I would argue that negative gearing is no more of a rort than any other business related tax deduction, particularly given that owner-occupiers are not liable for capital gains tax. Either way the bottom line is the same: the national treasury loses and governments then have to hit other taxpayers for the shortfall.
The example that rightly deserves contempt is Macquarie Bank's avoidance of ten years of tax on its massive Sydney Airport investment. In the housing sector, negative gearing has done nothing to improve the availability or affordability of residential property.
Most investors buy existing stock rather than commission new housing, and they are more likely to push up prices because they are actually after net losses. Negative gearing is thus an active contributor to the Australian housing price bubble. One American economist was quite blunt in his assessment: ''I have to translate the words 'negative gearing' to people overseas because it just sounds crazy to have a system that rewards people for losing money. Removing it would be close to the top of my agenda.
And the IMF is of the same opinion. You can't just make a business loss year after year and apply it against your other taxable income. Rental loss provisions are in a league of their own. Could you explain why any business would want to run a loss year after year?
That would equate to a negative cash flow year after year. With property, rents tend to go up as does the value of your asset. I lived on 50 acres and sold horses.
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Australia's busiest airport rakes in billions of dollars from its monopoly over Sydney's commercial aviation movements. Yet the bank only has to adjust its ongoing loan from the Commonwealth Bank to ensure that its airport operation does not figure as a profit. For years it has been getting away with zero tax on its airport business. I don't think too many ordinary taxpayers would have the same audacity.
A housing bubble isn't the problem
Val's comment is also an excellent example of how property costs can be used to neutralise tax on other income. Two of Australia's big banks lined up at the US federal deserve in to receive a bail-out. Eventually this party will result in the total collapse of Australia's banking system. I assume the Liberals will be similarly dishonest. It is a strange thing that people whine about taxes but happily pay huge insurance for other people, the very small green slip, and cop a tax on deposits without a whimper.
Hi Alan, there is another factor to consider at the moment.
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So the bubbles follow crunches follow bubbles. I am not sure geared property is " as safe as houses", just at the moment. I keep reading about housing shortages, which in my city Canberra has resulted in a rush to build more and higher blocks of units and with the incoming government cutting public servants with gay abandon, who is going to live in them all? I know that people need houses, and I remember stories of the years after the second world war when many Australians ended up living with their parents after marriage. But need is one thing, investment is certainly needed but how they try to meet it another.
Every time we have this problem, we rush around building rubbish, and forget how to plan any decent areas for people to live in. Could we do better this time? Doubt it somehow. Our cities have only been a quarter to half full throughout the last century and we've had room to put up a bunch of free-standing single family dwellings, but that won't last. Freeze yourself and come back in years and inner to middle Sydney and Melbourne will be chockablock with apartment buildings and all the current houses will be gone.
We think our cities are mature and fully-formed. They're not. They are embryonic. Those "disgraceful" blocks of flats going up on the odd corner now, and taking the place of the old Edwardian joints - they will be on every housing block in 3 or 4 generations time. To avoid future economic pain from a house-price based inflated economy we need to look at the experiences the USA had with unregulated banking and lending. An interesting challenge to the ideology of the new government.
Watch this space. Housing led recoveries are disastrous. Year after year we see the building of houses with more bedrooms than ever to have less children. The ridiculous capital gains rules and negative gearing scam result in houses costing a ridiculous amount in a country this size, and noone can buy a simple straightforward first house or last one. It is a major misapplication of useful capital.
However do nothing Costello watched it all be piddled away and here we are looking to housing again. Supply is not the problem. It is the type of demand that is the problem. People want their Mcmansion in the suburbs and want the rest of the community to pay for the infrastrature and winge that there is no nearby parks or community centres.
For every mcmansion we could build two comfortable townhouses or four comfortable flats. Plus with higher density more community activities can be provided. Demand and need are mutually exclusive. I used to manage the delivery of the last infrastructure bonds scheme. It was stopped when we found that it had developed into a complicated tax rort with offshore structures designed to shuttle tax benefits around the world. This is the problem with many good ideas to use tax advantages to promote investment in certain areas. Yes some investment occurs but the first thought of the people who play with money seems to be "How do we make the benefit even larger.
See the statements by Peter Costello and tax officals when he closed the scheme. Census results show the average number of people per dwelling has remained constant at 2. Secondly even if this occurred it could be due to lifestyle factors like gen y living at home longer. Anyway the supply side shortage is a myth. Australia has plenty of use able land on which to build dwellings and levels of govt simply choose not to make it available.
I think it is ridiculous to argue that with house prices at oecd highs of x median income in Australia, there isn't a house price bubble. Demand is a function of what people are willing and ABLE to pay. It is only the explosion of cheap credit that has pressured prices, not this mystical supply shortage people like you constantly babble on about. Hi Daniel, I think that you may be missing the distorting effect of foreign investors on our real estate market.
I wonder how many Australian apartment buildings are directly sold to investors in China and Singapore Have you seen the apartment building going on in Singapore? Most of it selling to investors. Seems to take care of their spare investment funds. I haven't seen it, but I have read about it. Amazing how they can still find land to pile up tall apartment buildings there I would suggest perhaps we are seeing speculation in the Sydney and Melbourne market from foreign buyers and DIY funds.
Given Australia has the highest housing price to average income in the world, it would not surprise me if the housing bubble burst as the unemployment rate goes up. Behind every housing bubble is a credit bubble - even if housing has been in short supply in Australia, the banks have been pretty keen to lend as much as they can. We could all move to Western Australia where they have just lost their AAA credit rating and have a huge deficit since their Liberal Premier got in.
He has attributed this to "falling revenue" which is exactly what the Labor Party said was the cause of their deficit. I wonder how long it will be before Tony Abbott gets the message? House prices should fall like a stone over there and there will be property to be had for a song. No no no Francie! When the Liberals preside over falling revenue, it's an unfortunate side effect of unforseen effects of the global economy. When the ALP preside over it, it's because they're fiscally incompetent.
Remember the mantra: Liberal good, ALP bad. Whilst we all want to live in 7 cities and two in particular, we will have this problem.
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Urban congestion and a shortage of cheap housing. We have wasted our boom money on McMansions and other goodies. Rather than spend the money on infrastructure and expanding regional cities. Building for the future has not been one of Australia's best points. Anyone who has heard the story of the Ant and the Grasshopper will recognise the wisdom of this approach.
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Pay off the loan as fast as, or buy your banker a new BMW. Your choice. Alan says And all too often, that housing is large houses that: a take a long time to build in terms of months build time per person housed ; b can never be afforded by young house buyers unless they are lawyers, merchant bankers, celebrities or footballers; c are holiday houses for business executives that are left vacant for long periods during the year; and d are often build in places that don't have many jobs close by.
How can the continuation of negative gearing be justified in any country that values the fair go for all? Oh yes, I remember, the 'fair go for all' got up and left many years ago. Money, money, money is the only game in town now. The problem is that the market is distorted by a lack of supply, the supply that is available is distorted by the loading up of developers with infrastructure costs up front which distorts the risk profile, the financiers make certain demands and there is a tendency to pitch house and land packages at those with high cash flow or poor judgement.
The size of houses is ridiculous, they are therefore relatively expensive to build, buy and run, the planning rules with stupid setback requirements drive down housing density rendering public transport impractical and requiring more cars per house hold and so the loony roundabout goes. At the end of the day it is all just shitforbrains game playing and it is high time local, State and Federal governments stepped in and sorted the whole freaking shambles out before we end up with vast tracts of macburbia suffering Detroit disease and a generation or two unable to afford housing so they just leave.
Baby boomers are having a great retirement at the expense of their children not being able to get into the property market.
But in the end, we all die! Better to share wealth now, than be deprived of the pride and joy in our children's faces when buy their first home.