Renewed Debate on Negative Gearing

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On the weekend, auction clearance rates hit record highs of 91.7% in Sydney and 87.4% in Melbourne. Total auction numbers were down for ANZAC Day as at least some people stopped to reflect on the freedoms (including the freedom to speculate at will) that past generations have afforded us.

Still, the RBA will be acutely aware that they have set this bubble off with their low interest rate policy, combined as it is with highly favourable tax treatment that encourages Australian housing speculation.

If there’s one decent thing to come out of this most recent housing frenzy, it’s a renewed debate on negative gearing. While Joe Hockey thinks it’s ok for Australian taxpayers to subsidise property punters, others aren’t so sure.

Finally, it’s becoming acceptable to criticise negative gearing in this country. Shadow Treasurer Chris Bowen put it on the table last week, saying he would take changes to the contentious policy to the next election.

While hardly revolutionary, he will propose restricting negative gearing to new builds only, and grandfathering existing rules so punters aren’t disadvantaged.

It’s about time Labor started putting some policy ideas on the table. But the way Bill Shorten is travelling as Labor leader, he might be lucky to get to the next election in that position. His Treasurer, currently the ‘ideas man’ in the party, might be the better leadership option.

It’s now becoming respectable for the mainstream media to question negative gearing too. It’s not just fringe blogs like The Daily Reckoning or the guys at MacroBusiness shouting about the stupidity of this policy.

Today’s Financial Review takes aim, albeit behind the cover of a ‘professor’:

Negative gearing could be scaled back to finance income tax rate cuts in a similar vein to Ronald Reagan’s 1986 tax reforms in the US, a leading tax professor says.

Miranda Stewart, who will host a two-day forum on the future of the tax system at the Australian National University this week, said taxpayers subsidised rental losses for property investors by more than $7 billion in 2011-12, the latest figures available. That money might be better spent on arresting bracket creep, particularly for moderate income earners, she said.

"We’re putting more than $7 billion into some people’s speculative investments at the expense of other taxpayers who are paying higher tax over time," Professor Stewart said. 
"That’s a lot of money. If we were to quarantine those losses even partly, over time we could finance a tax cut to recapture bracket creep."

Tax cuts for the many at the expense of a few? That sounds way too egalitarian to form a part of Australia’s tax policy. The political imperative these days is to pander to the special interest groups and hope they get you home…for another three years at least.

The Age had a great article on the weekend that inadvertently pointed out the destruction caused by the current policy of negative gearing. That is, running your investment property at a loss (and claiming a tax deduction on that loss) in the hope and expectation that capital gains will more than make up for the difference.

The article discussed the demise of Fitzroy Street in St Kilda. Fitzroy Street was the site of the old Daily Reckoning headquarters, so I’m quite fond of the scruffy old strip.

The street is a bit run down, and has quite a few empty shopfronts. Many of the shop owners complained of the onerous rents on the strip and blamed these high costs for the constant turnover and vacant lots.

I could be wrong, but what’s the incentive for a wealthy property owner to lower their rent and let out a space. Isn’t it just as lucrative to leave it empty, run it as a loss (to offset tax on other income) and just watch the land boom push up the asset value?

This is the hidden cost of land speculation and the brainless tax policy that encourages it. It chips away at the structure of society…not only creating haves and have nots…but changing the shape of our local streets and the way we interact.

Phil Anderson at Cycles, Trends and Forecasts would no doubt agree with me. But he would also say I’m screaming at the wind and the cycle is simply playing out the way it always does. So why not just accept it and take advantage of it.

That sounds good in theory, but I’d rather stay angry instead. When the fire in the belly goes out, what’s left? The Daily Reckoning speaks out for the underdogs, and if there is an underdog in Australia’s society right now, it’s the non-land owning peasant class.

Regards,

Greg Canavan+,
for The Daily Reckoning Australia

Join The Daily Reckoning on Google+

Greg Canavan
Greg Canavan is the Managing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. For more on Greg go here.
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3 Comments on "Renewed Debate on Negative Gearing"

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Johnno
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I get Negative Gearing and all, however I don’t know why it is treated differently when it come to the Tax laws in this country. If someone has one or two properties that is OK to Negative gear, you are running a “Hobby Business”. When you have 10 or 15 you are running a Business in its own right, You have invested $mill’s and gaining a return, if you are losing then you have overpaid and your investment paradigm needs to shift. At this point if you are an Employee earning $75,000, then your “Business” is a completely separate entity… Read more »
Frank
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No government will remove negative gearing, it has created a booming financial industry. Negative gearing = Bigger wealthier financial institutions at the investors expense. Fast forward into the future, yes you have made a capital gain but the government knows the investor or beneficiary will sell the asset and someone will be paying capital gains tax. So if you live a long prosperous life, would you have been better off paying a little more tax stress free or are you better off with all the burdens that come with negative gearing expenses. I know of families in both these situations… Read more »
SFR
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GC: “I’d rather stay angry instead…” You’ve been angry for years, Greg. I don’t really blame you. Nothing in Australia works the way you believe it should. But this continuing anger, this unresolved conflict, isn’t good for you. Counselling may help, but even a visit to your GP might assist you to avoid a life-threatening illness. Meanwhile, there’s a possibility that Labor will shut the gate, if elected. That won’t affect all those who have already invested, of course. They’ll retain their tax concessions. In the year prior to the election we may see an increase in investor interest, as… Read more »
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