Human Rights Commission President Gillian Triggs recently observed that Australian politicians were generally ill-informed and uneducated.
She was speaking in reference to democracy, human rights and international law.
I am beginning to suspect her observations may apply to almost any matter that is placed before them for consideration or action.
When it comes to negative gearing, Liberal and Nationals federal politicians have obviously not read beyond those party talking points released as the federal election campaign heats up and, I suspect their ignorance is wilful.
Readers have probably already noticed how many of them have declared investment properties and accompanying mortgages in the current Register of Members’ Interests?
So in an effort to balance the one-eyed view of negative gearing held by those with vested interests, here are some facts and observations……
What is negative gearing?
Negative gearing: cost of the property is greater than the income generated. e.g. total cost is $2,000 per month (includes loan, council rates, real estate management fees etc) less the incoming rent $1,500/month rent received. The difference is $500 per month or $115. 38/week, which costs the investor.
The benefit of negative gearing is the cash loss is offset against income from other sources, thus reducing your taxable income, and hence the amount of tax you have to pay (compared to the tax you'd pay without the investment).
The effects of this cash loss are buffered or absorbed by the tax system.
Because of the tax effects your loss is reduced.
Simply put: the tax man and the rental income pays for your investment property!!
A rental property is negatively geared if it is purchased with the assistance of borrowed funds and the net rental income, after deducting other expenses, is less than the interest on the borrowings.
The overall taxation result of a negatively geared property is that a net rental loss arises. In this case, you may be able to claim a deduction for the full amount of rental expenses against your rental and other income (such as salary, wages or business income) when you complete your tax return for the relevant income year. Where the other income is not sufficient to absorb the loss it is carried forward to the next tax year.
If by negatively gearing a rental property, the rental expenses you claim in your tax return would result in a tax refund, you may reduce your rate of withholding to better match your year-end tax liability.
If you believe your circumstances warrant a reduction to your rate or amount of withholding, you can apply to us for a variation using the PAYG income tax withholding variation (ITWV) application (NAT 2036).
Advice from domain.com.au on how to negatively gear your own holiday house so that the taxman pays for your weekends away and annual holidays.
Who negatively gears investment properties?
The richest 40% of Australians carry 80% of the investor housing debt.
Data is not directly available on what proportion of home purchases are made by investors. Data on new home lending from The Australian Bureau of Statistics’ Lending Finance figures indicates that between one-third and half of new lending is to investors. And ABS census data shows that just under a third of existing properties are owned by investors.
But not all of them negatively gear. Some do not borrow, and others do not borrow enough to be negatively geared: that is, their rental income is greater than the expenses and loan interest. The tax stats show us that about two-thirds of all housing investors are negatively geared. This suggests that around 20% of housing buyers are negatively geared investors.
These figures indicate that in 2015 negatively-geared investors borrowed an est. total of $14.7 million in housing finance.
It appears that many investors who negatively gear property have borrowed up to 50 to 80 per cent of the purchase price of their investment.
This is a breakdown of who these investors are thought to be, according to Grattan Institute spokespersons writing in The Conversation on 8 March 2016:
Click on images to enlarge
"In total, these concessions [negative gearing, capital gains tax discount & superannuation tax concessions] are worth more than $37 billion, yet the young receive only $2.4 billion of their value…
"The capital gains tax discount and negative gearing are particularly unfair for the young, with the under 30s taking approximately 1 per cent of the benefit of tax breaks worth $7.7 billion a year and climbing.
The NATSEM research also shows that 73 per cent of the benefits of the capital gains tax discount, flows to the top 10 per cent of income earners.
The Sydney Morning Herald also reported on 13 November 2015 that:
According to Tax Office data, nearly 30 per cent of anaesthetists negatively gear their properties, compared to just 3.6 per cent of cleaners.
Surgeons (27.7 per cent), finance managers (23.4 per cent), mining engineers (22.2 per cent), and lawyers (22.1 per cent) are also far more likely to use the strategy than people in lesser-paying jobs, the data shows.
Sales assistants (3.7 per cent), hairdressers (5 per cent), nurses (9.6 per cent) and teachers (12 per cent) are much less likely than surgeons and lawyers to use negative gearing…..
Click on images to enlarge
Data shows the average tax benefit that surgeons received from negatively geared property was $4161 in 2012-13, followed by anaesthetists ($3353), lawyers ($1788), mining engineers ($1336) and finance managers ($1247).
But cleaners only received an average tax benefit of $41, while sales assistants ($42), hairdressers ($167), nurses ($254) and teachers ($327) fared little better…..
Data for the 2013-14 financial year confirms the same professional occupation mix as benefiting most from negative gearing tax concessions.
It comes as no surprise that an electorate with some of the wealthiest people in Australia - the Liberal Party electorate of Point Piper held by Malcolm Bligh Turnbull MP - is also the electorate which claims the most in average rental losses from negative gearing:
ABC News, 27 April 2016, ATO (2014) and NATSEM
New research by the Parliamentary
Library has found that of the 6071 people in Mr Turnbull's
postcode who submitted a tax return in 2014, 592 claimed the tax
deduction to the tune of almost $18 million - or $30,278 each.
That works out at about $582 a week.
Nor does it come as a surprise to find some Turnbull Government ministers have one or more geared investment properties, such as Minister for Immigration and Border Protection Peter Dutton, who in December 2015 purchased a $2.235 million two-story beach-front house at Palm Beach QLD with money borrowed from the ANZ Bank. He and his wife appear to own four other properties - two of which are also listed as investments.
In fact an est. 1 in 3 federal politicians own rental properties and ownership by party breaks down like this:
Qld Nationals
senator Barry O'Sullivan reportedly owns 41 of these properties, Nationals MP David
Gillespie 18 properties, Palmer
United Party MP Clive Palmer 12 properties and Country Liberal Party MP
Natasha Griggs 12 properties.
So why does multi-millionaire Prime Minister Malcolm Turnbull insist that removal of the negative gearing would hurt mum and dad investors ie those with taxable income incomes at or below $80,000pa?
Well, the first point to remember is that people with genuine and 'unmassaged' taxable incomes below $80,000 per annum are more likely to be receiving negative gearing tax concessions worth less than $800 per year.
The second point is that Labor is only talking about removing the negatively gearing option from old housing stock that is not already negatively geared.
Current investment properties - no matter who they are owned by - will be exempt from proposed negative gearing changes.
Basically, removing negative gearing from old housing stock purchased after 30 June 2017 would predominately affect that section of society which seeks to aggressively avoid tax and accrue wealth by property speculation.
The simple answer to the question of why Malcolm Turnbull has taken his contrary stance is that this is a federal election year and the country is probably heading to the polls in less than six weeks - therefore both Liberal and National ministers, senators and MPs all need to keep their political donors, personal support bases and the property, banking and finance industries firmly on their side if they are to retain their seats and win the Abbott-Turnbull Government a second term in office.
I suspect that small-time investors did not genuinely factor into Turnbull’s decision to leave negative gearing arrangements well and truly alone, no matter what he argues between now and 2 July 2016.
After all, before this election year dawned negative gearing was open to debate in his own party. As the departing treasurer Joe Hockey demonstrated in Hansard
on 21 October 2015 at Page 11952 when he appeared to be agreeing with an element in Labor’s draft affordable
housing policy:
JOE HOCKEY: We
should be wiser and more consistent on tax concessions to help pay for that. In
particular, tax concessions on superannuation should be carefully pared back.
In that framework, negative gearing should be skewed towards new
housing so that there is an incentive to add to the housing stock rather than
an incentive to speculate on existing property.
In an effort
to paper over Turnbull Government unwillingness to look taxation inequities
squarely in the eye, Liberal and Nationals politicians are apparently blaming
ordinary Australians and their supposedly shaky levels of confidence, if The
Saturday Paper of 30 April 2016 is any indication:
Coalition sources say
concerns about the impact on consumer confidence of big changes to the tax
system – along with the assessment that the boost to growth was too small to
justify the upheaval – were behind the decision to abandon an increase in the
goods and services tax.
Similar concerns also
fed into the decision not to fiddle with negative gearing.
The online
newspaper went on to say:
The Saturday Paper has
been told cabinet took its decision to retain negative gearing some weeks ago
and that it was a political – and not an economic – move.
The policy decision was
made to form part of the government’s armoury in the lead-up to the election…..
What do ordinary people think of negative gearing?
According to The Australia Institute less than 9 per cent of the Australian population owned investment properties in 2012, so it is unsurprising to find this online poll in The Daily Examiner (Clarence Valley) on 29 April 2016:
Conclusion?
Putting it quite frankly; protecting current negative gearing tax concessions for an estimated less than 9 per cent of the population (whose cumulative tax minimisation/avoidance is by most accounts distorting the property market) at the expense of the remaining est. 91 per cent is bad taxation policy.
Favouring this less than 9 per cent, during a federal government term which saw first Abbott then Turnbull rip into the fabric of health, education and welfare safety nets protecting over 23 million people because tax revenue is not keeping pace with government spending, is mindlessly destructive politics.
A fairer approach to taxation concessions - particularly those on self-managed superannuation funds, investments and capital gains realized - which does not encourage aggressive tax minimisation/avoidance at the expense of the common good is not the bogeyman vested interests are making out.
