Hello all,
Bad news
News Source
Cheers
Marc
Bad news
Patrick Lion
March 07, 2006
ONE of the best wealth creation tools available to Australian investors is under threat.
Negative gearing – which occurs when an investment property is run with expenses exceeding rental income so interest and other expenses can be written off against the income – is tipped to be one of the casualties of Treasurer Peter Costello's expected tax reform in the May Federal Budget.
Also a chance of being caught in the crossfire are capital gains tax concessions and personal tax rates.
Reserve Bank of Australia governor Ian Macfarlane has been a vocal critic of Australia's love affair with property, saying the generous tax breaks given to investors have led to an over-investment in housing rather than business and infrastructure.
Negative gearing and the first home buyer's grant were two of the most popular tools used by investors during the property boom, while many sharemarket investors are not utilising the tax write-off in their equity investments.
Tax experts expect negative gearing to at least be reviewed in the lead-up to the Budget, but warn of making any drastic changes.
The last major change occurred in 1985 and was an economic disaster, resulting in rents rising sharply as the supply of rental properties dried up.
Research conducted by the Centre for Independent Studies (CIS) last year shows more than one in eight Australians now declares a rental income.
Our love affair with property investment is as much as eightfold that of other major developed countries around the world.
About 17 per cent of Australians own an investment property, compared to only 6.5 per cent in the US and Canada and 2 per cent in the UK.
And while negative gearing was once the domain of those in the higher tax brackets, both high and low income earners are now practising it.
Peter Saunders, a social director at the CIS, says the over-investment in housing means negative gearing and capital gains tax concessions must be looked at.
"Negative gearing has hugely distorted investment behaviour," he says.
"You might say that's a good thing as it gives people capital assets and housing for tenants, but tax reform is not supposed to distort behaviour and clearly negative gearing is doing just that.
"There is a compelling case to simplify tax overall and it means getting rid of all these claims because right now it's a patchwork system – each concession is trying to correct the previous distortion."
He admits, however, any change would hurt a lot of people.
"People would be left high and dry if you changed it. All you can do is flag your intention to change and give the market a chance to adjust its behaviour, in this case away from negative gearing and property."
Tax experts believe any of three results from the tax review could impact on negative gearing.
While direct changes or restrictions to negative gearing are unlikely due to the problems that occurred in the 1980s, the method could be impacted indirectly through other changes to personal or capital gains tax.
"In order to fund personal tax cuts they could introduce measures to restrict negative gearing," says Gary Addison, a senior tax adviser at Certified Practising Accountants.
"But any one of those things would reduce the incentive for investors. All three would compound the impact greatly."
Mr Addison adds that if the 50 per cent capital gains discount was removed, then negative gearers would be hurt because capital would be taxed at the personal rate rather than the discount.
"There a lot of people who are investing on the basis of the concession and think it will continue, but there is no guarantee that discount will be there in 10 or 20 years' time," he says.
But any change to taxation will most likely be about winning votes ahead of next year's federal election, and nothing gets the electorate onside like personal tax cuts.
Experts believe this, in itself, could lessen the attraction of negative gearing by making it riskier and therefore self-correct the over-investment in housing.
According to BDO Kendalls tax consulting partner Brian Richards, negative gearers on salaries between $70,000 and $125,000 would be worst affected if, as predicted, the top marginal tax rates were reduced from 47 and 42 per cent down the mid to low 40s.
"When you go into negative gearing you're counting on the income from that investment to grow over time and the capital value to grow," Mr Richards says.
"The risk is that all of a sudden you're getting less tax deductions in raw terms because of the lower rate."
Any change to negative gearing, directly at least, is unlikely according to Simon Grant, the Queensland general manager of the Institute of Chartered Accountants.
"It would be very brave if they did get rid of it completely or made major changes to it because it's so built into the property market now and how people invest," Mr Grant says.
"People have made investment decisions on what they earn now and what tax breaks they're going to earn now.
"They'd have to flag it to warn investors and then maybe do it from a point of time or roll it back to just zero gearing."
If investors weren't warned, many would be caught in the crossfire and repossession sales would follow after repayments were missed as they weren't getting the same tax break they once were.
"The problem is," Mr Grant adds, breaking into a laugh, "the whole property industry is based on it."
March 07, 2006
ONE of the best wealth creation tools available to Australian investors is under threat.
Negative gearing – which occurs when an investment property is run with expenses exceeding rental income so interest and other expenses can be written off against the income – is tipped to be one of the casualties of Treasurer Peter Costello's expected tax reform in the May Federal Budget.
Also a chance of being caught in the crossfire are capital gains tax concessions and personal tax rates.
Reserve Bank of Australia governor Ian Macfarlane has been a vocal critic of Australia's love affair with property, saying the generous tax breaks given to investors have led to an over-investment in housing rather than business and infrastructure.
Negative gearing and the first home buyer's grant were two of the most popular tools used by investors during the property boom, while many sharemarket investors are not utilising the tax write-off in their equity investments.
Tax experts expect negative gearing to at least be reviewed in the lead-up to the Budget, but warn of making any drastic changes.
The last major change occurred in 1985 and was an economic disaster, resulting in rents rising sharply as the supply of rental properties dried up.
Research conducted by the Centre for Independent Studies (CIS) last year shows more than one in eight Australians now declares a rental income.
Our love affair with property investment is as much as eightfold that of other major developed countries around the world.
About 17 per cent of Australians own an investment property, compared to only 6.5 per cent in the US and Canada and 2 per cent in the UK.
And while negative gearing was once the domain of those in the higher tax brackets, both high and low income earners are now practising it.
Peter Saunders, a social director at the CIS, says the over-investment in housing means negative gearing and capital gains tax concessions must be looked at.
"Negative gearing has hugely distorted investment behaviour," he says.
"You might say that's a good thing as it gives people capital assets and housing for tenants, but tax reform is not supposed to distort behaviour and clearly negative gearing is doing just that.
"There is a compelling case to simplify tax overall and it means getting rid of all these claims because right now it's a patchwork system – each concession is trying to correct the previous distortion."
He admits, however, any change would hurt a lot of people.
"People would be left high and dry if you changed it. All you can do is flag your intention to change and give the market a chance to adjust its behaviour, in this case away from negative gearing and property."
Tax experts believe any of three results from the tax review could impact on negative gearing.
While direct changes or restrictions to negative gearing are unlikely due to the problems that occurred in the 1980s, the method could be impacted indirectly through other changes to personal or capital gains tax.
"In order to fund personal tax cuts they could introduce measures to restrict negative gearing," says Gary Addison, a senior tax adviser at Certified Practising Accountants.
"But any one of those things would reduce the incentive for investors. All three would compound the impact greatly."
Mr Addison adds that if the 50 per cent capital gains discount was removed, then negative gearers would be hurt because capital would be taxed at the personal rate rather than the discount.
"There a lot of people who are investing on the basis of the concession and think it will continue, but there is no guarantee that discount will be there in 10 or 20 years' time," he says.
But any change to taxation will most likely be about winning votes ahead of next year's federal election, and nothing gets the electorate onside like personal tax cuts.
Experts believe this, in itself, could lessen the attraction of negative gearing by making it riskier and therefore self-correct the over-investment in housing.
According to BDO Kendalls tax consulting partner Brian Richards, negative gearers on salaries between $70,000 and $125,000 would be worst affected if, as predicted, the top marginal tax rates were reduced from 47 and 42 per cent down the mid to low 40s.
"When you go into negative gearing you're counting on the income from that investment to grow over time and the capital value to grow," Mr Richards says.
"The risk is that all of a sudden you're getting less tax deductions in raw terms because of the lower rate."
Any change to negative gearing, directly at least, is unlikely according to Simon Grant, the Queensland general manager of the Institute of Chartered Accountants.
"It would be very brave if they did get rid of it completely or made major changes to it because it's so built into the property market now and how people invest," Mr Grant says.
"People have made investment decisions on what they earn now and what tax breaks they're going to earn now.
"They'd have to flag it to warn investors and then maybe do it from a point of time or roll it back to just zero gearing."
If investors weren't warned, many would be caught in the crossfire and repossession sales would follow after repayments were missed as they weren't getting the same tax break they once were.
"The problem is," Mr Grant adds, breaking into a laugh, "the whole property industry is based on it."
Cheers
Marc
Comment