7 reasons why negative gearing should not go

1st Mar 2016By: Margaret Lomas

Negative gearing has ruled the airwaves over the past few weeks, with speculation rife that it’s removal, or at the very least, reduction, is on the top of the list for both the government and the opposition. The Labour party has already provided sketchy details of their intentions, with the government ‘not ruling out’ sweeping changes. Being an outspoken property person, I’ve been drawn into this debate, and already I’ve been accused of not being impartial due to my own large property holdings. I’d like to think that I can still remain unbiased in any comment I make about property, but in this case let’s remember that any changes made are more than likely to be grandfathered, meaning they won’t affect me anyway.

But, what will they do? You’ve likely heard plenty of reasonable argument to date for the proposed changes – a boost to the new housing stock, a return to affordability, and a fairer tax system as the ‘rich’ are deprived of the tax breaks they don’t need because, well, they’re rich, aren’t they? But, in my opinion (impartial I hope), there are just too many arguments against changing a system which presently provides many, many benefits outside of those enjoyed by the recipients of the benefits. Here are some:

1. For so many years there have been scare tactics around the fact that, once baby boomers retire, there may not be enough money to support them via welfare. I’ve been in this industry for a very long time, and so I can attest to the fact that the response to this scare tactic for many people was to become more educated about investing, choose a class that they felt comfortable with, and proceed headlong into that class. Many invested in residential property as it felt safe, created a suitable income and, as an aside rather than a motivating factor, it also carried tax benefits. Now, if it is removed, they will no longer be able to afford to do this – and so the savings the government makes today will only be lost in the future with an increased welfare bill.

2. It is not the wealthy who will be affected, it is every day mums and dads, who will not be able to afford to buy property without those tax breaks. These are people who do not have a lot of disposable income, and losing the tax breaks would make it impossible for them to support the expenses on the properties. Brand new properties come at a premium and usually have a low yield which, even with tax breaks, makes the shortfall impossible to manage, but existing property is affordable and achievable. To create just enough to cover what an aged pension otherwise would, these average mums and dads need to buy around 6 properties and keep them for 15 years. That’s hardly people getting rich off tax breaks!

3. Around 25% of housing is privately provided rental housing – and make no mistake, any altering of available tax breaks will most certainly result in less investment into rental housing. It’s not suitable to suggest that renters will now become home owners – many, many gen Y people do not want to own their own home as they are mobile, travel often, change jobs a lot and could not afford to buy where they really want to live, even if prices became more reasonable. Those same gen Y people do want to be investors though, and in my experience a lot of them build solid property portfolios with the aim of being self- funded retirees, and so they are hit with a double whammy if negative gearing benefits are altered.

4. It’s a fact that many property investors own property which is only negatively geared for the first few years, in a buy and hold strategy which is planned to span 15 – 20 years. Rent increases usually mean that, within 3 – 5 years, many properties become positively geared. This means the owners pay tax. I wonder whether either party has assessed how much future tax revenue will be lost if property investing is discouraged. Most property investors buy established property in affordable areas with solid yields and so a positively geared situation is more likely than not to occur early in the investing period.

5. Small businesses can claim their expenses against income. Share investors can negatively gear their share portfolios. It is complete discrimination to hit only those choosing to create retirement funds through property.

6. While the theory is that it will make housing more affordable, I believe that it will instead open the flood gates for more spruikers to sell over- priced property. If the decision to go forward with this plan becomes reality, then the government must also regulate the property industry to protect investors – which they have so far refused to do.

7. Despite all of the rubbish being written in the media, rents would absolutely increase as those who do invest attempt to get better cover for their expenses. Less people would own property to rent out, and this means that each property available would have more people vying for it, placing pressure on rents.

Those saying there will be no related rent increase didn’t pay attention in their economics classes – decreased supply ALWAYS results in rising prices. If the concern is that savings need to be made, and that housing needs to be made more affordable, there are many better ways to do this. Red tape and compliance in all areas currently cost the government many, many millions and streamlining in these areas would add to the right side of the ledger. Tightening rules around who may obtain welfare and for how long would also help. Housing incentives such as first home owner’s grants would encourage people to buy rather than rent and improve affordability.

And, dare I say it, generous super schemes, travel allowances, and other fringe benefits for politicians could instead be brought into line with those in the corporate world – that should save a dollar or two! For me, though the most alarming factor here is that no one seems to understand what negative gearing means!!! Negative gearing is not a strategy – it’s a tax outcome. Negative gearing is when your income is less than expenses and you claim a tax break equivalent to your marginal rate of tax on that loss. So, lose $3000 over a year and get $1000 of your tax back.

That same tax outcome is just as easily transformed to mean that when you make $3,000, because your property’s income has had a natural market increase and your loan interest has decreased as you pay off the debt, you pay $1000 EXTRA tax. I have to ask – does the plan to remove negative gearing when you’re losing include a plan to remove the need to pay tax when you’re winning?

The whole argument needs to be thought through with the benefit of all of the information. Sadly, that won’t happen. Long term thinking has never been a feature of any political party’s modus operandi as long term thinking simply doesn’t win votes. Heaven help us if we finally had a party with a long term view. We just wouldn’t know what to do!!