Property investors breathed a collective sigh of relief when this year’s Federal budget retained current arrangements for negative gearing. So what exactly is negative gearing and why do real estate agents, and the REIQ as their peak body in Queensland, lobby for this tax relief to continue?
Firstly a ‘myth-buster’: This is not a tax break that lines the fat pockets of landlords and we’d argue one of the biggest beneficiaries of negative gearing is actually tenants.
In rough numbers approx one-third of our population live in a rental home, and unlike many modern nations, our government provides only limited housing. It’s there for a small number, especially those most disadvantaged, but for the most part in Australia we call on individual investors to provide rental homes. So how do we then attract investors to put their hard-earned into a property (and commit to a big loan from the bank)?
The promise of capital gains is the main attraction, with mid to long term growth rewarding many for their patience over past property cycles. The ‘running costs’ however, (and there’s commonly a shortfall in the early stages of the investment when expenses outweigh rents), is the pain an investor wears to stay in the asset while they wait for those gains. And if that cost is too high, or the prospect of growth too remote, investors sell up and another home is lost from the rental pool. Supply and demand… rents can only grow when we lose supply.
Negative gearing is simply the government allowing an investor to reduce their tax bill to compensate them for the high costs while their debt is high. Once they pay down some debt, or rents rise to exceed costs, the investor makes a profit and pays tax on it. So what of those wealthy landlords with minimal or no debt? They’re already paying tax and rarely benefiting from negative gearing.
Investors have a choice of asset classes and what’s not commonly discussed is this same tax break applies to most other investments too. Borrow to buy a bunch of shares and you can usually claim your losses. But unlike other investments, when you buy property you pay a huge whack stamp duty to the government, council rates and water bills during your ownership, and buy too many and the government will hit you again with land tax too. Add in some tricky legislation that provides tenants with various rights, and we already have a pile of disincentives on property investment.
Tax deductions and the rules on investment can be confusing. But it’s simple to see we need to continue attracting investors to property or rents will rise. Or we’ll be back asking government to find extra housing – and you and I will pay for that in higher taxes.
Note: Bees Nees’ principal Rob Honeycombe is the Chairman of the Real Estate Institute of Queensland. He wrote this article for the Market Outlook column of the Courier Mail.
Ugh. “This is not a tax break that lines the fat pockets of landlords” — are you saying it’s:
1) not a tax break, or
2) doesn’t “line pockets” (i.e. result in higher post-tax income), or
3) doesn’t “line pockets” of landlords, or
4) the pockets of landlords are not “fat” (compared to non-landlords)?
Many thanks for commenting Roy. We wrote this because there’s a lot of confusion on how tax deductions (including negative gearing) actually work. For example two breakfast TV hosts recently argued on air that the new small business tax write off of $20,000 meant the government would be writing cheques for $20,000…
Apologies if our point was unclear. If an investor has fat pockets and minimal or no debt on their property, they will usually have income that exceeds expenses and be paying tax on it. They don’t benefit from negative gearing.
The other point we tried to make was that if an investor has a loss of $1000 (expenses exceed income by $1000) then they only reduce their taxable income by $1000. So the tax benefit for someone on 30% rate would be $300 for example. But they do not get $1000 from the government as some mistakenly believe.
I understand if you don’t agree there should be any benefits – everyone’s entitled to a view. Especially if they have an alternative way to house one third of our population.
Thanks for the response admin. I can sympathise with the breakfast TV facepalm moments, and I too appreciate *non-sensational*, *non-biased* information. Just not sure that’s what you’re providing here…
You can define “fat pockets” as “[having] minimal or no debt”, but that is certainly not how I would use the idiom. Anyway, thanks for clarifying.
“[Everyone’s entitled to a view] if they have an alternative way to house one third of our population.”…”it’s simple to see we need to continue attracting investors to property or rents will rise”.
Um, what? Are you suggesting that repealing negative gearing would result in there being no rental properties anymore? Please provide your sources.
Here are some of mine:
http://www.abc.net.au/news/2015-05-06/hockey-negative-gearing/6431100
https://www.youtube.com/watch?v=QXoeWl0bW7w&feature=youtu.be&t=4m34s
Thanks again,
Roy
This article sends to be propagating the same myth that Joe Hockey referred to in the ABC article. From what I understand, the data shows that negative gearing doesn’t significantly influence rental prices, but it does push up land values, making it harder for first home buyers and people without capital to enter the market, while those with capital continue to benefit from tax deductions that benefit only the wealthy in our society. Most people seem to agree that real estate is over priced, and that Australia’s tax laws contribute to the problem.
I have collected a few South side properties over the last 20 years. Negative gearing is a hard economic balancing act that you have to continue for many years and even then it questionable if its worth the effort, emotionally, physically not to mention financially but the government makes it attractive for the reasons that you say in your latest article but a lot of people are burnt because they think they can make a quick profit, not realising its a long term investment — but you know all this.
I just wanted to say that, I really liked your article on negative gearing. Its very accurate.
I can’t help wondering how many of those discoursing so learnedly about the alleged evils of negative gearing have ever actually owned any investment properties themselves. Indeed, I’m cynical enough to suspect some outspoken critics of negative gearing probably don’t even own their own home, and are still living in Mum and Dad’s basement, borrowing Mum’s computer to dash off their pearls of wisdom and literary gems. As one who has bought and sold a lot of real estate over thirty plus years, could I say this: The negatively geared investor makes a loss. At least fifty percent of that loss must be paid out of the investor’s after tax dollars, even after any tax benefits are taken into account. This means that the negatively geared property investor is actually subsidising the tenant’s standard of living, at the expense of the investor’s own standard of living. Allowing negative gearing simply acknowledges this reality. If the private investor is not encouraged into the letting market, the State must make up the shortfall. This can often mean many more impersonal tower blocks and welfare ghettoes, and an ever increasing drain on the public purse. ‘Struggle Street’ anyone? I also wish I could rid myself of the niggling feeling that much of the criticism of negative gearing stems from the politics of hatred and envy, rather than a genuine empathy with those having to cope with high real estate prices.
@Grumpy Greg
“[I] suspect some outspoken critics of negative gearing probably don’t even own their own home, and are still living in Mum and Dad’s basement”
I suggest you skip the ad hominem next time.
It’s a great heading for your article but I can’t see where the benefits to a tenant are at all. There will always be greedy landlords increasing the rent whenever they can while declining to provide any improvements to their property. It is a sad situation when the roundabout of good tenants vs bad landlords is passed off as ‘oh well’ when the real power is sometimes with the property manager. Isn’t it you the PM who gives the landlord advice on returns etc? Oh yes that’s right, the more rent the higher PM percentage.
What I would like to see is an article on greedy landlords and how to look after good tenants. That would be a nice thing to see
Thank you so much for the advice, Roy. As I’m sure you are already aware, ‘ad hominem’ means attacking a person’s character, rather than attacking that person’s argument. It is clearly not an ad hominem attack merely to express such a suspicion. In any event, there are reasonable grounds for suspecting that some, perhaps many, of those having a lot to say on the subject of property investment have never owned investment properties themselves. It is also a matter of public record that, several years ago, one very strident Australian critic of negative gearing, and property investment generally, owned no real estate whatsoever. He was living in a rented flat at the time, but appeared smugly certain that there would soon be a collapse in Australian real estate prices, and he would then be able to pick up lots of real estate very cheaply.
@Grumpy Greg
No problem. I interpreted the following as a attack (through passive aggressive sarcasm) on the character of negative gearing critics, i.e. an ad hominem attack: “I’m cynical enough to suspect some outspoken critics of negative gearing probably don’t even own their own home, and are still living in Mum and Dad’s basement, borrowing Mum’s computer to dash off their pearls of wisdom and literary gems”. My apologies if I misinterpreted.
You keep bringing up the point that critics of negative gearing “don’t even own their own home”, “have never owned investment properties themselves”, “own no real estate whatsoever”, etc. That seems to be an allegation of bias, right? To which I would agree! Those who do not stand to benefit from negative gearing are prone to a natural bias against it. But in accepting such a point, we must also accept the converse, i.e. that those who *do* stand to benefit from negative gearing are prone to a natural bias toward it. You must see that, right?
So, leaving personal attacks and biases aside, if you’d like to convince me, I’d be very interested to hear your specific critique of this article: http://www.abc.net.au/news/2015-05-06/hockey-negative-gearing/6431100
If not, cheers and best of luck with your investments.
Hi Roy, Thank you for your post, which I have just this minute seen. Unfortunately, I will be away ‘incommunicado’ for the next few days, and can not give a considered response till I return. (If that is interpreted as me running for cover, I’ll just have to accept that). However, it is not for me to try to convince anyone of anything. There are many issues raised by the article you mention, and it would be impossible to deal with them all. However, I am happy to share a few thoughts from my perspective, as a long time, albeit small scale, property investor, one who has made all the mistakes, and is definitely not rich or (I hope) greedy. In the interim, could I just say this: I think the main point is not that many critics of negative gearing and property investment generally may not own property themselves, it is that every negatively geared investor is making a loss, most of which must be paid out of the investor’s after tax dollars. They are hanging on grimly, in the hope that, one day, capital gains will outweigh the accumulating annual loss. This may be one reason why, I understand, over seventy percent of property investors only ever own one investment property. It property investors are performing a useful public function, in helping provide accommodation, maybe they should be given a bit of encouragement, and not demonised. Cheers.
@Grumpy Greg
“It (sic) property investors are performing a useful public function, in helping provide accommodation, maybe they should be given a bit of encouragement”
“If” investors help provide accommodation, sure. But let’s break this down:
1) Do investors perform a useful public function in helping provide accommodation? No. Without investors inflating the market, those poor tenants we’re so worried about would be able to own their own home.
2) Even if they were helping provide accommodation, should they be given “a bit” of encouragement? How much is “a bit”? We’re talking $5 billion here. That’s on top of the “encouragement” that is the 50% CGT discount. Negative gearing + the CGT discount is, quite simply, double dipping 😉
Not really needing help just reading Beenees article on negative gearing, I totally agree with your article and anyone who does not should try investing in property and they will find out what you say is correct. We owned 10 investment properties but are slowly selling them off as it is too much trouble with new tenant/landlord legislation, slow capital growth, new bank loan restrictions on interest only loans and that even begin to cover bad tenant damage risk etc.
It’s comical that the entire concept of negative gearing is so controversial. Perhaps one way to start dispelling the myth is to avoid using the term “beneficial” in reference to the net effect of having to write down losses of the operating costs of an investment property. As was noted in your response to “Roy”, if the bottom line on the property is that I’m out of pocket by $1,000, then my income is reduced by $1,000. I only *recover* the taxes I likely have already paid, which in the highest of brackets is still only half that amount, so in no way is the property owner “benefiting”. (Incidentally I use the term likely because everyone’s financial situation and income sources/tax payments schedules can vary). At the end of the day, if the property is operating at a loss, no matter the negative gearing, so is the investor.
Also, for Trish who mentions greedy landlords, rent increases, and so on, those same landlords will be all the more cut-throat if they have to wear the operating losses of an investment property from their post-tax income. Along with them, the less greedy landlords would be forced to raise rents and scrutinize all expenditures even more if it is all money spent post-tax.
Finally, from a simple accounting point of view as well as in comparing the concept of negative gearing to other countries, the debate being had makes no sense. By definition, your income is supposed to be the net product of your income minus expenditures. It’s the same for every business, only in this case the person is running their business without being incorporated. This is the practice in countries across the globe and to remove the ability to account for your operating costs would make the approach to investing here a joke comparatively.
Agree with Shirley. A few years ago I purchased 2 investment properties and right now if I had my time over I would not have done so. Considerable difficulties in obtaining bank loans and paying overs, numerous ongoing costs (including management fees and even an additional statement fee!) tenant issues and that’s before we mention the apartment market pull back. We are only slightly negatively geared by the way and are still cash-flow negative and we actually have to financially prop up an annual shortfall.
As the article states all this leaves us well behind in the short and medium term and laying hopeful of a capital increase somewhere in the future which of coursed is far from guaranteed.
The developer, the developer’s agent and my state based intermediate have all banked their capital return from our 2 purchase’s.
Also what seems to be forgotten is that a Labor government in the mid 80’s caved in to the demands and did actually abolish negative gearing and the result was almost exactly as outlined in this article…….private landlords quickly withdrew from the market pushing up rents for existing properties and created huge pressure on public housing waiting lists. Two years later the same govt reinstated negative gearing which remains to this day.