By Michael Yardney March 22, 2018

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Negative Gearing — Slug greedy property investors and save the government $1.7 Billion

Property Market News
Negative Gearing — Slug greedy property investors and save the government $1.7 Billion

There’s an easy way to save the government $1.7 billion annually.

Just slug greedy, rich property investors by reforming negative gearing and capital gains tax and it won’t increase rents for tenants or hurt mum and dad investors a bit.

Really??

Well that’s the recommendation in a recent well publicised report from the AHURI, a left of centre organisation that doesn’t really understand how the property investors think.

The AHURI suggests that reforming negative gearing and changing capital gains tax, could make the Australian housing market more “sustainable and equitable.”

I see it as just another attempt to stimulate debate on negative gearing and encourage the government to tax entrepreneurial Australians

They seem concerned that negative gearing allows investors to claim a tax deduction when their rental income is less than their expenses, saying this cost the federal government A$3.04 billion in 2013-14.

The AHURI report explains that negative gearing and the capital gains tax discount incentivises housing investors to take on debt and they believe this potentially makes the housing market less stable and crowds out first home buyers.

What have they missed?

In my mind any reduction in negative gearing benefits would significantly reduce rental investment in both new and existing properties and would worsen rental affordability through a reduced supply of investment housing.

A reduced rental supply means lower rental vacancies and increased rents which is the opposite effect of what the AHURI is looking for.

Remember that 30% of Australians live in rental accommodation, of which the vast majority is provided by property investors.

I would argue that these property investors provide an essential service to millions of Australians who chose to, or have to, rent their accommodation and as such these investors should be treated like all other business people.

More than that…

In our modern society we pay taxes and expect the government to provide us with certain essential services.

These include hospitals, roads, schools, jails, public transport, aged care and public housing.

In Australia the government often shares the burden of providing these services with private enterprises that can often deliver them more efficiently and cheaper.

When the government can’t supply enough public hospital beds, private run hospitals step up to the mark and not only receive tax deductions for their business loans, but also allowances to subsidize them.

So do aged care providers, schools and public transport providers who provide services in tandem with the government.

Our government also provides public housing, but not enough for all those who can’t afford to buy their own property.

While government social and public housing programs are helpful, it is only the private rental market that can deliver rental accommodation at the rate and scale that is required at present.

Property investors save a deposit, buy a property, commit to a loan for 25 or 30 years and provide accommodation for others in our community.

In return we expect to get a reasonable return on our investment risk, just like other business people do.

We know that the rent won’t always cover our expenses but accept that certain tax benefits plus the long term capital growth will make up for this.

Sometimes it does, and sometimes it doesn’t.

Fact is, property investment is a real and effective method for bolstering the savings of middle Australia at the same time providing accommodation for those who the government can’t or won’t help and should remain as is.

What if the government removes negative gearing?

Before the last Federal Election, Bill Shorten planned to remove negative gearing if he was elected into government scaring the public with lines like: “The great Australian dream of owning your own house could be the great Australian nightmare of being locked out of the housing market”.

And he is still pursuing the same policy lines today.

What he doesn’t seem to understand is that while negative gearing compounds returns in the good times, it multiplies losses when property prices are flat or falling.

I know as many people who have lost money in property investment as those who have made money.

Much like most other small business people.

If the government takes away my tax concessions, I would have to consider my investment options.

To ensure I get a decent return I’d put up my rents if I could, or maybe I’d invest elsewhere to get the best bang for my bucks.

The result would be that rents would rise and tenants would have to fight over the few rental properties left, or the government would have to invest its own money and buy or build properties and enjoy the pleasures of being a landlord.

Of course, the government already provides some public housing, but not enough, leaving the task of providing rental accommodation not only in our capital cities, but also in regional Australia and in the remote parts of Australia to private investors.

Property investors have chosen to run their own little property investment businesses.

If I set up a dog wash business or a restaurant, I’d be able to claim a tax deduction for legitimate business expenses including loans to set up our business or purchasing business equipment.

Why should it be different for property investors who take on a business risk?

How does negative gearing affect property values?

To say removing negative gearing will “stabilise our property markets” is a smoke screen.

Just look what happened to property prices overseas in countries like the USA and parts of Europe where negative gearing isn’t allowed.

Over the last decade they experienced a boom and a subsequent bust of much greater magnitude that we have gone through.

What these lobbyists may not recognise is that borrowing in order to undertake productive investment actually helps economic growth because value is being added.

After all, there will always be some investments that have lower returns than the interest expenses on the loans taken on to acquire them.

This economic reality has nothing whatsoever to do with tax.

For example, a typical property investment may start off with a large loan and lowish rent.

As time goes by the loan is paid down and the rent increases.

Overall the investor makes a profit and the tax office gets its share of this.

Actually, there is not as much loss of revenue to the authorities as some critics believe because for every dollar of interest claimed as a tax deduction by a borrower there is a corresponding dollar of interest assessable to a lender.

But that’s not all…

If the government stops the availability of negative gearing benefits the danger arises that there may be unintended consequences.

It is possible that even following a positive cash flow strategy you end up negatively geared and suffer.

What if:

Interest rates rise after you buy your investment?
Rents fall, or your property becomes vacant for a period of time? Or
You have to undertake a major repair of your investment property.

To deny the person making commercial a loss like this a tax deduction would be to inflict a double whammy on them and increase their hardship unduly.

The Bottom Line:

Any reduction in negative gearing benefits would significantly reduce rental investment in both new and existing properties and would worsen rental affordability through a reduced supply of investment housing.

A reduced rental supply means lower rental vacancies and increased rents.

Property investment is a real and effective method for bolstering the savings of middle Australia at the same time providing accommodation for those who the government can’t or won’t help and should remain as is.

HERE’S WHAT YOU CAN DO ABOUT THIS…

Don’t make your long term investment decisions based on short term concerns or rumours about potential policy changes.

If you want to take advantage of the opportunities our growing property markets will offer you now is a good time to consider your options.

If you’re looking for independent advice, no one can help you quite like the independent property investment strategists at Metropole.

Remember the multi award winning team of property investment strategists at Metropole have no properties to sell, so their advice is unbiased.

Whether you are a beginner or a seasoned property investor, we would love to help you formulate an investment strategy or do a review of your existing portfolio, and help you take your property investment to the next level. Please click here to organise a time for a chat. Or call us on 1300 20 30 30.

When you attend our offices in Melbourne, Sydney or Brisbane you will receive a free copy of my latest 2 x DVD program Building Wealth through Property Investment in the new Economy valued at $49.

Just click on this link to find out more and reserve your place.

You may also wish to read:

Why be so negative about negative gearing?

Proposed reforms to negative gearing

About Michael Yardney Michael is the founder of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and one of Australia's 50 most influential Thought Leaders. His opinions are regularly featured in the media.

16 comments

Con 2018-03-23 12:44:03

So let me get this straight. Current personal tax system is: Add up ALL your income and deduct ALL your expenses. You pay tax on the "profit". Simple. Proposed tax system to remove negative gearing: Pay tax on the "profit" of your wages type inco ...Read full version

1 reply

Jeremy 2018-03-23 12:40:13

As Jeff points out, your investment strategy is not a charity. You are not doing it to be benevolent to renters. Quite the reverse. In fact, when Howard & Costello gave huge CGT concessions and combined them with the existing NG system, they c ...Read full version

3 replies

Marlene 2018-03-23 11:33:31

Politicians spruce on about young people can't afford to get into their own home. But a point I would like to make is that working people these days can be transient in their jobs and can be better off renting. If they own a home and have to relocat ...Read full version

0 replies

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Con March 23, 2018

So let me get this straight.
Current personal tax system is:
Add up ALL your income and deduct ALL your expenses. You pay tax on the “profit”. Simple.
Proposed tax system to remove negative gearing:
Pay tax on the “profit” of your wages type income. Pay separate tax on the “profit” of your investment.
It doesn’t make sense to me.
Do my investment profits get a $18,200 tax free threshold as well?
If I can’t add losses from my investments onto my wages income, why do I have add profits onto it. This unfairly pushes me into a higher tax bracket.

1 reply Reply

Michael Yardney March 23, 2018

Of course your arguments make good sense Con, but tell them to Bill Shorten

0 replies Reply

Jeremy March 23, 2018

As Jeff points out, your investment strategy is not a charity. You are not doing it to be benevolent to renters.

Quite the reverse. In fact, when Howard & Costello gave huge CGT concessions and combined them with the existing NG system, they created the out-of-control property price spiral which has created this housing affordability crisis.

It is a nonsense to pretend you are some kind of benevolent providers of housing: you push up prices, which itself INCREASES RENTS. And if you took your investment money out of housing, and put it somewhere less antisocial, it would put downward pressure on prices and, therefore, rents.

The line that you are increasing the rental supply by outbidding a homebuyer is nonsense. If you left the market, either you’d sell to a landlord or a homebuyer. In the former case, the rental supply hasn’t changed. In the latter, it’s reduced by one – but demand has also reduced by one. They cancel out.

I suspect you know this, and the rhetoric pretending that landlords leaving the market would somehow push up rents is disingenuous propaganda you are aware is false.

Please, do something else with your investment money, something that doesn’t create a generation of renters and leave your kids having to rely on the charity of their parents to avoid a lifetime of poverty.

When you were young, an ordinary person could save up and buy an average home in an average location.

That is clearly no longer the case. The system is broken, and it is broken in the interests of speculating property investors at the expense of the rest of us.

Look, I know other investments don’t give you the kind of glorious almost king-like power over the lives of ordinary people that landlords (“lords” indeed) seek to impose. You know, the thing where you get to send strangers through our homes every 6 months checking for dust, or tell us whether we can have pets, or put pictures on the wall and so on. The sort of things you would never endure in your own homes. Oh, and the power to uproot us at will, just because you feel like it.

Look, that might give some of you a bit of a power trip. But the rest of us are getting heartily sick of it.

Maybe invest in industry instead? The country’s going down the gurgler because instead of investing in constructive things, you’re concentrating on easy profiteering at the expense of the next generation.

5 replies Reply

Michael Yardney March 23, 2018

Thanks for leaving your detailed comment Jeremy – clearly we don’t have different points of view.
I don’t invest for a “power trip.” I invest to secure my financial future and that of my family, children and grandchildren. If I don’t who will?
By the way…just because I own investment properties doesn’t stop you or anyone else in Australia owning them

0 replies Reply

Jeff March 24, 2018

I get so sick and tired of people assuming that all rental properties have been stolen away from first home buyers.
All of my investment properties have market values of $1,250,000.00 and up , and are all one bed , one bath , one car space and are located in some of the most desirable locations in Sydney.
Every single one of my properties are rented to single professionals with exceptionally high incomes – as an example – one is a surgeon , one is a CEO , one is a buyers agent for one of the largest realestate companies in the world and I am quite sure every single one of them would be capable of purchasing something much nicer than what I am renting them.
The points I am trying to make here are – a lot of people rent as a preference – not all renters want affordable rentals in affordable locations – someone has to provide these rentals – the investors that do expect a return on the substantial outlay required – and we aren’t all the slumlords taking advantage of the disadvantaged that people with an entitlement mentality think we are.
I own my own company employing quite a few people who are all very well paid and I pay hundreds of thousands of dollars in taxes (way way more than my fair share) and I invest my hard earned remaining profits into high quality realestate so that I can hopefully one day live a very comfortable retirement cruising the world at my own expense – not the country’s.
Now they want to tax that off me as well – perhaps I’d be a better person if I just bludged on the dole in a housing commission house and waited for an old age pension at your expense.

1 reply Reply

Michael Yardney March 24, 2018

Well said Jeff – clearly you’re not one of those rich greedy selfish property investors who is making all those poor first home buyers live in a cardboard box under a bridge

0 replies Reply

Pam March 24, 2018

I totally agree with Jeremy. If more people could afford to be homeowners (removal of tax perks drives down prices) than more Australians would be home owners and there would not need to be as much rental accommodation.
Its not true to say Shorten plans to scrap negative gearing, he actually plans to change it so its not just there to make the rich richer.
Get real, landlords are not providing any sort of community service – quite the opposite!

1 reply Reply

Michael Yardney March 24, 2018

Thanks for your thoughts Pam – to say negative gearing has pushed up property prices is a smoke screen. Investors in general buy at the lower end of the market – the arena of first home buyers and yes they did push up prices and make it harder for first home buyers in Sydney – but not really in the rest of Australia – median prices in Brisbane are half that of Sydney and first home buyers are still complaining.

Just look what happened to property prices overseas in countries like the USA and parts of Europe where negative gearing isn’t allowed. Prices are high in their super star cities where demand is high – just like they are in the 2 superstar cities in Australia.

Pam I think this blog explains why prices in Sydney and Melbourne are so high and have decoupled from the rest of Australia

0 replies Reply

Marlene March 23, 2018

Politicians spruce on about young people can’t afford to get into their own home. But a point I would like to make is that working
people these days can be transient in their jobs and can be better off renting. If they own a home and have to relocate the stamp duty and the selling agent commissions costs are too much for home ownership.

0 replies Reply

Enzo March 23, 2018

Hi Michael
I’ve just returned from 3 years living in London where negative gearing is not an option and I can tell you that not only are property prices high but also rents. In fact rent accounted for almost 40% of my monthly wages.
We have a massive under supply of appropriate housing in Australia. You only need to go to an open inspection for a rental property and see for yourself the number of people that attend and have to compete with.
Also, to your point Michael, if I run a ‘traditional’ business most business owners pay themselves a very low wage (thus low personal income tax) and run all expenses out of the business using pre-tax dollars. How is that any different?
Lastly, I was advised a long time ago by a very wise accountant ‘why spend a dollar to save 30 cents?”.
I just love the way people want to socialise the gains but don’t want t socialise the losses.
That’s my two cents worth.

1 reply Reply

Michael Yardney March 23, 2018

Enzo thanks for leaving your comments – you make some good points. And I love the name of your website

0 replies Reply

enzo March 23, 2018

0 replies Reply

Sean March 21, 2018

Another point is that negative gearing changes will not actually fix the budget. They just bring revenue to the government forward and reduce CGT revenue for the government in later years as the losses become claimable at the time of sale. It is a classic case of short-term thinking and poor understanding by our politicians. It skews the potential of property investment towards those who can take short-term cash losses (which are normally the rich), but doesn’t really change the overall equation.

Furthermore, the current government has already significantly reduced the availability of negative gearing, by limiting depreciation, which probably covers a large portion of negatively geared properties around the country.

1 reply Reply

Michael Yardney March 21, 2018

You make some good points Sean

0 replies Reply

Jeff March 21, 2018

This is 100% spot on.
I would most definitely be looking at my options of either increasing rents or investing elsewhere if negative gearing and / or capital gains tax were to be removed or change for property investment.
It is called property INVESTMENT for a good reason – not a property CHARITY. As selfish as this may sound I think even a charity would need to make it all pay for itself or it would NOT be sustainable.
Property investors use leverage in property investing because stumping up the entire cost of an investment property would provide an insufficient return on investment which would be further worsened by the removal of negative gearing ( not to mention being prohibitive to almost all property investors ).
I would love to know how much difference the tampering with the depreciation allowances has affected affordable investment properties.
I would be very surprised if the long term effect isn’t to push a lot of first time investors toward depreciable new builds that are more expensive and therefore require a greater return – as in higher rent !
I know first hand that it has changed what I look for in investment properties.
I now look for properties that are in dire need of a complete rebuild in order to create equity , create something that is more desirable to rent , and to have depreciation of the costs of the rebuild.
Previously I bought properties that were less than 10 years old that just needed a minimal tidy up and still had reasonable depreciation.
I certainly won’t be looking at older tidy properties with no depreciation available , without the view toward a complete overhaul.
Which means I will be expecting higher rent !
Why don’t all of these Dogooders go and chase people who invest in shares and try to take away their legitimate tax deductions.
I’d love to see the reaction that would have.

1 reply Reply

Michael Yardney March 21, 2018

Jeff -you’re right the government has been fiddling around the edges so far, but a major change like removing negative gearing will have more widespread effects

0 replies Reply

13 more comments...

Negative Gearing — Slug greedy property investors and save the government $1.7 Billion

What have they missed?

What if the government removes negative gearing?

How does negative gearing affect property values?

But that’s not all…

The Bottom Line:

HERE’S WHAT YOU CAN DO ABOUT THIS…

Would you like to share your thoughts?

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