What proposed changes to negative gearing really mean

  • 03/19/2019

Danika Wright, University of Sydney

The Labor party has already unveiled its policy, which involves only allowing negative gearing on new houses and cutting the generous 50% capital gains tax concession to 25 per cent.

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The Government has not confirmed its stance and has attacked Labor policy, but has crucially left its options open.

Less than 12 months ago, even considering changes to negative gearing was considered “unpopular” at best with then-Prime Minister Tony Abbott reassuring voters that there would be no changes to negative gearing.

Now, while neither the Liberal government or Labor opposition are keen to abolish negative gearing entirely as the Greens and some economists (most notably Saul Eslake) have proposed, both sides of politics are claiming they will “make the system fairer”.

So what has prompted this change?

First, a quick refresher on negative gearing. Gearing is the use of debt (such as a mortgage) to increase the amount of money that may be invested. Negative gearing occurs when the cost of this debt (for example, the interest charged) exceeds the income from the investment (like the rent).

Why would anyone want to incur a loss? The most widely promoted reason is because this net loss may be deducted against the investor’s taxable income, lowering their overall tax bill. This is clearly going to benefit those investors with higher incomes more than those with lower incomes. And, the statistics show that those with more to gain are more likely to take advantage of it:

Proportion of tax filers with negatively geared investment properties by income band ‘Better Tax’, Tax Discussion Paper, Australian Government, March 2015

There is a second benefit from the property investor’s perspective – the treatment of capital gains. When a capital gain on the investment asset is realised (it is sold), the investor gets a 50% discount on the capital gains tax.

For many years now, investment properties have been the most popular investment asset after the owner-occupied home and superannuation. Like any other investment, including shares, borrowers may take on debt to facilitate the property purchase. The benefits from negative gearing, combined with the perception of housing as a “safe” asset class with steady capital appreciation has fuelled the flow of investor capital into the market.

But now, with growing public awareness of the operation of negative gearing, its cost through missed tax revenue, and increasing housing affordability concerns, even those benefiting from negative gearing are questioning whether it is appropriate.

Comparing the alternatives

The Coalition government has been reluctant to commit to any policy changes, instead hinting at “capping” the amount of negative gearing benefit that may be claimed. In a way, this is a reinvention of the 2011 Gillard government proposal to target just the “wealthiest” investors who own portfolios of investment properties. We might expect to hear more details from Treasurer Scott Morrison in his Wednesday Press Club address.

The Labor party, by contrast, has made the first solid move. In so doing they have made negative gearing a major election issue and will force the government into presenting a real policy proposal, likely as part of the 2016-17 Budget.

The Bill Shorten-Chris Bowen policy announced over the weekend has been in the works since April 2015. If implemented, negative gearing would apply as usual to properties purchased prior to July 2017. After this date, however, investors would only be able to claim negative gearing against newly constructed investment properties.

But will it work?

The Government’s suggested approach would effectively create a “progressive negative gearing”. The tax rate increases (because the discount decreases) as income increases. While still lacking details, tackling the problem this way more reasonably considers the broad range of individuals who own investment properties, from teachers and nurses to the country’s most wealthy.

Labor argues that the asymmetry of its gearing policy between new and existing properties will divert investment to housing construction and boost the housing supply.

However, critics of the Labor proposal argue that it will trigger a rush of investors to the existing housing market prior to the July 2017 change, in turn reigniting a house price bubble.

Neither the opposition nor their critics are right and this is why:

To truly benefit from a negative gearing investment strategy, the property buyer would be hoping to win on the capital gains side. For that to occur, property prices need to keep rising, yet that is exactly what the policy is hoping to contain. Savvy investors will know this and take their savvy dollars elsewhere.If you still believe there will be a boom in 12 months time, the better strategy would be buy now (well, technically, when or if Labor are successful at the election) in order to sell to some sucker then.

An even more critical flaw in the Labor proposal is the absence of strategy addressing when and where we will see this new housing supply.

Fundamentally, either approach makes housing a less attractive investment. In the short term investors will look to move their capital into other asset classes, primarily the stock market, which has been volatile.

It could take decades to see the broader implications of removing the incentive to invest in housing over other assets if existing property owners continue to benefit from “grandfathering” the current rules. Therein lies the flaw with arguing this policy change will also help to repair the federal budget (remembering the owner-occupier still makes their capital gains completely tax free).

Ultimately, the tide has turned politically on negative gearing. Whichever party sells their proposal best (alongside changes to superannuation and the GST) will be the election winner.

Danika Wright is affiliated with Sirca as a member of the Sirca-CoreLogic joint research committee.

Labor gleeful with deadheat poll result

  • 03/19/2019

Federal Labor has seized on the latest Newspoll showing both major parties dead level, saying it shows the Turnbull government is in absolute chaos.

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Labor senator Sam Dastyari says the gloss has come off the prime minister.

“The reality is the honeymoon is over for Malcolm Turnbull,” he told reporters in Canberra on Monday.

The poll, published in The Australian, shows the coalition and Labor tied at 50 per cent after preferences, a sharp drop for the government.

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Malcolm Turnbull remains preferred prime minister with a 55-21 per cent lead over Bill Shorten.

Mr Turnbull’s satisfaction rating with voters remains in the positive (plus 10), but is significantly down on his plus 38 point high in November.

Liberal Democrats senator David Leyonhjelm says the result is a consequence of the government being reluctant to wheel out policies.

“Labor is beating them to the punch and they are paying a political price for that,” he told reporters.

“Their chief salesman … Malcolm Turnbull has been missing in action, we’ve barely seen him.”

Labor senator Doug Cameron says voters are seeing through the government.

“We’ve got a prime minister who is weak-kneed and won’t make decisions,” Senator Cameron told reporters.

Employment Minister Michaelia Cash says the polls always narrow in an election year.

“This is not unexpected,” she told ABC radio.

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Immigration Minister Peter Dutton concedes the government has a lot of work to do.

“The prospect of Bill Shorten leading the country is now in play,” he told reporters.

Senior Labor MP Tony Burke says the poll result shows voters realise Mr Turnbull is continuing with Abbott government policy.

“The only thing that has changed is Malcolm Turnbull himself,” he said.

“He picks up the old Tony Abbott notebook and just starts reading Tony Abbott’s old lines – that’s all he has got.”

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Digital lights up APN Outdoor profits

  • 03/19/2019

APN Outdoor is confident of a solid lift in earnings this year after beating expectations with a $41 million profit for 2015.

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APN, which owns billboards on buses and trams, and at train stations and airports, says its profit was driven by its digital advertising business and increased market share.

The company’s 2015 net profit compares to a $12.2 million statutory loss in 2014.

The result came in well ahead of the company’s own forecast of $25.7 million made in its prospectus ahead of its 2014 stock market listing.

Revenue jumped 20 per cent to $300.8 million, with APN lifting its final dividend to 11 cents a share from just one cent a year ago.

Digital billboards generated just over a quarter of the group’s revenues in the second half of 2015.

APN said it had added an extra 18 of its Elite large format digital screens during the year, half of which were installed in Sydney.

It now has about 52 screens across the country and plans to roll out more.

APN expects revenue to jump by between eight and 11 per cent in 2016, with underlying earnings expected to soar to $84-$88 million from $63.1 million in 2015.

“Outdoor advertising momentum from 2015 has continued into the early months of 2016,” APN said in a statement on Monday.

“Demand from advertisers and agencies for our large format digital screens remains strong and as a result, we are planning to accelerate our rollout programme in 2016 to over 20 new digital Elite Screens.”

APN said it increased its market share in both Australia and New Zealand during 2015, aided by acquisitions, investment in new products, operational improvements and contract wins.

Audience numbers for outdoor advertising had risen in both countries, APN said, due to population growth, increased travel habits and expanded urban areas.

Shares in APN were 35 cents, or 6.1 per cent, higher at $6.05 at 1054 AEDT.

DIGITAL DELIVERS FOR APN OUTDOOR

* Revenue up 20pct to $300.8m

* Net profit of $41m, up from $12.2m loss

* Fully franked final dividend of 11 cents, up from one cent.

Bubba Watson triumphs by one shot at Riviera

  • 03/19/2019

A stroke in front overnight, the American left-hander twice fell two off the pace as first Adam Scott and then Jason Kokrak broke clear but he regained control of the tournament with two birdies in the last three holes.

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Watson, who has always loved playing on the iconic Riviera Country Club layout, shot 68 on a breezy afternoon to land his ninth PGA Tour title with a 15-under total of 269.

“It means a lot,” Watson, who won the 2014 Northern Trust Open two months before claiming his second Masters title, told CBS Sports in a greenside interview.

“You never know when your last (win) is going to be. So for me to come back and to win, and pull one out in a tough way, is special for me and my family.

“It’s all about staying patient with (caddie) Teddy (Scott) in my ear. It’s been a struggle over the last five years but it’s going in the right direction.”

Australian Scott, after an electrifying start that included an eagle and three birdies in his first six holes, carded a roller-coaster 67 to share second place with long-hitting American Kokrak (68).

“There wasn’t a lot in it,” said Scott, who ended his round with a birdie-birdie flourish, including a chip-in at the last.

“I played a good round of golf around a pretty demanding course again today.”

World number three Rory McIlroy squandered a fast start with an erratic putting display as he shot 75 to finish nine shots off the pace.

A final-round shootout was always on the cards and the day began explosively as playing companions Scott and McIlroy both sank lengthy putts to eagle the par-five first, Scott sinking a 36-footer and McIlroy a 24-footer.

By the time Watson lined up a three-foot birdie at the same hole, five players were level with him at the top of the leaderboard, at 12 under.

Though Watson briefly regained his one-shot advantage with his birdie at the first, he was soon overtaken by the red-hot Scott, who drained putts from 32 feet at the third, 20 feet at the fourth and four feet at the sixth to move two strokes clear.

Scott stumbled with a double-bogey at the eighth, after his tee shot ended up in a creek bed dividing the two fairways on the hole, as the leaderboard bunched up again before Kokrak moved two ahead with a four-foot birdie putt at the 13th.

However Kokrak also faltered, with a bogey at the 15th after he over-hit the green with an adrenalin-fuelled approach, and Watson took control for good with birdies at the 16th and 17th.

(Editing by Andrew Both)

Multinational plan lacks detail: Labor

  • 03/19/2019

Labor has dismissed the Turnbull government’s latest effort to clamp down on multinational tax avoidance, saying it lacks detail.

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Foreign companies that don’t pay their fair share of tax could be forced to sell their Australian assets under the government plan.

Requirements on foreign investment applications will ensure multinational companies investing in Australia pay tax on what they earn here.

“Where companies fail to do so I will have powers to take action, including ordering divestment of Australian assets,” Treasurer Scott Morrison said in a statement on Monday.

But Labor dismissed the measure because there was no indication how many companies it would apply to or how much revenue it would raise.

Opposition Leader Bill Shorten said only Labor had a plan to make sure big companies pay their fair share of tax.

“We … would not be a soft touch for multinationals who are treating our tax system as a doormat upon which they rub their tax boots as they head off to other places to pay tax and minimise the taxation they pay in Australia,” he told reporters in Canberra.

Under the government’s plan, foreign investment applications will have to comply with Australian taxation law and tax office directions to provide information.

Companies will be required to advise the tax office if investors enter into any transactions with non-residents to which transfer pricing or anti-avoidance measures of Australian tax law apply.

Additional conditions may also be applied where there is a significant tax risk.

A breach of conditions could result in prosecution, fines and potentially divestment of the asset, Mr Morrison said.