Labor’s Negatively Geared Logic

soldSome weeks ago, the ABC’s0 7.30 host, Leigh Sales, put the following, remarkable question  to Malcolm Turnbull: In your first interview with this program as Prime Minister you said that the first principles of the Turnbull government would be the free market, so why are you now violating that principle by backing negative gearing, which is a government intervention that distorts the market?”

I concede that, intellectually, Sales is probably my superior, so I cannot imagine, not for one moment, she seriously believes what she said. I also wonder how many of viewers took her aside as gospel, the straight dope from a voice of authority.

Another example of the negative-gearing debate’s debasement is the habit of Bill Shorten and others to sneeringly condemn negatively-geared property owners as ‘speculators’ – a loaded term that somehow equates the prudent and productive  who secure their own futures with fast-buck operators and conscienceless exploiters. As BusinessDictionary.com puts it, “speculators aim primarily at quick profit from a short-term acquisition of assets”.  By no means or definition does the typical bricks-and-mortar property investor, prepared to take a long-term operating loss in order to secure a later gain, qualify as a speculator. The common thread among those who would see an end to negative gearing is that property investors are ripping off other taxpayers, a view captured neatly by a recent letter to  The Australian bemoaning the fact the 10% of taxpayers who invest in property are being subsidised, the writer alleged, by the 90% who don’t.

This simplistic assertion firstly ignores that fact lmost 50% of that 90% of ‘taxpayers’ pay no net tax. And it disregards how, for negative gearing to work, the investor must put his hand in his own pocket.  He takes home less than he otherwise would because his losses are only written off at his marginal tax rate. In other words, he is sacrificing, or at least diminishing, his current lifestyle in order to provide for his future and, thus, make himself ineligible for the aged pension.

Let’s look at an example. Let’s say I’m earning $100,000 pa and I pay a top marginal rate of 37c in the dollar.  So before any deductions I might have, I pay $24,950 income tax. For the purposes of this example, I’ll ignore all other deductions.

Let’s further say that I manage to save $300,000 and use that for a deposit on a rental property worth $800,000.  I need to borrow $500,000 and secure an interest-only loan over 30 years at 6%. (In reality, I wouldn’t maintain an interest-only loan over such a long period but would pay down principal wherever and whenever I was able).

Let’s say I get $600 per week rent, $31,200 pa.

I am paying $30,000 p.a. interest on my loan.  That is tax deductible.

Let’s say I pay annual rates of $2,000 and insurance of $1,000, also that I engage a managing agent who charges, say, 10% or $3,120 p.a.

My outgoings are $36,120.  So I’ve made a loss of $4,920.  My taxable income is $95,080 and tax payable is now $23,126.  So I’ve “ripped off” the government to the tune of a measly $1,824 – considerably less, I would guess, than the average low-income worker draws in various benefits and subsidies.

But what about those high-income earners?  Just how rapacious is the ‘speculator’ class? Fortuitously, a perfect example presents itself.  Labor’s own David Feeney, is currently embroiled in a controversy because he failed to declare on the Register of Pecuniary Interests a rental property in the trendy Melbourne suburb of Northcote worth a reputed $2.3 million. Feeney tells us the property is currently rented at $700 per week and that it is negatively geared.  As an aside, an annual return of $36,400 on capital of $2.3 million does not strike me as a particularly savvy investment. So, unless Feeney is gaming the system in a particularly ingenious and unsavoury way (a thoroughly unworthy thought and one to be shunned by the fair-minded observer), it might be best if a newly installed Prime Minister Shorten keeps him well away from any of the financial levers available to government.

I don’t know exactly how much Feeney pockets as an Opposition frontbencher but, for the purposes of this exercise, let’s use $200,000 (it’s probably considerably more than that: the MP base salary is $193,000).  That puts Feeney in the top tax bracket.  On $200,000 he would pay $63,500 p.a. income tax. Let’s further assume he borrowed $1 million on the property.  His annual interest bill, again based on interest at 6%, would be $60,000.

Let’s again assume rates and insurance at $3,000 p.a. and agents fees of $3,640, giving total annual expenses of  $66,640. Feeney’s annual loss would be $30,240, leaving him a taxable income of $169,760.  On this he would pay $50,758, saving himself $12,742 p.a. and leaving him $17,498 out of pocket.

Let’s now imagine Feeney were a more canny investor than he appears to be and outbid me for the same notional $800,000 property that I mentioned earlier, and that he also borrowed the same amount ($500,000). His annual loss, not surprisingly, would be the same: $4,920, reducing his taxable income to $195,180.  He would now pay tax of $61,634, a saving of only $1,866, and be $3,054 out of pocket.  A result virtually indistinguishable from mine.

In pushing its anti-negative gearing line, Labor often cites a hypothetical high income earner with ten negatively geared properties.  There may be a number of such investors, but you can bet they won’t have 10 properties all as highly leveraged as in my examples. But, even if they do, the tax advantage they receive will be neither here nor there in the grand scheme of things vis a vis total government debt.

And keep in mind that these figures are based on interest-only loans.  In reality, the serious property investor will also pay down principal while seeing his rental income increase over time, thus reducing the annual loss.  Sure, he’ll get it back in the end when he retires, but that’s the whole point.  He sure as hell won’t be on the pension.

Whether or not negative gearing has a distorting effect on the property market is a contentious point. What is not in dispute is that the vast majority of property investors are hardworking Australians who are doing no more than providing for their futures. If Bill Shorten  feels free to deride them, perhaps he should direct is opprobrium at Feeney.

8 thoughts on “Labor’s Negatively Geared Logic

  • Lawrie Ayres says:

    The problem with being a populist politician rather than man of principle is that they invariably defy logic and in their efforts to court one vote alienate two others. Malcolm has done the same in his rush to the left while jettisoning the party’s conservative base. Bill might find he has cheesed off quite a few ALP supporters who were trying to enter the property market. In short both Turnbull and Shorten are fools.

  • Jody says:

    And now headlines on the SMH that De Natale has failed to declare an investment home and that he pays his au pair low wages!! Well, as I’ve said from day one, more than one can play the class war fare game. This is going to get very ugly and Labor has significantly misjudged in taking this line as an election platform. Seriously and very damagingly for Labor.

  • en passant says:

    You have actually divulged the plan I began in 1980 when I bought my first negatively geared property. The idea was to remain negatively (or break-even) geared across an increasing property portfolio while I was earning money so that when I retired I would sell one (or more), pay off all debts and then have a positive position so that I could be a comfortably self-funded retiree and not a leech on the taxpayer, you know, like politicians pensions.
    The cost of course, was foregone family holidays, money saved to pay off the loans principal and canny expenditure on luxuries. I overlooked the rapaciousness of every politician needing money for their own pensions
    That is exactly how it worked out, until the latest robbery where I now find that my accumulated super fund is to be stolen by the government. I now find that I have become an ‘unpatriotic robber of the poor, the public purse and the profligate peasants’ and that my thrift now makes me a enemy of the State.

    Where to from here? The Oz I was once knew is in such social, cultural, economic and intellectual decline that I see no solution except to spend all that I can and join the public purse. Did I mention that I am booked on two overseas holidays between now and the end of the year? Feel free about suggesting exotic places I should visit next year. Price is not an issue as I have to get under the thresh hold as soon as possible so so I can get my cut of those taxes that the rich like Feeney and Di Natale are stealing from me …” …

    • Peter OBrien says:

      En Passant,

      Ditto. My wife and I have funded our retirement largely through property acquisition and we are fully self funded, something in which we take great pride.

      And on the subject of property investors squeezing out first home owners, there’s nothing to stop them getting into the market by buying a negatively geared property anywhere they can afford it.

  • Jody says:

    Take those holidays and enjoy them!!! (But think twice about Europe!) Life is still pretty grim on the Aged Pension, but it’s the concessions you can get which make it more palatable. Years ago an insurance broker recommended we build a safe into our home, convert everything into cash and put that cash into it. At the time interest rates were much higher and it was prudent not to do that; today with no interest being earned it seems a good idea to take our broker’s advice and, well, you know where I’m going with this…..!!!

    I think government wants every retiree to live on a multiple (or not) of the Aged Pension. That means no replacements for the home; carpets, curtains, furnishings, whitegoods – and particularly a new car. You’re probably getting a mental image of the kind of decay you’re expected to experience!! We’d all end up with homes like in those Domain advertisements for “deceased estate” – carpet out of the 1950’s and a home to boot.

    Thanks, but no thanks. Forget the punitive hours worked and delayed gratification in saving for retirement; this has all gone by the board in the endless class wars which we now seem to be enduring.

  • Sos says:

    Many older people desperately trying to pay off any kind of dwelling for their old age rely on negative gearing

    Because of age it is their only hope to pay off the shack is to negative gear it

    These older people are battlers like millions of others

    Negative gearing is the only way many people will get any kind of humble abode for old age

    According to shorten battlers using negative gearing to simply try to get a humble abode for their old age are filthy rich capitalists “tax dodgers”

    If shorten prevents these people getting a humble home by Labor’s plan destroying negative gearing they will have to look for public housing at taxpayers expense

    shame on you shorten for attacking battlers

    Labor’s campaign of class hatred is disgraceful

    Shorten does not care how many battlers who need negative gearing to get a home

    Shorten has a beautiful home for sure

    Shorten putting people last

  • mvgalak@bigpond.com says:

    Am I correct, remembering an abolition of the negative gearing by one of the Labour Governments many years ago? And reinstating it in a hurry, when the shortage of the rental accomodation became painfully obvious as a result? No? Must be from another opera. Oh, damn, could be an early Alzheimers. Better get my cruising tickets before I forget how to operate my super fund cheque book. Better still – before there ‘s still any money left !

    • EvilElvis says:

      You are correct a propos. Although, I’m afraid, all that history means is that Keating didn’t have the same devious intentions that will see negative gearing removed, rent control subsequently legislated and the slowly building raid on super continuing. ‘Equality’ is upon us…

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