What’s so bad about Negative Gearing? Part 2

This is Part 2 of a 2-part series on Negative gearing. Please click here start with Part 1.

The arguments for keeping negative gearing as it is

In my first post on negative gearing, I outlined what negative gearing is, and debunked some of the myths surrounding it. I’ll now go into the arguments for keeping negative gearing tax benefits as they are.

Other than the personal benefit to the investor, there are significant social reasons for not touching negative gearing arrangements. Property investors provide an essential service to the many Australians who choose to, or have to, rent their property. In essence, a property investor who rents out their asset is running a small business and should be treated like all other business people. This includes the right to tax deduct the costs of running that business.

Governments may speak as though they can meet all the needs of its citizens, but they can’t. This includes public housing. As taxpayers, we expect our government to provide essential infrastructure and services such as roads, hospitals, education and housing. The reality is that governments often shares the burden of providing public services with private enterprises (such as the new RAH) because private industry can meet a shortfall which the government is unable to meet. These private businesses that provide services in tandem with the government receive tax benefits for their finances and costs of running their business. Similarly, all privately run businesses are entitled to claim tax deductions for the costs associated with producing income.

When it comes to housing, the government provides public housing, but not enough for all those who can’t afford to buy their own property. If it could, there would be no homelessness problem and as we all know, there are thousands of unfortunate people who sleep rough because they have no other option. And this is before we look at requirements for specialist housing accommodation such as for our rapidly ageing population, and those with disabilities.

It’s only the private rental market that can provide properties at the rate and scale currently required by our population. Property investors take out a loan and commit to 20-30 years of repayments and providing accommodation for others and, at the end of that period, they expect to get a reasonable return for their efforts— just like other businesses do. These investors know the rent won’t cover all their expenses, but expect that the tax benefits and long-term capital growth will make-up for this. Sometimes it does, but not always. A good return is not a guaranteed.

Bottom line? Government relies on rental properties being available to house its population, and should afford property investors the same tax benefits as other business owners.

What would happen if Govt removed tax benefits of negative gearing?

If Labour gets elected, they say they’ll stop negative gearing tax benefits. And now the Liberals are also threatening to tinker with it. So what’s likely to happen if they do?

  • If negative gearing tax benefits are removed, investors will reconsider their investment options — if they can get better returns elsewhere, why wouldn’t they?
  • Investors may have to raise rents to recoup their losses that way
  • If fewer investors buy properties, tenants would have to fight over the reduced number of rentals available
  • Fewer rentals available may mean the government would have to increase its public housing stock, which would mean additional spending on infrastructure and higher taxes all round to fund this
  • In truth, the government can’t afford to make-up the level of housing stock required (it already fails to meet need) so the ultimate loser will be the renter.

 

What about limiting negative gearing to new houses?

This is another idea our politicians are considering. However, the consequences for this policy are just as bad.

If negative gearing tax benefits are only available for new homes, are you going to buy a new home or an established home that doesn’t have negative gearing benefits? Yep, I’m buying the new home too. So what’s likely to happen here is, this arrangement will push the price of new homes through the roof because supply will not keep up with demand. Add to this, that the First Home Owner’s Grant is only available for new homes, and it’s this demographic who are affected, basically wiping out the benefit of their grant.

An idiosyncrasy is that, if an investor or new home owner sells what was a new home when they bought it, they’ll make a loss because they’re selling an established home that doesn’t attract negative gearing benefits, and no-one wants it.

What’s the bottom line?

As a property manager, I know from experience that it’s not possible to guarantee a good return on your investment. Many factors affect your bottom line and it’s possible, even if you’re following a positively geared strategy, you’ll become negatively geared over time. What if interest rates rise, or rents fall, or your property is vacant for some time? What if you need to undertake a major repair to your investment property. What if the bottom falls out of the market in which you own property? By default, you’ll become negatively geared. To deny a person making a loss like this a tax deduction would be to inflict a double whammy on them and increase their hardship. Additionally, any reduction in negative gearing tax benefits would reduce investment in both new and existing property and worsen housing affordability through a reduction in the availability of rental properties.

Watch this space

It’s troubling times if you own investment property or it’s your goal to do so one day. No doubt you’ll want to keep abreast of this debate, after all, it affects your bottom line. So, stay-tuned and I’ll keep you informed as our political leaders release information about their negative gearing policies and how it’s likely to affect you.

Written by:

George Markoski Positive Property Solutions Adelaide