase in foreign investment in residential real estate is becoming apparent in the 2013-14 year with an 82 percent increase in non resident investment in residential real estate compared to the previous years.
<a href="/images/2016/03/23/Screen%20Shot%202016-03-22%20at%2012.18.44%20PM.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/03/23/Screen%20Shot%202016-03-22%20at%2012.18.44%20PM.png" alt="" width="1120" height="726">
Nicholas Proud is principal of <a href="https://propertyanalytics.com.au" target="_blank">Property and Construction Analytics Australia</a>.
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Negative gearing

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