There has been a lot of talk in the media lately about Negative Gearing. You are probably asking yourself – what is this negative gearing? How does it work? How will it affect me?
Well I am going to explain.
All the pollies are happy to go on about this Negative Gearing, but not once have any of them stopped to explained what it is or how it works, and to be honest I don’t even think they understand it themselves.
So…. what is Negative Gearing? Negative Gearing is when an asset you purchase costs you more to own than the revenue or cash coming in to cover its expenses. This provides a loss on the property / asset. You then get to claim that loss against your income. Now this is where it gets complicated as the amount you get back from the loss on the property depends on what tax bracket you are in.
If you are on the top marginal tax rate i.e. over $180,000pa then you pay $0.47c in every dollar you earn. So if you have a loss on your investment property of $10,000pa you would then be able to claim that loss against your income – therefore dropping your gross taxable income by $10,000. So say you earn $200,000 with the negative gearing loss from the property of $10,000 your new taxable income would be $190,000. So because you would have already paid tax on $200,000 you would then get a $4,700 tax refund from the ATO. Now it gets less if you earn say $80,000 as you only pay $0.30c in the dollar there for only getting back $3,000 at tax time and so on.
For example if you brought an investment property for $400,000, you had a 90% loan on the property of $360,000 and the interest rate at the bank was 5% – you would be paying $18,000 a year in interest (unfortunately you don’t get to claim the principle part of the loan if you are paying both principle and interest). Now if you have property holding costs of 1% of the property price – for additional expenses such as rates, property management fees, repairs and maintenance – this would be roughly $4000pa, you then have the depreciation of the building, fixtures and fittings of approximately $8,000. So in the first 5 years the figures would look like this….. $30,000 total expense to hold the property and say you are getting a rental return of 5% this would be a rental amount of $20,000 pa, there for leaving a short fall of $10,000. This is the negative gearing expense you would get to claim against your taxable income.
So there it is, negative gearing, I hope that makes it a little clearer for some of you!
What negative gearing allows is the average earning Australian some tax relief to be able to hold the property and not cause a cash flow shortage on the person’s income and living standards.
My thoughts on what I think would happen if they (labor or the Liberals) scrap Negative Gearing;
- Mum and Dad investors would be much great effect by the shortage of cash flow on the family budget
- Investors slowing up in investing in new properties
- Slowdown in property stock on the market – not keeping up with the countries growth and demand for new housing
- A housing shortage
- Rents to increase – hurting the people that are supposed to benefit – resulting in less money to save for a deposit on their own property
- The building industry slows putting thousands of people out of work and many small businesses fail or stop hiring staff. The big corporate builders cut such as Hutchings reduce profits and pay less tax
- Other related businesses providing services have less work, such as finance, brokers, accountants, architects, manufactures supplying the products and even the mobile food vans visiting the building sites
- The government loses Billions in tax revenue from PAYG works, companies and the small business.
- These people stop spending and reduce the circulation of money in the economy. The country, maybe the start of recession?
- The wealthy still buy properties but in company and trust structures which avoid the whole negative gearing issues as they can run at a loss and pay no tax and hold those losses and use them against future profits or revenues.
- Wealthier people pay slightly more tax, but after working out the sales capital gains, not much.
- People change their investing strategy and invest in shares and the stock market. (So the big multi nationals control your money and the big decisions)
- The wealthier can afford to keep buying properties and building their wealth
- Rents go up so give a better return on the investment property
- Government puts a spin on it that it is helping the struggling working class person, but they don’t see the big picture
- Buying a property is like a savings plan – where the Mum and Dad investors use it build wealth….. it is where the average Australian can make real wealth.
We would really love you feedback and the conversation on your stand on negative gearing being scrapped.