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January 13th, 2014
Is Negative Gearing Set To Go? By Daniel Martinez

Happy New Year

Investing through super is one of the most effective structures to build long term wealth.  Quite often, when espousing the virtues of superannuation to prospective clients they  retort ….‘I don’t trust super’.

It’s unfortunate that people feel that way.  When I delve a little deeper and quiz them about what it is that makes them feel that way they say things like:

  • They don’t trust the government.
  • The government is always changing the rules.

What they’re talking about is ‘legislative risk’.

I agree that the government changes the superannuation rules too often.  However, any investment can have the rules changed by government legislation.

For some reason people feel more confident investing outside of super.  Often an investment property is the investment of choice for non super investments.   People are really attracted to the negative gearing benefits of investment properties. They give little thought to the risk that legislation might move against them.

Think again!

All you have to do is cast your mind back to the mid eighties.  The more mature investors may recall that in 1985 the Hawke-Keating government changed the rules so that interest could only be claimed as a tax deduction against rental income.  It could not be claimed as a tax deduction against other forms of income such as salary and dividends.   It was re-introduced in 1987, after the property industry mounted political pressure to bring the tax break back.

In 2010 the Henry Review concluded that negative gearing was one of a plethora of inefficient taxes.  The report recommended abolishing the tax break. Fortunately for investors, the then Rudd Government refused to act on the recommendation for fear voters would turn against them.

These days there are mounting social and fiscal policy arguments to abolish negative gearing.

According to Joe Hockey, the federal budget position is not sustainable.  The government’s White Paper will be looking very closely at the budget impact of negative gearing.  According to the ATO, 1.2 million voting Australians were negative gearing in the year ended 30 June 2011. These investors recorded net losses of $13 billion.  Limiting investors to only deducting these losses against rental income would contribute about $4 billion a year to the budget bottom line in the short term.

On a social policy level, a key government objective is to increase home ownership amongst the more needy members of our society.   A key mechanism to increasing home ownership is to improve housing affordability.  One way the government can improve housing affordability is to increase the supply of housing.  A Grattan Institute report questioned whether negative gearing increased the supply of housing.   Their research found that about 95 per cent of investment property loans went towards acquiring existing dwellings rather than a new dwelling.

Business leaders have joined growing calls for a policy overhaul to help fix the distorted housing market.

Recently, company director Elizabeth Proust said, “It just isn’t a level playing field when you have first home buyers trying to put together a deposit when they’re up against older people with deeper pockets.  The policy is entrenching disadvantage by pushing buyers into cheaper property on the city fringe where ­transport, health and education aren’t as good. The policy is making the cost of home ownership so high”.

Aussie Home Loan founder John Symond said “negative gearing is a great tax break, but it needs a total overhaul to make it fairer. First home buyers have no hope of getting into home ownership these days unless they’re helped by their families”.

Other business leaders say negative gearing is giving investors an unfair advantage over people looking for a home to live in.

First home buyers and the less wealthy could end up being relegated to a lifetime in the rental market.

As you can see, nothing is off limits when you have such social and budgetary pressures
building.   Not even the tried and trusted negative gearing strategy is sacrosanct.

Watch this space.

Bye for now

Dan’s Corner

Source: Nassim Khadem The Australian Financial Review 25 December 2013

Samantha Hutchinson – The Australian Financial Review 11 January 2014

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