The New Daily

Negative gearing proponents’ claims don’t stack up

ANALYSIS: Labor’s policy to restrict negative gearing mirrors moves by the states to direct first homebuyers grants to new housing in an attempt to boost construction.

Labor's negative gearing plans won't cause a wipeout. Photo: AAP

Negative gearing policy has been a battleground for many years and its emergence as a hot button issue in the upcoming federal election has brought the friends and enemies of the practice into the field once more.

Some are warning about “unintended consequences” which they say would “inevitably flow” from paring back the practice, which allows investors to write off interest losses on investment property against other income.

That in turn cuts their income tax liability in the present and turns current taxable income into capital gains when the property is eventually sold, which are then taxed at half the rate levied on ordinary income.

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The Labor opposition has put the issue firmly on the agenda, pledging to end negative gearing on existing housing (and other assets) purchased after July 1 2017, while leaving negative gearing as an option only for buyers of new properties.

Since the policy was announced, negative gearing proponents have hit back. Rents will “soar”, they allege, property prices will be “smashed”, housing starts will decline, and untold damage will be done to the broader economy, they claim.

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These assertions are usually based on beliefs about how investors will respond to the removal of negative gearing. They sometimes support their arguments with reference to what allegedly happened when negative gearing was temporarily abolished by the Hawke government between 1985 and 1987.

These assertions don’t survive a moment’s confrontation with the statistical evidence from that period. Even BIS Shrapnel acknowledged that in a final-page addendum to the report they produced earlier this month.

That report attempted to put some numerical meat on the bones of the scare campaign relaunched by defenders of negative gearing and reiterated some of the arguments of the critics of Labor’s policy.

Look at the evidence

But there actually is some more recent evidence which adds weight to the argument that the removal of negative gearing, as envisaged by the Labor Party, will have very few of the effects alleged by this scare campaign.

Over the last five years or so, every state and territory government in Australia – of whatever political complexion – has abolished the grants they have been making to first-time buyers of existing properties introduced since 2000; whilst at the same time increasing (in most case doubling) grants for first-time buyers of new dwellings.

Scott Morrison claims that the vast majority of Australians who use negative gearing earn "modest" incomes.

Scott Morrison and the Coalition have attacked Labor’s negative gearing plans. Photo: AAP

The rationale for these changes has been that grants to first-time buyers of established dwellings serve only to increase the price of those dwellings; whilst restricting grants to those who purchase new dwellings and boosting the grant size, stands at least some chance of directing first-time buyer demand to new dwellings – and thus, potentially, increasing the supply of new housing.

This is exactly the same rationale for Labor’s proposals on negative gearing.

The figures tally up

Moreover, the amounts involved are comparable. First homeowner grants have typically been in the band between $7000-$14,000, a similar range to the average rental interest deduction claimed by landlords with taxable incomes under $80,000.

They are the “police officers, teachers and nurses” who, according to the Property Council and the Treasurer, are the ones doing almost all the ‘negative gearing’.

In other words, what federal Labor proposes with regard to investors, is very similar in its intended effects, to the aims state and territory governments have with regard to first-time owner-occupiers.

Yet there is absolutely no evidence that these changes, which (to repeat) have been made by every state and territory government over the past five years, have had any adverse consequences on the saleability of existing housing, on house prices, or on the supply of new housing.

While it may not represent definitive proof, it is certainly highly suggestive that what Labor is proposing will not have the dire consequences which those seeking to retain negative gearing in its present form allege.

And it is far more persuasive than the assertions which those who wish to retain negative gearing in its present form have thus far brought to bear on the debate.

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  • edweirdo

    Don’t be stupid Saul, of course the world will end. Investors will be jumping from the windows of their second, third or forth home, accountants will be moving to Ireland, the tax office will employ more people to follow the paper trails, dogs will be biting babies, Father Christmas will go on strike, the Catholic Church will let priests have sex, Abdiot will become the UN Ambassador-at-large for climate change.

    All as Peter Dutton and Scott Morrison have predicted.

    Oh! And Barnaby Joyce will become a catholic priest and marry a rough and ready stockman from North Queensland.

  • Athinker

    Negative gearing helps people who are already well-off. It harms those less well-off because they can’t afford houses at all.

  • harry the original

    Someone needs to tell Turnbull why the “teachers/policemen/nurses/ambulance/public servants” are mostly the ones participating in negative gearing, decent wage and some times plenty of spare time at work, been there.

  • David

    Labors plans for negative gearing simply don’t stack up, maybe they should be getting some helpful advice from Paul Keating. Turnbull’s statements on the other hand are simply too confusing to know.

  • Doc Viper

    Saul Eslake is true to form here where his theoretical solutions are nearly always skewed towards higher taxes which explains why Labour politicians adore his commentary.
    Saul, it is a fact that in the largest housing markets of Melb & Syd, rents increased significantly when Hawke temporarily abolished negative gearing in 1985 as rental investment supply diminished. Comparing first home buyer grants to housing investors is absurd as they are two diametrically opposed demographics who’s purchasing motivations are completely different.
    As always Eslakes theories rarely translate into reality.

  • GB5

    I think I’d rely on Saul’s opinion (he has an excellent track record) than anything the Libs have to say on the subject. They have proven that unlike the rhetoric, they are lousy managers of the economy.

  • Glen Paton

    The LNP government has one great opportunity this time around to address significant tax reform, but I fear they are going soft, marshmallow soft – Marshmallow Malcolm!!!

  • jeff

    By all means, negatively gear against the profit from rents, from that specific property – just like most businesses can do with plant and equipment costs etc.
    The problem is, the well-off can reduce their income – from other sources, to below the various tax thresholds. THAT is what wants fixing.
    Also, the LNP cries about Mums and Dads on $80,000 being a large proportion of negative gearers. Thats because the well-off’s TAXABLE income is reduced (by negative gearing) INTO the $80k or under tax bracket!
    Redo the figures guys. Tell us the GROSS average salaries of negatively geared investors

  • Cherie

    In England people can use negative gearing on only one property and only up to around $50,000. When you consider people who own several properties here (I heard of one person owning 29 properties) all negatively geared, they just don’t pay tax – ridiculous. No wonder Australia is lagging behind other OECD countries.

    But, of course, the LNP doesn’t want to rock any boats except slugging the poor with a rise in GST. Typical. And, tragically so many of the poor vote LNP under the misapprehension that they are the best economic managers.

    Oh well, downhill all the way with the LNP.

  • Athinker

    So what?

  • Charles U Farley

    What’s right with poorly spent public money?

    • Athinker

      Now that’s a cryptic response.

      What’s wrong with higher taxes?

  • Ian

    There is a very simple principle in taxation law. That is, expenses in earning an income are deductible. Many innovative start-ups live by this. By abolishing negative gearing you are in contravention of this principle. Once this principle has been disallowed there will be all sorts of unintended (or perhaps intended) consequences – eg no deductions for expenses in earning income.

    • Saul Eslake

      Ian, you overlook the fact that the whole point of negative gearing is to turn wage and salary (or other ordinary) income, taxable in the year in which it is earned at the full applicable marginal rate, into capital gains, taxable at half the otherwise applicable rate when the asset is sold. Incorporated businesses don’t get the 50% discount on capital gains. So the “very simple principle” that expenses incurred in earning taxable income should be deductible is being distorted in the case of negatively geared investments.

    • Elizabeth Spiegel

      That very simple principle has a number of exceptions that limit the application of losses to other types of income. Examples include non-commercial losses and capital losses.

  • Saul Eslake

    You’re welcome, Mr Mike 🙂

  • Rachael Clarke

    Its a separate issue. First tackle NG and CGT discounts. Then have a go a land bankers.
    (We don’t have a housing shortage. We have an affordable housing shortage. Both of these issues must be tackled.)

    • Kothos

      I don’t think it’s separate. Both are supposed factors in the “unaffordability” of housing. Whilst I believe that there is too much investor speculation in the housing industry, I don’t think NG is at fault. CGT definitely is a factor, but so does “vacant possession” where landlords can kick tenants out just because they are selling, short-term leases with no option for long-term leases, and more authority for renters to treat a property as their own. There’s nothing wrong with being a landlord who makes a profit or a loss – it’s the flippers causing the unsustainable capital gains.

  • RaoulDuke6666

    We need to retain negative gearing at all costs. I don’t want any loser rent serfs being able to compete with me when I bid for my next investment property.

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