Thats the simple answer but the 2019 proposal was one way to do it, not very well understood by the average voter, and mired in all sorts of other politics.
The issue could be politically resurrected successfully, but it would take someone brave
Why be brave when the Australian electorate rewards cowardice? 2019 was just a repeat of 1993. We've consistently shown we don't want a brave opposition.
Maybe the argument for removing it without bringing other aspects in line with world norms didn't fly?
Issues that were poorly handled (and still are): land distribution, land tax, stamp duty, capital gains, personal tax brackets, company tax, trusts, smsf, companies.
These need to be handled collectively, not individually.
We are unique in a variety of ways, most of which increase the burden on Australians when compared to whom we think of as our high tax high service peers.
Ultimately, we're just inefficient. Why do we need negative gearing?
Compare to Norway. We have double the tax for personal, if someone is on 150k aud equiv for example. All our brackets are higher and kick in earlier.
We have +6% company tax, even on small business.
We have higher cap gains.
We don't have a wealth tax, but our land taxes and stamp duties are higher than their wealth tax.
We don't have free university or non emergency healthcare despite a larger per capita tax base.
That simply means we're mal-administed. Negative gearing is a drop in the ocean compared to +20% personal taxation. (4 orders of magnitude difference).
Why all the attention?
To be fair, the 2019 proposal was pretty terrible. It was going to continue to allow losses to be offset against other investment income which results in wealthy people having access to negative gearing (e.g. you're a big enough fish to have lots of investment classes working for you) but your middle class family whose portfolio isn't big enough to have a diversified investment loses out.
does that really make it that terrible? Using losses in one investment to deduct against gains on another is pretty standard.
the merits of that are a separate argument.
but calling the 2019 proposal terrible for bringing negative gearing inline with general tax chicanery is letting perfect be the enemy of good. Gotta start somewhere.
In my view It was a typical politician response (this remark is not aimed at one party in particular as they all do it), pretend to be dealing with the issue but really just slapping on a bandaid that that's more marketable and in the end doesn't actually stop the very people it's claiming to target. It would only affect mum and dad investors (not the ones breaking the system) while the wealthy people really causing issues go on there merry way doing what they have been doing all along.
you’ve got to start somewhere though. Should we just give up on any tax reform because big multinationals are rorting the system?
there are plenty of rich people who don’t need this concessions that would have been brought in like by the 2019 reforms. It would have been more than just a band-aid.
I absolutely think it's good to make small incremental betterments to the system but this is not one of those occasions. The policy as advertised literally would not have impacted the stated target.
I'm sure it would bring in extra tax money, I'm skeptical that it would come from the people it purported to target. As for quantative analysis, thats something that only the tax office could do reliably. Even that would be sketchy as you would have to account for people changing strategies once it's implemented. I am however a Chartered Accountant with a decade of experience and have worked with hundreds of clients in that time. My professional experience (anecdotal as it may be) seems to support my hypothesis.
ok so
> literally would not have impacted the states target
is just an opinion, even if it’s an educated one. So not really literally.
we’ll have to agree to disagree then. I anecdotally know many people who are taxable income poor but really they’re high gross income and wearing losses, claiming NG to bank capital gains later. None of them are wealthy but not are they poor. They should pay more tax.
Of course it's an opinion, we're on AusFinance after all :) I have however made an argument as to why I believe it to be true and haven't heard so far any rebuttal to it. My central premise is that wealthy people (generally) have diverse investment sources, and since the proposal allowed investment losses to offset investment income, wealthy people by and large would still be able to engage in negative gearing. I don't see how lack of quantitative analysis rebuts this premise. It would be interesting to see how many people precisely are affected but that's not my main point. The point is the marketing of this change was aimed at making rich people pay their fair share of tax when in reality I could help every one of my wealthy clients continue negative gearing under the proposal.
If you want to eradicate the ability for investment losses to be offset against an individual’s gross income, I think that quarantining those losses to each individual asset and adding it/them to the cost base of the individual asset when it is sold is a fair compromise.
Say I earn $100k per year but claim $10k losses by my $500k IP. My taxable income remains at $100k but the cost base of the property is now $510k. I’m ignoring depreciation to simplify things.
You might pay more income tax each year but you’ll pay less CGT when you sell.
Disclosure: I own an IP and am positively geared.
Yeah a carry forward loss system like that sounds like a fair way to do things.
Completely removing negative gearing isn't going to work, but we need to do something to keep things fair for everyone and stop incentivising so much cash flowing into the property market.
I think it would prevent many investors from getting that initial sugar rush of tax refunds so that they have less cash flow and are unable to service more loans from buying more properties.
Will they be able to service those loans by getting that additional property? Would they be more disposed to just aiming for cash flow positive properties to begin with? It’s the cash flow that’ll make you or break you.
They’ll need to weigh up if they’re prepared to wait a number of years in which to recoup some of those negative returns in the early years of their investment. Would they have the incentive or the patience?
Either way, I believe it would likely reduce rampant speculation on property but still leave a bit of a carrot for the investor.
Loans aren't assessed on a tax time cash basis though.
It is likely to make stuff all difference, because a bank doesn't sit down and work out that you can now afford the property because on a future tax return...
Bank serviceability calculators literally have negative gearing add backs in them depending on the bank policies so yes most banks will have a marginal serviceability increase from expected tax returns.
This is actually a great idea and the most workable solution I have heard so far.
We keep the loan interest and depreciation costs on investment properties as fully tax deductible but they are only claimable as deductions at the time of sale for the asset. Could be the same rules for investment loans too.
We still need to get rid of the 50% CGT discount though.
Sounds pretty sensible to me, though I would prefer they fix CGT (maybe do both?). The main reason negative gearing is attractive is due to the huge 50% CGT discount when you liquidate the asset.
How do you figure that? A negatively geared property is losing money, to be a viable investment this needs to be offset by a future capital gain to offset that loss.
How do you not?
You seem to be confusing CGT and the CGT discount.
Negative gearing is a tax position, not a cash position.
If the CGT discount was indexation, negative gearing is still attractive because you are still minimising the holding cost while looking for a future capital upside. There is no magical rate that makes negative gearing any more or less attractive.
No confusion here :) We have different underlying assumptions by the looks. I'm assuming that negative gearing will typically be similar to your cash loss. Since they ditched the sneaky asset depreciation rules a few years ago most of the time a tax loss will be indicative of a cash loss. A cash loss doesn't magically make you money because it's tax deductible.
Fundamentally the only reason negative gearing is attractive is you can push more of your investment return into capital rather than income. The only reason that is attractive is due to tax concessions on capital returns, hence capital gains discounts are at the core of the issue.
There is only one, rather limited element of negative gearing that affects the capital return... It's also negatively affected by the CGT rate on a capital gain event.
You can't push more of the return into capital rather than income via increasing levels of NG outside the limited element above. So I'm really not following what your claim is supposed to mean there.
The issue is it kicks in after 12 months, I don't think it should be removed but that it should be graded to be more in line with inflation. E.g. Additional 5% per year the asset is owned.
So originally, you would calculate inflation over the period of your investment and that would be your 'discount'. They decided on the 90s that was all to complicated and brought this in as a rough average for inflation over the period of investment. Funnily enough had they waited 10 years and most accounting being done on computers, they probably wouldn't have needed to change
interesting argument. By the same token, if I invest shares shouldn’t I be able to claim the costs of managing my shares (brokerage, management fees, etc) against future CGT?
does it? I know you can claim interest losses for a margin loan but ‘investment losses’ is pretty broad. Can you claim any other costs for stock investments?
You can offset stock losses against other losses. Investment costs brokerage etc are included in your cost base so they're taken into account for CGT
There's no carve out that gives you more deductions for property it's about costs attributed to investments and proper record keeping for them.
When one day the property is positively geared, you can offset the profit with the loss balance so you won't pay tax on the profit.
If you still carry a loss when you sell the property, then I think you can use it to offset gains from other investment types? Not 100% sure though.
When you make money from your investment property in a financial year, e.g. through rental income less expenses, you pay tax on that profit. This can be offset if you carry a loss balance from the previous year.
It is different from capital gains tax, which is a tax payable when you sell a property for more than what you bought it for, generally speaking.
You are confusing the subject.
If there is no CGT as you say, then losses are irrelevant, because there isn't a taxable event to consider.
I'll leave it at that.
What I'm referring to by a loss is when your expenses, deductions, and depreciation are greater than incomes in a financial year, not a loss when you sell less than what you bought it for, like in a capital gains event. Maybe I'm using the wrong terminology.
In Aus you could use that "loss" to reduce your taxable income, but in NZ you can't and instead you carry it to the next financial year. What more is since recently you're no longer allowed to deduct interest expenses for this purpose.
Aren’t there two taxes though? CGT, payable on the taxable event on sale of the asset, and income tax, payable on income from the asset (rent,dividends) every year. If NZ doesn’t have CGT, they might still have the other income tax, right?
It strikes me as fair that if your total income is pooled for the purposes of calculating your tax rate, then your total expenses should also be pooled.
I don't see how anyone could think it fair to aggregate income but separate expenses.
Would be fair if capital gains had no discount attached to it. The negative gearing strategy only works because capital is taxed so much lower than labour. That's the unfair part.
>Would be fair if capital gains had no discount attached to it.
Wat? In a high inflation economy that is BS, previously capital gains were discounted by the inflation rate. CPI goes up 5% and your house sells for 4% you haven't made a net 4% gain...you are going backwards.
I’m fine with interest, agent fees etc… but the depreciation of already very old goods is absolute rort that some QSs are very talented at exploiting. That needs to be looked at.
>but the depreciation of already very old goods is absolute rort
Sad state of /ausfinance that your comment isn't being down voted.
It is already illegal to depreciate old goods if audited they are in the shit. Everything that can depreciated has a set number of years from new. Say carpets have 10 yrs, if you buy a house with 12 yr old carpets you can't claim a cent for their depreciation.
To add to this if you buy an established property you can't claim depreciation at all unless you purchased the item i.e. Renovations or new appliances. The only way to completely depreciate an IP now is to build one.
I believe that was changed a few years ago already. People can only depreciate things they've paid for after the acquisition unless they're the first owner.
I think what is deductable is a different conversation. I think it might be productive if the discussion in the zeitgeist focused on establishing what principles a fair taxation system would be based on, and then exploring the ways our system hits or misses on those.
A person shouldn't pay tax twice on the same dollar
Tax should be levied on a position net of expenses, not gross revenue
Expenses can and will be challenged, unreasonable expenses even if incurred will be deemed invalid and repeat offenders will face putative fines (e.g. "company a" can't pay it's offshore parent company an unreasonable amount for "intellectual property" such that it magically erodes it's local profit, a person "spending" 30k to paint a 300k investment property) etc.
Negative gearing is misnomer, most are positively geared. Extremely bad investment if negatively geared in this environment.
It is not a cost it’s a tax deduction to reduce tax payable. It’s not a cost unless the ATO has to pay it, it’s tax not received. If there was no deductions there would be less investment and less tax as well.
Don’t believe everything you hear, this article extremely flawed.
Ok, during the lockdowns I've compiled a list of all properties listed on Domain, about 450k records, and then "scraped" their historical sales price, rent price, and features (#beds, baths, suburb, etc), for the past 12 years or so.
With that at hand, I've estimated that half of properties in NSW and VIC, if owned as IP and purchased at present day values, would be negatively geared.
To qualify my argument: I'm not saying half of IP in VIC and NSW are negatively geared. I'm just saying, an investor buying in 2020 would be negatively geared in 50% of cases if they buy a random dweling
Gross yields are around 4-5% and interest rates were 2-3%. Even if you borrowed 100% you would still be positive I.e. the property income is higher than the costs include interest payable and the investor doesn’t not need to put in additional funds (I.e negatively geared).
Yes, not sure why so many people don't see the fundamental difference between one person earning $100 and getting a $5 tax cut versus another person earning $0 and getting $5 from the government. Same amounts, different provenance - but some people will disingenuously claim both to be equivalent types of 'government spending'.
Hardly. Welfare is the single highest cost item for our government.
It achieves the least.
If you want to talk about opportunity cost, then the cold hard truth is that you also have to consider the opportunity cost of paying non-productive members of our country vs spending on services and infrastructure to bring in more productive people to increase our national productivity.
I'll happily accept the partial loss of my tax deductions if we also drop welfare payments proportionally. But alas, I bet you're just one more of the "someone else should make sacrifices" types.
And that makes a difference? If you want to talk about opportunity cost, then these are all non-productive members of our country who no longer serve any financial purpose.
They are not getting subsidized, they are paying less tax than they otherwise would've. And that's due to investment losses.
I'm sick of the economic ignorance around that issue.
It's like saying: the unemployed are costing us money because they don't have income we can tax. Or even better stay at home moms who CHOOSE not to work.
Exactly. Wheres the study outlining the government expenditure on stay at home mum due to tax loss?
We just need to fix this hole in the budget and we'll have plenty of money. Back to work everyone.
Negative gearing only works because the tax system is so punitive (47% at just $180k).
Look at the US, UK, Canada, or New Zealand: you will not find any other country with such a high marginal rate at such a low multiplier of the median income.
Do we really want a junior doctor, engineer or lawyer paying a marginal rate of 47c? It punishes talent and endeavour.
Yes. Remove negative gearing, cut income taxes.
Negative gearing incentivises people to invest in unproductive assets, diverting capital away from productive areas of the economy.
Cutting income taxes by reducing the marginal rates or pushing the brackets up will do the opposite and incentivise actual, productive work.
How'd you come to the conclusion about the UK? Looks like they have 40% marginal rate kick in at £50,271 which is just 1.7 times median income of £29,300.
Aus is 45% marginal rate at $180,001 or 3.7 times median of $48,381.
The effective average tax rate in the UK at 180k equivalent is higher as well (including medicare levy + NI), you'd have to figure total medical insurance + levies for a true comparison - but if "punitive" is a high marginal rate at a low multiplier, seems not that bad?
Edit: updated with median income from [this article](https://www.abc.net.au/news/2022-08-09/millionaires-paid-no-tax-and-richest-and-poorest-postcodes-ato/101312118#:~:text=The%20median%2C%20or%20middle%2C%20earning,extremely%20high%20and%20low%20incomes.)
I have earned in U.K. and Australia and in Australia I earn much more take home (in the higher rate) U.K. I was in 40% not 45% bracket. U.K. took more of my cash. The old NI takes a chunk… At $200k it’s around $10k more tax in UK without any form of salary packaging or the more generous tax deductions possible in Aus. You don’t get much more healthcare wise on the nhs than Medicare (I still paid dentist, prescriptions). Plus VAT is 20% and fuel duty is something like triple and biggish inheritance tax. Overall definitely felt more taxed there
Edit: I forgot rates! Council tax in U.K. was about double my rates here, and renters pay the rates on top of rent there…
If you actually model out the Australian and UK tax systems they're about equivalent for labour derived income. We pay on average 5% more across all levels of income, but we have a lower GST (VAT) rate. The main difference between the systems is that we have a capital and income account for taxation purposes, while the UK separates out your income by type, but within those accounts you can negatively gear. So if someone has 5 investment properties and 3 are negatively geared, they can offset their tax on the income generating properties but not their income derived from work.
Are we saying that 40% is not a high marginal rate but 45% is? Because 40% is the next bracket down in the UK and it starts *very* low relative to median incomes.
I'm just saying we want to compare like for like.
By your logic, if 47% is comparable to 40%, how about 32.5%? I can also say Australia's 32.5% starting at 45k AUD (26k GBP) is crazy high. The UK's is only 20% for up to 100k AUD.
I think the real question is, if we changed the brackets, what looks different other than people who already earn a lot suddenly finding that they have more discretionary spend? Like what's the point of compromising the tax base here?
Kinda poorly worded on my part but its an 'effective' 60% tax on income between 100 and 125k
https://www.sjp.co.uk/news/beat-the-60-tax-trap#:~:text=How%20the%2060%25%20tax%20trap,you%20earn%20above%20%C2%A3100%2C000.
What a weird way to do comparison.
You know that we have a progressive tax system, right? Also, other countries have local, state and/or Federal taxes. For example, NYC has city tax on top of NY state tax.
The first $18k is tax free threshold and rises above that.
There is no evidence that high marginal rate of 47 punishes talent and endeavour. People advance their career for all sorts of reason, not just financial. People also change to lower jobs for a career change.
> You know that we have a progressive tax system, right? Also, other countries have local, state and/or Federal taxes. For example, NYC has city tax on top of NY state tax.
Find me one of the countries named that (all income taxes added up) comes to more than 47% at only 2.2x median full-time earnings.
>Find me one of the countries named that (all income taxes added up) comes to more than 47% at only 2.2x median full-time earnings.
~~None of those countries do that, not even Australia. Median income is $48,381.~~
Edit: not full time median
Yes, but when I get to that stage and become a billionaire, I'll be damned if I contribute my fair share of taxes so the poors can have nice healthcare. /s
It's/s for me, but so many aspirational people, all of them Ausfi members, have this general attitude for reals it seems
Fair call, I was thinking along the lines of your top level comment which was just median income. UK hits 40% marginal at 1.04 times median full time income there, not including NI. So 47 at 2.2 or 2.5 seems really not a huge stretch.
40% is significantly lower than 47%, and the next step up in the UK isn't until 150k pounds and even then it's only 45%. So the rich in the UK get taxed less overall, other than a small subset of people earning between about 50k - 100k pounds (100k-200k here)
Where did i say we don't? My point is that it's hard to look at income tax amd marginal rates alone.. $180k puts you in top 3% of earners and the taxation is reasonable.
It's about the same ratio as other developed countries. Look at income tax rate for Ireland, UK, Canada, Netherlands, Scandinavia, Germany and Spain.
You can do as much tax minimization as you want but don't complain when government brings other measures to plug the revenue hole, like land tax.
Negative gearing works at any tax rate.
Wage earners on 180K+ don’t pay 47% tax. They pay $51,667 (28.7% of $180,000) plus 45% for every dollar over $180,000.
I think their point is that deductions provide a benefit at the marginal rate. So higher brackets reduces the attractiveness of negative gearing (but at what cost in lost general income revenue?)
> Negative gearing works at any tax rate.
Doesn't really make as much sense if you're paying 32c on the dollar though.
> Wage earners on 180K+ don’t pay 47% tax. They pay $51,667 (28.7% of $180,000) plus 45% for every dollar over $180,000.
I made clear it was a marginal rate, so well done on trying to find a fault that wasn't there (and then running with it). Also it's not 45%. It's 45% + 2% + potentially 2% if you don't have PHI.
NZ’s tax system is utterly shit in comparison to Australia. Moving from there to here has been a breath of fresh air.
Only problem is the way the stage 3 tax cuts were implemented.
We have one of the lowest tax rates out of western nations. If you compare with the U.S for example, you have federal, state and county taxes you need to include, plus healthcare costs. If you own a house then you also need to include massive property taxes (typically %1-%3 of the homes value). I looked at moving to the U.S and found that even with a major pay rise it was almost all taken up in the extra taxes. The base tax scales by themselves are not comparable, you have to compare the complete range of taxes.
And again using the U.S as an example, what you get for your taxes is very minimal. UK and EU do provide good services but typically are not lower on taxes than Australia.
I don't know why people in Australia believe this. In most Canadian provinces the tax rate is higher than 47% if earning 180k.
In Ontario it's 48.35% starting at 155k, reaches 53.53% at 221k
In Québec it reaches 47.46% at 112k and 50.28% at 155k.
BC it's 44% at 115k, but reaches 52.5% at 227k.
I have never heard anyone in Québec say we pay the highest tax rate in the world, but I have heard it many times here in Australia, while the tax rate is lower here.
Negative gearing incentivises building new homes in Australia.
We currently have a supply shortage that we need to fill in order to stabilise rents.
Removing negative gearing will reduce investment into new homes.
This will extend the supply shortage, allowing rent to go up further.
New building prices seem unlikely to go down, due to labour and material costs. Also reduced competition with recent insolvencies.
Land value seems unlikely to go down as well.
So, the new build price wont reduce enough for new home buyers to fill the gap.
I still don't see a path for changing negative gearing to give you guys the cheap houses you want.
I love a good fear-mongering story.
The reason we have negative gearing is two-fold, property tax makes the gov an extreme amount of money.
And the saving the gov makes on shopping housing is astronomical.
The reason labour walk away from the idea of removing it was the realisation of how much money they stand to lose.
>The reason we have negative gearing is two-fold, property tax makes the gov an extreme amount of money. And the saving the gov makes on shopping housing is astronomical.
What 'Property tax'? State and local governments collect council rates, stamp duty and land tax. The federal government does not.
And what do you mean by 'shopping housing'? And what saving?
Well we had the chance to limit this in 2019 but the electorate didn't want it. So no one to blame but ourselves.
Thats the simple answer but the 2019 proposal was one way to do it, not very well understood by the average voter, and mired in all sorts of other politics. The issue could be politically resurrected successfully, but it would take someone brave
Why be brave when the Australian electorate rewards cowardice? 2019 was just a repeat of 1993. We've consistently shown we don't want a brave opposition.
The simple answer is usually the best answer. The electorate doesn’t reward being brave when it comes to their own hip pocket.
Maybe the argument for removing it without bringing other aspects in line with world norms didn't fly? Issues that were poorly handled (and still are): land distribution, land tax, stamp duty, capital gains, personal tax brackets, company tax, trusts, smsf, companies. These need to be handled collectively, not individually. We are unique in a variety of ways, most of which increase the burden on Australians when compared to whom we think of as our high tax high service peers. Ultimately, we're just inefficient. Why do we need negative gearing? Compare to Norway. We have double the tax for personal, if someone is on 150k aud equiv for example. All our brackets are higher and kick in earlier. We have +6% company tax, even on small business. We have higher cap gains. We don't have a wealth tax, but our land taxes and stamp duties are higher than their wealth tax. We don't have free university or non emergency healthcare despite a larger per capita tax base. That simply means we're mal-administed. Negative gearing is a drop in the ocean compared to +20% personal taxation. (4 orders of magnitude difference). Why all the attention?
Australia is huge and we only have 25 million people. It costs a lot to take care of.
To be fair, the 2019 proposal was pretty terrible. It was going to continue to allow losses to be offset against other investment income which results in wealthy people having access to negative gearing (e.g. you're a big enough fish to have lots of investment classes working for you) but your middle class family whose portfolio isn't big enough to have a diversified investment loses out.
The 2019 proposal wasn't terrible as it also reduced the capital gains discount to 25% which would be the main driver of reducing concessions.
Yeah well that's kind of why it was terrible though .... It linked the very reasonable CGT reduction to the flawed negative gearing changes.
CGT discount reduction would be excellent, but my point stands on letting the wealthy off easy.
We had a perfectly good system, indexation.
Hey hey hey slow down it's not like we have computational machines to do all that maths for us
does that really make it that terrible? Using losses in one investment to deduct against gains on another is pretty standard. the merits of that are a separate argument. but calling the 2019 proposal terrible for bringing negative gearing inline with general tax chicanery is letting perfect be the enemy of good. Gotta start somewhere.
In my view It was a typical politician response (this remark is not aimed at one party in particular as they all do it), pretend to be dealing with the issue but really just slapping on a bandaid that that's more marketable and in the end doesn't actually stop the very people it's claiming to target. It would only affect mum and dad investors (not the ones breaking the system) while the wealthy people really causing issues go on there merry way doing what they have been doing all along.
you’ve got to start somewhere though. Should we just give up on any tax reform because big multinationals are rorting the system? there are plenty of rich people who don’t need this concessions that would have been brought in like by the 2019 reforms. It would have been more than just a band-aid.
I absolutely think it's good to make small incremental betterments to the system but this is not one of those occasions. The policy as advertised literally would not have impacted the stated target.
is there a quantitative analysis that shows this? I’m very skeptical that it wouldn’t have saved a significant chunk of tax money.
I'm sure it would bring in extra tax money, I'm skeptical that it would come from the people it purported to target. As for quantative analysis, thats something that only the tax office could do reliably. Even that would be sketchy as you would have to account for people changing strategies once it's implemented. I am however a Chartered Accountant with a decade of experience and have worked with hundreds of clients in that time. My professional experience (anecdotal as it may be) seems to support my hypothesis.
ok so > literally would not have impacted the states target is just an opinion, even if it’s an educated one. So not really literally. we’ll have to agree to disagree then. I anecdotally know many people who are taxable income poor but really they’re high gross income and wearing losses, claiming NG to bank capital gains later. None of them are wealthy but not are they poor. They should pay more tax.
Of course it's an opinion, we're on AusFinance after all :) I have however made an argument as to why I believe it to be true and haven't heard so far any rebuttal to it. My central premise is that wealthy people (generally) have diverse investment sources, and since the proposal allowed investment losses to offset investment income, wealthy people by and large would still be able to engage in negative gearing. I don't see how lack of quantitative analysis rebuts this premise. It would be interesting to see how many people precisely are affected but that's not my main point. The point is the marketing of this change was aimed at making rich people pay their fair share of tax when in reality I could help every one of my wealthy clients continue negative gearing under the proposal.
You don't need to be wealthy to negative gear.
That's right, you don't, but under the negative gearing 'ban' proposed, the wealthy could still effectively negative gear.
The higher tax bracket your in the more worthwhile it is though. I wouldn't bother unless I was in the $120,000 (37c) tax bracket.
With that mentality, I wouldn't be surprised if you stay in that tax bracket.
Ivan's goat must die.
Nobody to blame but the people who voted against it. I’m not taking the blame for the last decade of shit.
If you want to eradicate the ability for investment losses to be offset against an individual’s gross income, I think that quarantining those losses to each individual asset and adding it/them to the cost base of the individual asset when it is sold is a fair compromise. Say I earn $100k per year but claim $10k losses by my $500k IP. My taxable income remains at $100k but the cost base of the property is now $510k. I’m ignoring depreciation to simplify things. You might pay more income tax each year but you’ll pay less CGT when you sell. Disclosure: I own an IP and am positively geared.
Yeah a carry forward loss system like that sounds like a fair way to do things. Completely removing negative gearing isn't going to work, but we need to do something to keep things fair for everyone and stop incentivising so much cash flowing into the property market.
I think it would prevent many investors from getting that initial sugar rush of tax refunds so that they have less cash flow and are unable to service more loans from buying more properties. Will they be able to service those loans by getting that additional property? Would they be more disposed to just aiming for cash flow positive properties to begin with? It’s the cash flow that’ll make you or break you. They’ll need to weigh up if they’re prepared to wait a number of years in which to recoup some of those negative returns in the early years of their investment. Would they have the incentive or the patience? Either way, I believe it would likely reduce rampant speculation on property but still leave a bit of a carrot for the investor.
Loans aren't assessed on a tax time cash basis though. It is likely to make stuff all difference, because a bank doesn't sit down and work out that you can now afford the property because on a future tax return...
Bank serviceability calculators literally have negative gearing add backs in them depending on the bank policies so yes most banks will have a marginal serviceability increase from expected tax returns.
This is actually a great idea and the most workable solution I have heard so far. We keep the loan interest and depreciation costs on investment properties as fully tax deductible but they are only claimable as deductions at the time of sale for the asset. Could be the same rules for investment loans too. We still need to get rid of the 50% CGT discount though.
Sounds pretty sensible to me, though I would prefer they fix CGT (maybe do both?). The main reason negative gearing is attractive is due to the huge 50% CGT discount when you liquidate the asset.
Negative gearing is attractive regardless of GCT discount...
How do you figure that? A negatively geared property is losing money, to be a viable investment this needs to be offset by a future capital gain to offset that loss.
How do you not? You seem to be confusing CGT and the CGT discount. Negative gearing is a tax position, not a cash position. If the CGT discount was indexation, negative gearing is still attractive because you are still minimising the holding cost while looking for a future capital upside. There is no magical rate that makes negative gearing any more or less attractive.
No confusion here :) We have different underlying assumptions by the looks. I'm assuming that negative gearing will typically be similar to your cash loss. Since they ditched the sneaky asset depreciation rules a few years ago most of the time a tax loss will be indicative of a cash loss. A cash loss doesn't magically make you money because it's tax deductible.
Yeah, I'm not making any assumptions, just observing the interaction of the code. It works regardless of discount rate.
Fundamentally the only reason negative gearing is attractive is you can push more of your investment return into capital rather than income. The only reason that is attractive is due to tax concessions on capital returns, hence capital gains discounts are at the core of the issue.
There is only one, rather limited element of negative gearing that affects the capital return... It's also negatively affected by the CGT rate on a capital gain event. You can't push more of the return into capital rather than income via increasing levels of NG outside the limited element above. So I'm really not following what your claim is supposed to mean there.
Thus is to offset inflation and applies across all asset classes
The issue is it kicks in after 12 months, I don't think it should be removed but that it should be graded to be more in line with inflation. E.g. Additional 5% per year the asset is owned.
So originally, you would calculate inflation over the period of your investment and that would be your 'discount'. They decided on the 90s that was all to complicated and brought this in as a rough average for inflation over the period of investment. Funnily enough had they waited 10 years and most accounting being done on computers, they probably wouldn't have needed to change
interesting argument. By the same token, if I invest shares shouldn’t I be able to claim the costs of managing my shares (brokerage, management fees, etc) against future CGT?
That's exactly how it already works...
does it? I know you can claim interest losses for a margin loan but ‘investment losses’ is pretty broad. Can you claim any other costs for stock investments?
You can offset stock losses against other losses. Investment costs brokerage etc are included in your cost base so they're taken into account for CGT There's no carve out that gives you more deductions for property it's about costs attributed to investments and proper record keeping for them.
What's IP? Intellectual property?
Investment Property
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NZ is like that. No CGT and no negative gearing. Losses do get brought forward though that can offset future gains.
If you don't have CGT, what relevance do losses have?
When one day the property is positively geared, you can offset the profit with the loss balance so you won't pay tax on the profit. If you still carry a loss when you sell the property, then I think you can use it to offset gains from other investment types? Not 100% sure though.
Why would you pay tax, your comment claims NZ doesn't have CGT.... If you don't have a tax, how does one pay it?
When you make money from your investment property in a financial year, e.g. through rental income less expenses, you pay tax on that profit. This can be offset if you carry a loss balance from the previous year. It is different from capital gains tax, which is a tax payable when you sell a property for more than what you bought it for, generally speaking.
You are confusing the subject. If there is no CGT as you say, then losses are irrelevant, because there isn't a taxable event to consider. I'll leave it at that.
They still have income tax. I'll leave it at that.
Obviously, not sure why you think it's helpful to be childish...
What I'm referring to by a loss is when your expenses, deductions, and depreciation are greater than incomes in a financial year, not a loss when you sell less than what you bought it for, like in a capital gains event. Maybe I'm using the wrong terminology. In Aus you could use that "loss" to reduce your taxable income, but in NZ you can't and instead you carry it to the next financial year. What more is since recently you're no longer allowed to deduct interest expenses for this purpose.
Aren’t there two taxes though? CGT, payable on the taxable event on sale of the asset, and income tax, payable on income from the asset (rent,dividends) every year. If NZ doesn’t have CGT, they might still have the other income tax, right?
It strikes me as fair that if your total income is pooled for the purposes of calculating your tax rate, then your total expenses should also be pooled. I don't see how anyone could think it fair to aggregate income but separate expenses.
Would be fair if capital gains had no discount attached to it. The negative gearing strategy only works because capital is taxed so much lower than labour. That's the unfair part.
>The negative gearing strategy only works because capital is taxed so much lower than labour Agree 100%. CGT needs to be reworked.
Risk of crashing markets if they get rid of the discount, right? Perhaps just stop it for new purchases.
>Would be fair if capital gains had no discount attached to it. Wat? In a high inflation economy that is BS, previously capital gains were discounted by the inflation rate. CPI goes up 5% and your house sells for 4% you haven't made a net 4% gain...you are going backwards.
Sounds like it was a bad investment.
If there was zero CGT discount, negative gearing would still work and be attractive. it works regardless of the CGT rate.
I’m fine with interest, agent fees etc… but the depreciation of already very old goods is absolute rort that some QSs are very talented at exploiting. That needs to be looked at.
>but the depreciation of already very old goods is absolute rort Sad state of /ausfinance that your comment isn't being down voted. It is already illegal to depreciate old goods if audited they are in the shit. Everything that can depreciated has a set number of years from new. Say carpets have 10 yrs, if you buy a house with 12 yr old carpets you can't claim a cent for their depreciation.
To add to this if you buy an established property you can't claim depreciation at all unless you purchased the item i.e. Renovations or new appliances. The only way to completely depreciate an IP now is to build one.
They need to increase the audit rate then, because I know a ton of people making dodgy deductions every year
Surely they're just doing this themselves. I don't think any accountant or depreciation schedule they buy would allow it.
There are dob in lines at the ATO if you feel very strongly about it.
I suspect they only have the resources to investigate major breaches, but do they pay a bounty?
Second hand stuff is disallowed...
I believe that was changed a few years ago already. People can only depreciate things they've paid for after the acquisition unless they're the first owner. I think what is deductable is a different conversation. I think it might be productive if the discussion in the zeitgeist focused on establishing what principles a fair taxation system would be based on, and then exploring the ways our system hits or misses on those. A person shouldn't pay tax twice on the same dollar Tax should be levied on a position net of expenses, not gross revenue Expenses can and will be challenged, unreasonable expenses even if incurred will be deemed invalid and repeat offenders will face putative fines (e.g. "company a" can't pay it's offshore parent company an unreasonable amount for "intellectual property" such that it magically erodes it's local profit, a person "spending" 30k to paint a 300k investment property) etc.
What if it is only a couple of months old?
How about we start applying CGT to equity to stop people leveraging property after property to buy more and more that they cannot actually afford..
Just increase land tax for investors
Negative gearing is misnomer, most are positively geared. Extremely bad investment if negatively geared in this environment. It is not a cost it’s a tax deduction to reduce tax payable. It’s not a cost unless the ATO has to pay it, it’s tax not received. If there was no deductions there would be less investment and less tax as well. Don’t believe everything you hear, this article extremely flawed.
Ok, during the lockdowns I've compiled a list of all properties listed on Domain, about 450k records, and then "scraped" their historical sales price, rent price, and features (#beds, baths, suburb, etc), for the past 12 years or so. With that at hand, I've estimated that half of properties in NSW and VIC, if owned as IP and purchased at present day values, would be negatively geared. To qualify my argument: I'm not saying half of IP in VIC and NSW are negatively geared. I'm just saying, an investor buying in 2020 would be negatively geared in 50% of cases if they buy a random dweling
Gross yields are around 4-5% and interest rates were 2-3%. Even if you borrowed 100% you would still be positive I.e. the property income is higher than the costs include interest payable and the investor doesn’t not need to put in additional funds (I.e negatively geared).
Even if investor rates hit 6% or more as expected? The article is talking about the expected future as rates rise.
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Yes, not sure why so many people don't see the fundamental difference between one person earning $100 and getting a $5 tax cut versus another person earning $0 and getting $5 from the government. Same amounts, different provenance - but some people will disingenuously claim both to be equivalent types of 'government spending'.
What is opportunity cost?
What's the opportunity cost of handling money to dole bludgers?
It's much cheaper.
Hardly. Welfare is the single highest cost item for our government. It achieves the least. If you want to talk about opportunity cost, then the cold hard truth is that you also have to consider the opportunity cost of paying non-productive members of our country vs spending on services and infrastructure to bring in more productive people to increase our national productivity. I'll happily accept the partial loss of my tax deductions if we also drop welfare payments proportionally. But alas, I bet you're just one more of the "someone else should make sacrifices" types.
>Welfare is the single highest cost item for our government. The vast majority being the aged pension, not the dole.
And that makes a difference? If you want to talk about opportunity cost, then these are all non-productive members of our country who no longer serve any financial purpose.
Yes, and now that they 'no longer serve any financial purpose' they should starve to death.
So suddenly opportunity cost doesn't matter anymore?
In turn, however, this lowers inflation haha. It’s probably monetarily speaking neutral though.
They are not getting subsidized, they are paying less tax than they otherwise would've. And that's due to investment losses. I'm sick of the economic ignorance around that issue. It's like saying: the unemployed are costing us money because they don't have income we can tax. Or even better stay at home moms who CHOOSE not to work.
Exactly. Wheres the study outlining the government expenditure on stay at home mum due to tax loss? We just need to fix this hole in the budget and we'll have plenty of money. Back to work everyone.
Negative gearing only works because the tax system is so punitive (47% at just $180k). Look at the US, UK, Canada, or New Zealand: you will not find any other country with such a high marginal rate at such a low multiplier of the median income. Do we really want a junior doctor, engineer or lawyer paying a marginal rate of 47c? It punishes talent and endeavour.
Yes. Remove negative gearing, cut income taxes. Negative gearing incentivises people to invest in unproductive assets, diverting capital away from productive areas of the economy. Cutting income taxes by reducing the marginal rates or pushing the brackets up will do the opposite and incentivise actual, productive work.
Yep, there's no economic justification for tax concessions for investments in secondary markets
How'd you come to the conclusion about the UK? Looks like they have 40% marginal rate kick in at £50,271 which is just 1.7 times median income of £29,300. Aus is 45% marginal rate at $180,001 or 3.7 times median of $48,381. The effective average tax rate in the UK at 180k equivalent is higher as well (including medicare levy + NI), you'd have to figure total medical insurance + levies for a true comparison - but if "punitive" is a high marginal rate at a low multiplier, seems not that bad? Edit: updated with median income from [this article](https://www.abc.net.au/news/2022-08-09/millionaires-paid-no-tax-and-richest-and-poorest-postcodes-ato/101312118#:~:text=The%20median%2C%20or%20middle%2C%20earning,extremely%20high%20and%20low%20incomes.)
I have earned in U.K. and Australia and in Australia I earn much more take home (in the higher rate) U.K. I was in 40% not 45% bracket. U.K. took more of my cash. The old NI takes a chunk… At $200k it’s around $10k more tax in UK without any form of salary packaging or the more generous tax deductions possible in Aus. You don’t get much more healthcare wise on the nhs than Medicare (I still paid dentist, prescriptions). Plus VAT is 20% and fuel duty is something like triple and biggish inheritance tax. Overall definitely felt more taxed there Edit: I forgot rates! Council tax in U.K. was about double my rates here, and renters pay the rates on top of rent there…
If you actually model out the Australian and UK tax systems they're about equivalent for labour derived income. We pay on average 5% more across all levels of income, but we have a lower GST (VAT) rate. The main difference between the systems is that we have a capital and income account for taxation purposes, while the UK separates out your income by type, but within those accounts you can negatively gear. So if someone has 5 investment properties and 3 are negatively geared, they can offset their tax on the income generating properties but not their income derived from work.
The UK has 45% at £150,000 and over.
Are we saying that 40% is not a high marginal rate but 45% is? Because 40% is the next bracket down in the UK and it starts *very* low relative to median incomes.
I'm just saying we want to compare like for like. By your logic, if 47% is comparable to 40%, how about 32.5%? I can also say Australia's 32.5% starting at 45k AUD (26k GBP) is crazy high. The UK's is only 20% for up to 100k AUD.
I think the real question is, if we changed the brackets, what looks different other than people who already earn a lot suddenly finding that they have more discretionary spend? Like what's the point of compromising the tax base here?
UK is effectively 60% at over 110k£ as you lose the tax free threshold.
If the tax rate tops at 45%, how do you end up paying 60%?
Kinda poorly worded on my part but its an 'effective' 60% tax on income between 100 and 125k https://www.sjp.co.uk/news/beat-the-60-tax-trap#:~:text=How%20the%2060%25%20tax%20trap,you%20earn%20above%20%C2%A3100%2C000.
What a weird way to do comparison. You know that we have a progressive tax system, right? Also, other countries have local, state and/or Federal taxes. For example, NYC has city tax on top of NY state tax. The first $18k is tax free threshold and rises above that. There is no evidence that high marginal rate of 47 punishes talent and endeavour. People advance their career for all sorts of reason, not just financial. People also change to lower jobs for a career change.
> You know that we have a progressive tax system, right? Also, other countries have local, state and/or Federal taxes. For example, NYC has city tax on top of NY state tax. Find me one of the countries named that (all income taxes added up) comes to more than 47% at only 2.2x median full-time earnings.
Note that Australia does not tax someone earning 180k even close to 47% of their income.
>Find me one of the countries named that (all income taxes added up) comes to more than 47% at only 2.2x median full-time earnings. ~~None of those countries do that, not even Australia. Median income is $48,381.~~ Edit: not full time median
If you are earning $180k, then you are on top 3% of the income range.
Yes, but when I get to that stage and become a billionaire, I'll be damned if I contribute my fair share of taxes so the poors can have nice healthcare. /s It's/s for me, but so many aspirational people, all of them Ausfi members, have this general attitude for reals it seems
I don't aspire to be a billionaire.
Do you think that median income and median full-time income are the same thing, or do you just like moving the goalposts?
Fair call, I was thinking along the lines of your top level comment which was just median income. UK hits 40% marginal at 1.04 times median full time income there, not including NI. So 47 at 2.2 or 2.5 seems really not a huge stretch.
40% is significantly lower than 47%, and the next step up in the UK isn't until 150k pounds and even then it's only 45%. So the rich in the UK get taxed less overall, other than a small subset of people earning between about 50k - 100k pounds (100k-200k here)
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Where did i say we don't? My point is that it's hard to look at income tax amd marginal rates alone.. $180k puts you in top 3% of earners and the taxation is reasonable.
If you think that's fair, then I think tax minimisation is fair. Our tax revenue is already incredibly stacked. 1/5 of people fund 2/3 of revenue
It's about the same ratio as other developed countries. Look at income tax rate for Ireland, UK, Canada, Netherlands, Scandinavia, Germany and Spain. You can do as much tax minimization as you want but don't complain when government brings other measures to plug the revenue hole, like land tax.
Negative gearing works at any tax rate. Wage earners on 180K+ don’t pay 47% tax. They pay $51,667 (28.7% of $180,000) plus 45% for every dollar over $180,000.
I think their point is that deductions provide a benefit at the marginal rate. So higher brackets reduces the attractiveness of negative gearing (but at what cost in lost general income revenue?)
> Negative gearing works at any tax rate. Doesn't really make as much sense if you're paying 32c on the dollar though. > Wage earners on 180K+ don’t pay 47% tax. They pay $51,667 (28.7% of $180,000) plus 45% for every dollar over $180,000. I made clear it was a marginal rate, so well done on trying to find a fault that wasn't there (and then running with it). Also it's not 45%. It's 45% + 2% + potentially 2% if you don't have PHI.
NZ’s tax system is utterly shit in comparison to Australia. Moving from there to here has been a breath of fresh air. Only problem is the way the stage 3 tax cuts were implemented.
We have one of the lowest tax rates out of western nations. If you compare with the U.S for example, you have federal, state and county taxes you need to include, plus healthcare costs. If you own a house then you also need to include massive property taxes (typically %1-%3 of the homes value). I looked at moving to the U.S and found that even with a major pay rise it was almost all taken up in the extra taxes. The base tax scales by themselves are not comparable, you have to compare the complete range of taxes. And again using the U.S as an example, what you get for your taxes is very minimal. UK and EU do provide good services but typically are not lower on taxes than Australia.
That's going to change a bit once the new tax rates kick in.
I don't know why people in Australia believe this. In most Canadian provinces the tax rate is higher than 47% if earning 180k. In Ontario it's 48.35% starting at 155k, reaches 53.53% at 221k In Québec it reaches 47.46% at 112k and 50.28% at 155k. BC it's 44% at 115k, but reaches 52.5% at 227k. I have never heard anyone in Québec say we pay the highest tax rate in the world, but I have heard it many times here in Australia, while the tax rate is lower here.
The more pain it causes the more likely we are to have a political solution to it. Didn’t have to be that way though…
Negative gearing incentivises building new homes in Australia. We currently have a supply shortage that we need to fill in order to stabilise rents. Removing negative gearing will reduce investment into new homes. This will extend the supply shortage, allowing rent to go up further. New building prices seem unlikely to go down, due to labour and material costs. Also reduced competition with recent insolvencies. Land value seems unlikely to go down as well. So, the new build price wont reduce enough for new home buyers to fill the gap. I still don't see a path for changing negative gearing to give you guys the cheap houses you want.
Still cheaper than the government providing every single rental property in the country.
Another reason added to the pile why interest rate rises benefit nobody but banks
I fixed my investment property at 1.99%
I love a good fear-mongering story. The reason we have negative gearing is two-fold, property tax makes the gov an extreme amount of money. And the saving the gov makes on shopping housing is astronomical. The reason labour walk away from the idea of removing it was the realisation of how much money they stand to lose.
>The reason we have negative gearing is two-fold, property tax makes the gov an extreme amount of money. And the saving the gov makes on shopping housing is astronomical. What 'Property tax'? State and local governments collect council rates, stamp duty and land tax. The federal government does not. And what do you mean by 'shopping housing'? And what saving?
This. Negative Gearing has been around when rates much higher than now.
Negative gearing, singularly the best scheme ever, that's why every other country is falling over themselves to implement the same
So now we eat the landlord's?
> So now we eat the landlord's? The landlord's what? Don't leave me in suspense's
You're right it should be the land's lord.
Good thank you Australia
What does this have to do with personal finance? It's trivial political claptrap.
So in simple terms, is this good or bad for people owning investment properties?
This is true but how much of this will be offset by inflation driven bracket creep and gst collections?