Negative Gearing is not the Problem 5

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Monday, March 21st, 2016
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The recent and ongoing debate surrounding negative gearing in the media and in Parliament in recent weeks has been relentless.

The media speculation is just another indication that 2016 is a Federal Election year.

While the Coalition have been in the process of developing some kind of tax reform policy, they have been investigating every possible angle to reduce personal and company income tax and to assist in repairing the structural budget deficit.

The Coalition is reportedly seriously considering imposing an annual cap on negative gearing for ‘wealthy investors’ and limiting those with ‘excesses.’ The speculation has been given some added intensity because the government has not made public its policy in regard to negative gearing.

Meanwhile, the Labor Party has put forward a policy to limit negative gearing to new property only and for the capital gains discount to be reduced from the current 50 per cent to 25 per cent after 1 July 2017.

It is claimed that this will be a fix for improving home ownership for first home buyers and at the same time reduce the cost of housing.

Master Builders’ concern is that the proposed changes are being taken in isolation and are not part of a holistic tax reform package nor about any serious reform to improve housing affordability.

It is about a tax grab to pay for a ballooning structural budget deficit, but since any savings will be relatively negligible, it is a poor one. Yes, the structural budget deficit needs repair, but to tax housing more is a poor policy response. A serious policy response must also include how government spends the tax it raises.

Removing negative gearing will not improve the cost of housing; this will require different policy responses. Master Builders has been calling for competition payments to be made to state and territory governments to remove the structural impediments that limit the supply of housing and which drives up housing costs. Stamp duty reform is also needed as this raises the deposit to enter home ownership.

Although it is argued that there will be a benefit to builders undertaking residential work if this policy is put in place should the ALP win this year’s Federal Election, it ignores the substantial work done in repairing and upgrading established dwellings.

Changing negative gearing will also not result in a major boost in employment in the building industry since the Labor proposals equate to only a small increase in the number of new dwellings and resulting employment.

Master Builders in its comprehensive pre-budget submission has called for a holistic approach to tax reforms which generate economic growth and jobs. This is best done by reducing the company and personal income rates.

Master Builders will continue its advocacy to improving access to affordable housing for first home buyers, but taxing investors – most of whom are mums and dads – by removing negative gearing is not the answer.

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5
  1. Steve Ryan

    If you are allowed to write off the cost of borrowing against other income, for the purchase of assets whose value by and large always at least keeps pace with inflation, you will encourage purchase of that asset. Full stop; no argument.
    The thing is what to do about it. You went for the violin with the Mum & Dad paragragh at the end, which was really sweet. We all love our Mum & Dad and would hate anything bad to happen to them. We dont want them to be hit by a nasty, nasty tax change.
    Most of the Tax havens inside our economy have been tackled, but the real estate rort has been left untouched except Hawke Keating but then J Howard reversed some of that.

  2. John Coleman

    Whilst I certainly agree with the comment regarding a holistic approach, it should be said that there is an argument that investors who use negative gearing are squeezing out new home buyers. More than nine in ten dwellings purchased by domestic investors relate to the purchase of established homes. By bidding almost solely for established homes rather than investing in new housing supply, investors (many using negative gearing) are largely merely competing with would be home buyers for existing housing stock.

    • Charles Litho

      My neighbour sold his house to an investor; and, he then used the money to build a new house on a vacant block.
      We still gain one new house.
      People have very short memories, and, they forget the agony of trying to find a house or flat to rent when the supply in Melbourne was almost non existent. I can remember knocking on the door of hundreds of houses with my mother and asking if they had anything to rent or knew of anything in the area that was availuble. We eventually knocked on the right door and we found a one bed room house that was so small, my parents painted it annually with four litres of paint inside and out. The six of us stayed there for three years not daring to move.
      What do you call the thousands of people who buy of the plan or those that build small developments in the thousands and keep them as rental properties?
      I suspect if investors did not buy many older houses they would be demolished.
      The matter is not simple.
      Revolutions do not work.

  3. Bruce Christopher

    Someone correct me if I'm wrong, but isn't the confusion based on negative gearing never being a specific tax policy to begin with? It seems the lines and definitions have been blurred as I heard recent commentary suggesting that 'negative gearing was introduced to encourage the building of new houses and based on that assumption it had failed' – then this one premise used as logic to make a change.

    My understanding is that the decades old tax policy change was more broadly to allow loan interest on any investment (residential, commercial, company shares, gold etc.) to be tabled as a valid expense against income. This encouraged further borrowing which allowed a higher target investment value. The terminology and fresh financial advice of 'negative gearing' an investment was developed as a consequence of the original tax policy change but I believe in itself not ever an isolated stated policy or specific to housing.

  4. Rod Shepherd

    A good article Wilhelm
    Ive found that most people who argue that negative gearing is a massive tax rort and needs to be removed don't consider the equation in full. And many dont understand how it works in dollar term or tax terms.
    Even the more detailed newspaper articles that quote the cost to the budget never seem to also include the capital gains tax collected upon sale of such properties. If you look at a typical investment property in Sydney, consider the tax concessions to the investor compared to the capital gains tax paid on sale after 5-10 years of holding the asset, the Federal government makes a clear net profit over time. This makes the federal government a co-investor and shows why they don't get rid of the policy from first principles.
    Then add the benefit to the states in that it provides a massive stock of social housing that they can provide a rent subsidy to house people in need. The alternative being spending a billion per year in developing new housing and maintaining it. Then the benefit to (yes Ill say it) mum and dad investors of whom there are hundred of thousands and not all are RICH but some day maybe hope to be able to be comfortable in retirement. What is actually wrong with that ?.
    Negative gearing has kept the construction industry going post mining construction boom adding countless jobs inconstruction, materials and transport, etc etc etc. plus taxes to the state, but this is invisible unless you look.
    Keep up the good work MBA.
    Thanks