Some 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.