Negative Gearing Under Attack

Tax concessions for property investors – including negative gearing and
the concessional capital gains rate – are distorting the housing market
and should be reviewed, according to the Productivity Commission’s
review of home ownership.
The investigation into barriers to first-home ownership will also
increase pressure on state governments to follow New South Wales’ lead and
effectively abolish stamp duty for first-home buyers. Rejecting the
states’ arguments that stamp duty does not act as a barrier to home
ownership, the Commission has indicated that increasing the deposit first-home
buyers must save introduces another hurdle.
Both major parties are reluctant to consider changes because of fears
that it could increase rents and discourage investors. Negative gearing
was last tampered with by the Hawke government in 1985, which sent the
supply of rental property plummeting. Two years later treasurer Paul
Keating was forced into reversing that decision when rents went through
the roof.
According to new financial modelling by Deloitte Touche Tohmatsu,
removing the tax benefit from property investments will increase rents by as
much as 80 per cent, putting a greater burden on public housing and
making it harder to save that first home deposit for those still in the
private rental market.
The commission has toughened its stance, arguing that current tax
breaks to investors in property and trusts are overly generous, compared
with other investments such as shares. At present, when an investor sells
a property, capital gains tax applies only on half the profits.
The submission from Professor Cameron Rider of Melbourne University’s
Law School argued for a change to the tax treatment.
“With the capital gains tax discount you have an absolute certainty
that one half of your gain will be tax-free. People have seen the
combination of negative gearing, depreciation and capital gains tax discount
can be marketed as a residential investment product to produce a
significant tax advantage.”
Mr Costello defended the concessional rate of capital gains tax, saying
that the objective was to encourage people to put money into
investments and save for the long term. He has also ruled out abolishing negative
gearing, despite the Reserve Bank’s warnings that “further examination”
is required of the laws that allow investors to reduce their tax by
writing off the costs of an investment property.
Concern has centred on the ability of some investors to purchase
multiple loss-making properties under the current negative gearing tax laws,
with some analysts calling for a limit to be placed on the use of
negative gearing.
However, Housing Industry Association chief economist Simon Tennent
warned that further government interventions in an already cooling
property market could not have come at a worse time.
“To be trying to put out the flames of the inner-city investment unit
market at the expense of mum and dad investors is just dangerous,” he
said.
Macquarie Bank economist Brian Redican lays much more of the blame for
spiralling house and apartment prices on the October 1999 capital gains
tax concessions, which virtually halved the impost placed on investors.
There is no coincidence that the biggest surge in investor borrowing
for housing has occurred since capital gains tax was reduced, says
Redican.
However Redican makes the point that negative gearing is simply not as
valuable in the low interest-rate environment we now live in. Investors
adopting a negative-gearing strategy normally borrow as much as
possible against their rental property. The higher the interest rate they pay,
the bigger the deduction. A property is negatively geared if the cost
of owning it, including interest on borrowings, is greater than the
rental income it produces. The owner can claim a deduction for the
shortfall against other income.
On the flip side, capital growth has been very strong for the past few
years, says Redican, making the halving of CGT an attractive incentive
for investors. Another major driver, he says, is that the increasing
proportion of households on the top marginal tax rate has meant more
people have been exploring tax offsets.
The Macquarie Research Economics study found that negatively gearing a
property was not attractive unless it also had good capital growth
potential. It found that even if negative gearing was scrapped, borrowing
to invest would still be attractive as long as the property was expected
to deliver strong capital gains.
In another blow to property investors in a cooling market, the
Australian Taxation Office recently announced a review from July 1 of
depreciation rules on residential investment, which allow a building’s fittings
to be claimed as a loss for negative-gearing purposes.

Courtesy of Noel Whittakers Newsletter- a great source of Information

“Money is a currency, like electricity and it requires momentum to make it Effective”
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PG

I had a look ..no new pictures [glum2]

REDWING

“Money is a currency, like electricity and it requires momentum to make it Effective”
Count The Currency With This Online Positive Cashflow Calculator

Agree in principle with paying off your + geared IP’s faster, however the interest on my PPOR is not tax deductible, so i’m reducing my non-deductible debt ASAP, meanwhile building Equity in the property..

Negative gearing is part of my strategy, i for one acknowledge the CG prospects with it, however when it becomes + geared.. i wont be selling it as it’s lost its tax benefits..so achieving a ‘balanced portfolio’ is my goal..

REDWING

“Money is a currency, like electricity and it requires momentum to make it Effective”
Count The Currency With This Online Positive Cashflow Calculator

Congrats Dean..Midland has potential, and the Council there are “busting a Gut’ to get some solid business happening agian and harrasing the Government..

Still some cheap IP’s here..

And LOTS happening up North of WA[biggrin]

REDWING

“Money is a currency, like electricity and it requires momentum to make it Effective”

It’s always been full since i’ve known it..

REDWING

“Money is a currency, like electricity and it requires momentum to make it Effective”

fjficm..

Why..?

“Money is a currency, like electricity and it requires momentum to make it Effective”

Dean, i believe you’d have to have lived there 6months at least ( anyone ?) to prove PPOR status, if this is the case i presume you could delay settlement.

If you sell…what would you then do ?

Also, work out your exit costs from your loan , buying and selling costs etc to work out the ‘true’ end figure.

If you bought the place as an investment to make money, then i’d say it’s achieved that goal, as for your paranoa, why not speak to some local real estate agents and see what’s happening in your suburb..

REDWING

“Money is a currency, like electricity and it requires momentum to make it Effective”

No Pill in mine.. i looked twice !![angry2]

Off to Dymocks 2mw to ‘sort’ through the books..I’ll get one of those little suckers yet !!!

REDWING

“Money is a currency, like electricity and it requires momentum to make it Effective”

Agree with the fact many workers travel from Bunbury or Australind..

Kemerton was the town of 200 rentals required, haven’t looked at the issue though, have you ?

Redwing

“Money is a currency, like electricity and it requires momentum to make it Effective”

CHAN$

Still in School has thrown me there also, just when i thought i was getting a grasp of his ‘Offset principles’..[confused2] Doh..!

REDWING

“Money is a currency, like electricity and it requires momentum to make it Effective”