The challenge for negative gearing to become a replacement tax for the GST has bubbled to the surface as we round the corner towards another election. To quote the leaders of today, ‘everything in tax is on the table’.
Solid’s current view is that it is way too early to speculate as to the final outcome of our politicians ‘dining out’ on Negative Gearing.
If the current Labour view becomes the endorsed government for the future, the impact appears very minimal for the clients of Solid and The Formula. With the current government ‘keeping their powder dry’ with their proposed changes, it has become nothing short of a slanging match between the political parties; which unfortunately has become the genre for Australian politics of the 21st century.
What little has been shot from the current Governments smoking gun appears to be the argument that increasing the GST isn’t going to fly; so they have moved the sights onto Negative Gearing.
It appears that neither government are sure which area to target first. Is it old, new, borrowed or blue? One thing for sure is that with GST off the table, the excessive tax breaks provided by Negative Gearing are up for review. In other words, it will become a wealth tax targeting the super wealthy claiming large amounts of deductions.
Having been an avid investor for the past three decades, I know first hand that there are so many influences, dynamics and micro-economic factors that both drive and slow the property market. I have absolutely no faith in either government to predict the exact outcome of their future rulings that will translate into either growth for one sector or losses for another.
The argument is that Negative gearing and capital gains tax discounts for investors together encourage over investing in existing properties and in particular expensive inner city apartments. The view is that this lifts housing prices and does little to promote construction of affordable housing.
Interestingly enough the current statistics tell us that:
– 43% of home buyers are existing home buyers
– 5% are First Home Buyers
– 31% are Investors
– 8.5% are Self Managed Superannuation funds
– 12.5 % are Foreign Investors
There are approximately 1.9 million Australians owning an investment property and around 1.3 million of these are Negative Gearing. 70% of people Negative Gearing earn less than $80,000 per annum. Given that Investment properties are the preferred investment asset class outside of the family home and superannuation, the implications of this will be hard to quantify.
My major comfort is that last time Negative Gearing came under attack, it was reversed in 9 months. Yes, Sydney’s vacancy rate hit a colossal 10.5% in 1985.
Today $14 billion property losses are tabled in tax returns. This seems to translate into $2 billion in tax refunds. Ironically $5 billion is lost in capital gains tax sales claiming the 50% deduction threshold.
Rents over the past two decades have reached a point that 60% of low income earners are in stress, spending over 30% of their income on rent. There is a shortage of some 500,000 rental properties that are affordable and available to this sector of the market.
Taking this to a new level, with only 5% of the market being First Home Buyers and with 60% of the population renting, where will all of these people live if the Mums and Dads decided not to buy an investment property as part of their accumulation strategy for retirement. Ironically many of these Mums and Dads are investing to help their soon to be adult children to get into the property market!
It begs an answer. Given that the Government has canned the NRAS (National Rental Affordability Scheme), which enabled average Australians to secure affordable housing, what is the strategy for rental properties? The NRAS enabled people earning under $50,000 per annum as an individual or $72,000 as a combined couple to receive a discount for their rent. In return the Government paid a $10,000 per year bonus to the Landlords. If we discourage people from creating rental housing accommodation and we have canned NRAS – is the government going to build more housing commission flats?
When you think about it, your own home is Negatively Geared. Let’s imagine that you purchase a home for $700,000 and have only a $200,000 deposit. You spend the next 25 years paying off $500,000 with no tax breaks, other than no Capital Gains Tax at the end when you sell it. Interesting concept. You are actually negatively gearing with your after tax dollars, so that you can avoid Capital Gains Tax. That could be one to put in your pipe and smoke for a while!
Scott Morrison for one, has proposed a 50% cut for Capital Gains Tax; which unfortunately implies that we will not be able to protect the Mums and Dads that have invested in an old apartment in Hawthorn, when they elect to cash it in for their superannuation! I would hazard a bet that Mr. Morrison has a guilty conscience on diminishing their retirement.
I recall when they wanted to dredge the bay, that many reports were tabled that we were in jeopardy of losing Portsea beach. As usual counter reports emerged claiming that no beach erosion would be incurred. Today if you visit Portsea beach; there isn’t any. All you will find outside the Pub is a retaining wall of boulders to prevent the rest of the suburb from washing away.
In closing, I think that by attacking the current structure of Negative Gearing may make the curtains fade!