Yesterday the Australian Labor Party announced their proposed changes to Negative Gearing. They even managed to put in a definition of negative gearing in their proposal – “negative gearing refers to the situation where investors make an investment (mostly in property) that loses money in the short term (e.g. loan and related costs are greater than rental income), in the expectation of making capital gains in the future” (my emphasis added).
Thanks Labor party for that! However you might first want to first speak to some people in the real world and refine your definition accordingly.
Many, many people use negative gearing as a way of entering the property market, or to build up their own investment assets. The plan generally goes something like this (a) buy a house (using debt – because that’s basically the only way you can possibly do it), (b) spend the next 10-25 years paying down the debt, (c) retire in the future with a property that is paying you a nice regular income stream to help you not be reliant on the aged pension (i.e. save the government money in the future).
So generally what happens is that over time, as the debt is reduced, the property goes from being negatively geared (yes the investor gets a tax advantage of this), to being positively geared (investor then pays extra tax), to eventually being debt free (investor pays extra tax). Note that these people paying tax are always conveniently excluded from the conversation about the “nasty people” who use negative gearing.
My point is, that negative gearing is not about expecting to make a future capital gain, it’s about starting the process of building up an investment asset. So if we are going to have a ‘conversation’ about negative gearing (it seems that all politicians want to talk about having ‘conversations’ with us), then let’s at least start with the facts!
Also, one of the fundamental components of the tax legislation is that “you can deduct from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing assessable income”- Income Tax Assessment Act 1997 s8(1)(a). That is, if I need to buy paper to help me operate my business, then I can claim it as a deduction. Why therefore should it not be ok to claim interest that is associated with a loan I used to buy a rental property?
Additionally, the proposal put forward by Labor says that it’ll start in July 2017, and all those who own their property before then will still be able to carry as normal. So it’s going to create another system with two sets of rules – one for those who bought before then, and another for those who buy after then. Just more red tape! And that’s not to mention the distortions that will occur in the property market with people racing to buy before the deadline!
So Labor (and for that matter all other parties), how about you go back to the drawing board and come up with a proposal that:
(a) reduces, rather than increases red tape,
(b) doesn’t distort the property market,
(c) doesn’t create a two class system, and
(d) allows people to continue to claim costs that are legitimate expenses incurred by them in trying to produce assessable (taxable) income.
Finally, just a few facts that are not often shared – the latest data from the ATO shows that in 2012/13, there were 1,944,080 individuals who showed rental income in their tax returns. Out of these, 706,950 showed a net profit (i.e. had net rental income that they paid tax on). This was 54,270 (8.3%) higher than the year before. So perhaps my example above where people buy a house & pay down the debt over time is actually true, and in the years to come all of those ‘nasty landlords’ that are showing a loss now, will end up being the ones who will be paying taxes on their investment earnings!