"Negative" thinking keeps rentals affordable
If you’re going to do a thorough review of Australia’s taxation system then everything’s got to be reconsidered. So with Treasury head Ken Henry’s rummaging around in the tax-breaks closet we weren’t surprised to hear negative gearing again pulled out for discussion. One of our landlord clients rang us concerned, online investor blogs have started a nervous chatter and the weekend’s Courier Mail headlined with “Negative gearing attacked for driving up property prices”.
What is it? The ATO says “A rental property is negatively geared if it is purchased with the assistance of borrowed funds and the net rental income, after deducting other expenses, is less than the interest on the borrowings“. So it costs more for you to own the property than a tenant will cover with rent payments.
Okay so we’re real estate agents, we have a vested interest in encouraging property investment. But so does the 32% of Australia’s population that rents. Who will provide their housing if we discourage investors?
A recent get-together of unions, welfare reps, conservationists and consumer groups discussed the Henry Review. The group, calling themselves “Community Tax Forum”, says Australia is a low taxing nation. Blaming negative gearing for high home prices their spokesperson said, “There’s no doubt we’ve got the most generous system in the world for rental investors”. Maybe they have images running through their heads of wealthy old landlords banging on poor pensioners’ doors demanding more rent…
The Real Estate Institute prepared a paper on the topic as far back as June 2008. Their findings: 72% of property investors using negative gearing earn $63,000pa or less. Just 11% earn over $95,000pa. Most are Mum and Dad investors building their retirement nest eggs. The Property Council says negative gearing costs the tax man $2billion a year, but taxes on property generate $29billion.
Of course Paul Keating had a crack at this tax break in July 1985, limiting a property investor’s interest deduction to that property – that is, not letting them claim the loss against other income. Either people forget too easily or they choose to ignore history’s lessons. Following the 1985 change new housing construction plummeted and rents rose 32% in Brisbane, 37% nationally. By 1987 Mr Keating had backflipped and rental supply eventually caught back up to demand.
Property investments don’t stay ‘negative’ as rents rise and principals are repaid, and at some point they’re sold with capital gains tax incurred by the investor. So in time the Treasurer will get his pound of flesh. And in the meantime our nation’s tenants can enjoy more reasonable rents.
Despite our role as real estate agents we would welcome your opinion! Do you agree with tax breaks for property investors?
I agree that losses made from an investment property (negative gearing) should be tax deductable, but people should seriously consider whether buying a loss making investment of any sort is a good idea!
After all, it only makes a loss because you are buying it for so much. So is it then realistic to expect its value to go even higher in order to offset those losses AND provide a profit too.
Hi Rob
If the taxbreaks for negative gearing are removed then there will be fewer rental properties available and rent will rise for people who are already having trouble affording rental. The Govt is misguided in its efforts to curb individual investor returns and should consider the principle that the more one gives the more one gets. Especially the Govt. !
Hi Rob,
As we recently discussed, I very much agree with your comments supporting the retention of negative gearing, in a recent ‘Inner City News.’ You have asked for reader’s comments, and I am happy to oblige.
I have been very concerned by the campaign to end negative gearing, being waged in the press and elsewhere. Many demanding its abolition clearly have little knowledge of the subject. Many bloggers and other critics openly admit that they own no investment property themselves (some admit they don’t even own their own home), but their uninformed views are still getting a lot of attention. They have already convinced the Henry Taxation Review to consider recommending the possible abolition of negative gearing for property investors, in its final report to the Federal Government. According to the Weekend Financial Review (April 4-5, 2009), it is now confirmed that ‘trusts, superannuation concessions, negative gearing and fringe benefits tax are being analysed by the (Henry Tax) review, in response to concerns raised in submissions.’ The article also warned: ‘Shutting down tax loopholes that favour the wealthy and ensuring the tax transfer system is fairer will be key themes in the recommendations of the federal tax review, its chairman, Treasury Secretary Ken Henry said on friday.’
No prizes for guessing where all this is leading, particularly so far as property investors are concerned.
Why are so many Real Estate Agents, and the Real Estate industry generally, standing idly by while tax benefits for investors in real estate are deliberately and wrongly labelled as tax breaks for the wealthy? Obviously real estate agents’ incomes would be adversely affected by the abolition of negative gearing and other tax breaks for investors. Does the Real Estate industry care? And most of the property investors I have met over the years are certainly not wealthy. Many are low to middle income earners -ordinary Australians just trying to provide some measure of future security for themselves and their families by investing in real estate.
I will concentrate on negative gearing, as that was the focus of your article.
The arguments in favour of retaining negative gearing are really overwhelming. They include (in addition to the valid and important points already made in your article):
1. Some critics of negative gearing appear to believe that all of the investor’s losses on the investment are being paid in full by the Government. Of course this is not so. Even if the taxpayer is on the highest marginal tax rate, the investor still must pay at least 55% of the loss out of his or her after tax income. Investors on lower incomes must pay an even higher percentage. Certain consequences flow from this reality:
(i) It is obvious that the rent paid by the tenant does not meet all the expenses of ownership (interest on the loan, rates, taxes, insurance, Body Corporate levies etc).
This in turn means that the negatively geared investor is actually subsidising the tenant’s lifestyle at the expense of the investor’s own. Allowing negative gearing
as a tax deduction simply acknowledges this basic truth. The property investor should be applauded and encouraged by Government – not punished.
(ii) A second consequence is that those calling for a statutory limit on the number of negatively geared properties any investor may own (another great favourite in
the blogosphere) are also exposing their ignorance. If an investor has an annual after tax loss of (say) $10,000 per investment property, then obviously
there is a practical limit to the number of negatively geared properties any investor (even a very wealthy one) can support. Even property investors still have to feed
and clothe themselves and their families!
(iii) A third, and most fundamental consequence, is that negative gearing will only be viable if the annual capital appreciation on the investment property exceeds
any after tax loss. The property investor thinks long term, and the negatively geared investor consciously absorbs short term losses in the expectation of compound
capital growth in the longer term. However some ‘experts’ are arguing that we are now entering a lengthy period of flat, or even negative, growth in property values.
Let’s hypothetically assume these doomsday merchants are right. Clearly, in that environment, negative gearing ceases to be a viable option for anyone, even after
tax benefits. Many negatively geared property investors would doubtless make the commercial decision to divest themselves of an under performing asset class,
further diminishing the stock of available properties for rent. If there is even a possibility of this scenario unfolding, surely it makes sense for Governments to keep
the negative gearing benefits intact, and encourage as many property investors as possible to stay in a static or falling market?
2. Most of those calling for the abolition of taxation benefits for negatively geared investors argue that real property is overpriced. They believe the abolition of negative gearing will cause real estate values to collapse and openly admit they want this to happen. A property collapse will ‘make housing more affordable.’ According to this perverse viewpoint, it’s just unfortunate for those property buyers -home owner and investor alike – who have bought real estate since the last housing boom. The politics of hatred and envy actually motivates many of those demanding the abolition of negative gearing. An unspoken subtext is the desire to see the property investor suffer, and to lose money by being forced to sell in a down market. After all, investors ultimately want to make a profit. But according to the ‘abolish negative gearing’ perspective, all property investors are ‘greedy’, and moral justice demands that the Government changes the ground rules, so these ‘greedy’ investors and landlords lose money. (Anyone who believes this criticism is unfair should carefully peruse the ‘readers comments’ under virtually any recent internet article on the Australian real estate market. The politics of envy is never stated expressly, of course, but is always implied).
3. If negative gearing is abolished, clearly many investors will be unable to continue subsidising their tenants. Those investors will have to sell their properties. I understand that, when an investor sells a property, it is usually purchased by an owner occupier. Obviously any shortage of private rental properties will cause rents to rise. People are already complaining about rising rents. What will happen to rents if investors suddenly have to meet all rental property losses out of their own after tax dollars, and get no tax relief? Rents will have to rise even more, surely? It would perhaps be poetic justice if those skyrocketing rents meant that many negatively geared properties suddenly became positively geared, so their owners won’t need the tax breaks anyway.
4. If the Federal and State Governments propose to take over the provision of rental housing themselves (which seems to be where we are heading) then obviously taxes, rates and charges at all levels of Government will have to rise exponentially. Has anyone worked out exactly how much Government money (Federal, State and local) will be required, on an ongoing basis, to house the ever increasing army of renters in Australia? Where will this money come from? Will taxes have to rise dramatically, will new taxes be imposed or will the expenses just be tacked on to Australia’s already rapidly escalating national debt?
5. The cityscapes of many major English and European cities are already blighted by huge, unsightly complexes of low cost housing and ‘council flats’ – typically Government subsidised housing for those on low incomes. Is this what lies in store for all Australian cities, if private property investors are forced out of the rental market?
6. Those calling for the abolition of negative gearing for property investors conveniently ignore the fact that negative gearing benefits can also be claimed by those investing in shares. Is it proposed to abolish negative gearing for share investment too? If so, on what basis? If, on the other hand, negative gearing benefits are to be left untouched for those investing in equities, how can this discriminatory treatment between different asset classes be justified?
7. It is most unfortunate and regrettable that all levels of Government already seem to have set out to punish those who invest in real property.
For instance: The Brisbane City Council offers the home owner rates ‘capped’ at a lower level. The investor is forced to pay a higher level of general rates than does the home occupier. And the Council’s justification for its differential and discriminatory rating system?: Investors can claim a tax deduction for their rates; home owners can’t. At the State level, Queensland Landlord and Tenant legislation, already strongly favouring the tenant, is being replaced by new legislation that is apparently even more weighted against the landlord. And State Land Tax operates as a de facto Wealth Tax. Finally, at the Federal level, the Family Allowance rules were changed some years ago (by the Hawke/Keating Governments). These new rules require negatively geared property investors to add all gross rents they receive on to their salaries and other income, when determining their eligibility for Family Allowance payments. This is despite the obvious fact that all gross rents on a negatively geared property are expended to meet property expenses. The result is that many property investors with school age children, and salaries well below the maximum cut off threshold, are nonetheless deemed ineligible for Family Allowance payments. And then there is the capital gains tax, that the ‘abolish negative gearing’ brigade all want to see increased. Why are property investors already so discriminated against by all levels of Government???
8. The basic point seems to me to be that property investors are mostly ordinary people who are trying to make direct provision for their own security and retirement by investing in real estate: the direct investor in property (and, for that matter, shares) seeks to retain some measure of personal control over his or her financial future. Those who invest everything in managed funds (including superannuation), by way of contrast, effectively abdicate all responsiblity for their financial future to others. Why are property investors the ones being treated as pariahs?
Apparently the Henry Tax Enquiry is still open to receive submissions. Could I encourage you and other Agents to make your own submissions to the Enquiry? I am considering sending a copy of this email as a submission from me, as an individual, but realistically don’t expect anyone at the enquiry to take any notice.
Thank you for your efforts in bringing this issue to people’s attention.
Best Wishes
Greg