From John Ray's shorter notes

February 16, 2016

Negative gearing: The Left never learn

It's a basic principle of taxation law that you levy a tax not on all income but on what is left after costs of earning that income are taken into account.  The Labor party can't get that into their thick heads.  "Negative Gearing" simply refers to the fact that some investors think long term and are willing to accept that the rent from properties they let out will not cover all  their costs immediately. They take a loss.  The Labor party wants to stop that because investors can claim that loss against other income.  If Labor does stop it, rents will obviously shoot up as long-term investors are driven out by the increase in their losses.

And here's the crazy bit.  The ALP did once before legislate against negative gearing -- under Paul Keating.  The results were so disastrous that they reversed course in not much more than a year.  They even gave back tax that they had previously levied.

Their present proposals are some improvement on the past in that they intend to preserve negative gearing for new  builds.  They assume that investors will divert all their money into new builds.  But new builds are a more risky proposition so that is in fact likely to mean that many investors will sit on their hands until rents rise. There is such a thing as a risk premium and it is renters who will pay it

And in the end what is the point?  If investors flocked to new builds, they would still be using negative gearing -- meaning that no new tax would be collected -- which frustrates the whole point of the exercise

The Opposition Leader has unveiled a major new policy restricting the tax breaks given to investment property owners.

Bill Shorten has used the New South Wales Labor conference to put forward the proposal to make negative gearing only available on newly constructed homes from July next year.

Mr Shorten says Australia's tax system is like a leaky bucket and limiting access to negative gearing can help fix it.

Shadow Minister for Immigration Richard Marles said on Sky News the decision is a hard but fair one.

'This policy is going to put new home buyers on an equal footing in the housing market and help housing affordability,' Marles said on Sky News' Pyne and Marles program.

Capital gains tax concessions would also be cut from 50 per cent to 25 per cent, also with no change to the rules applying to existing assets.

And the family home, along with personal superannuation, would be 100 per cent capital gains tax free.

'Taken together, these decisions will save $32.1 billion (over 10 years) and help put fairness back into the housing market,' Mr Shorten says.

Analysis by the McKell Institute shows the negative gearing changes could create up to 25,000 new construction jobs annually and add $4.5 billion to economic growth.

Costs for renters would also drop.

Mr Shorten says fixing the 'leaky bucket' is necessary to grow the economy, create jobs and improve the sustainability of the budget.

'The holes are costing our country money and subsidising people and firms who don't need government handouts,' he said.

'Every dollar in revenue lost through a loophole is a dollar that can't be invested in our future - in our schools, universities and TAFEs.'

Negative gearing occurs when the cost of owning a rental property outweighs the income it generates each year.

This creates a taxable loss, which can normally be offset against other income, such as a salary or wage, to provide tax savings.

The housing industry has previously argued restricting access to negative gearing would reduce investment in housing, make it more unaffordable and put pressure on rents.

But studies by welfare groups and unions have pointed to economic benefits.


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