Since the capital gains tax (CGT) discount was introduced by the Howard government in 1999, negative gearing (NG) and the CGT have combined to inflate the largest real estate bubble in Australia since the 1880s. They have highly distorted the real estate market and have resulted in a massive allocation of Australian capital into unproductive assets and a massive increase in household debt.
Australia now has the accolade of having the second most expensive housing in the world, second only to Hong Kong, which unlike Australia has a land shortage. Australian house holds are also the most indebted house holds in the world.
Vested interests (hello FIRE) means an impartial and sane debate will be next to impossible, such as our treasurer Scott Morrison being a former Property Council Australia (PCA) Research Manager, who is spouting a lot of fear and nonsense in the NG debate. And the PCA's own [url= [url=http://dontplaywithproperty.org.au/ads/]campaign against NG changes[/url] (I think the the house of cards symbolism is poetic irony).
Let's not forget other people with vested interests flip flopping on the NG topic such as Mark Bouris, of Wizard Home Loans and Yellow Brick road fame. Who in 2003 supported reviewing changes to NG saying: "negative gearing is being used for incorrect taxation purposes" and that it "could be overhauled without producing a drop in the market." Then fast forward to this year Mr Bouris assertted that changing NG will "will kill the investment market. I think it’s a terrible idea".
Similarly John Symonds, founder of Aussie Home Loans, in 2014 called for "a review" into NG saying that NG was a "tax break [that] favoured investors and was distorting the property market". And like Mr Bouris, this year after the ALP's NG policy announcement earlier this month "slammed" the proposed changes and that NG changes "would most likely result in unintended, negative consequences for the housing sector".
Even our Prime Minister Malcolm Turnbull has back flipped on the issue, penning a taxation paper in 2005 that stated that:
But just like Scott Morrison, Tony Turnbull attacked Labor's NG changes as "very dangerous" and would result in a decline in property prices. Obviously the Liberals must think there a more people (votes!) who want property prices to either stay where they are or to go up rather than address the affordability issue.Malcolm Turnbull notes that his own experience as Chairman of Goldman Sachs Australia confirmed this conclusion. Combined with high marginal tax rates, or rates that are too high becoming effective too low in the income distribution causes many distortions in the tax system. The Australian recently editorialised “.. our top tax threshold .. is far too low as a multiple of earnings. This in turn, distorts economic behaviour, sending honest taxpayers scurrying towards sheltering havens – such as negative gearing, a capital gains tax regime that was halved in 2000, or the 30% company rate – and skewing national investment away from wealth-creating pursuits, towards housing. The result- a property bubble”
Finally, the three arguments used against removing NG:
- It'll affect Mum & Dad or ordinary Australians who use NG.
- It'll push up rent.
- NG promotes new housing supply.
As for what changes should occur to NG, I feel like Labor's proposed changes of limiting NG to new properties and halving CGT are overall steps in the right direction. Grandfathering the current NG properties, whilst I wish it wasn't there, is necessary to make NG changes at least somewhat palatable. However, I feel unsure about what will constitute a "new" property in the proposed legislation, so it could be open to abuse. And what about trusts or businesses that invest in property? Will they still be able to NG?
I also still think limiting NG to only being able to reduce your taxable income from only property would be best.
I could mention a few other things such as CPI methodology change in 1999, the ineptness of the RBA, but that's probably a long enough rant for today.