It looks like the ALP is going to break its promise on negative gearing and change the tax rules. There is a constant stream of misinformation about negative gearing, essentially taking advantage of people's ignorance.

The tax rules treat different investments like housing, shares and your business in the same way. This is important because the tax rules should try to minimise their impact on how people invest. Essentially, you get taxed on the profit, not the turnover. If you borrow money to invest in a house or the share market, the interest on that loan is a cost, and you only get taxed on the net profit, after you have paid the interest. For a housing investment, this allows people to delay the profit and make a loss for many years, if the interest on the loan is higher than the rental income. They can offset this loss against their salary (the same rule applies for share investments). Jealous people think this is "cheating" somehow, but you still have to pay the tax at the end of the day. It may end up increasing your tax bill. When you sell the investment property, you might have several hundred thousand dollars in capital gains. This will most likely push you into a very high tax bracket for that year, if not the highest.

The reason this is necessary is because otherwise the tax rules might send an otherwise viable business broke, which is not what the tax rules should be doing. People who negatively gear are not "cheating" the system. They are actually losing money on their investment until they sell it. Their income actually goes down, and the income tax they pay should reflect that. If you lump them with a tax bill they cannot afford, they will go bankrupt, be forced to sell an otherwise viable investment, or their business will go bust. All 'business activities' are treated the same way, whether it is investing in the housing market, investing in shares, or investing in your own business. Whether it is wise to make an investment that loses you money for years before you see any kind of return is a decision for the investor, not the government.

Negative gearing is heavily spruiked by wealth managers, especially in the past when they took a 2% cut on any money you invested through them. They wanted you to borrow everything you could and give them a chunk of it upfront. Their marketing was so effective that they created  a mythology around negative gearing, but the reality is that few people actually choose to invest in something that is making a loss from day 1, and when they do, they try to keep the losses small. In the back of their mind is the ever present risk that interest rates will double or triple and they will lose everything.

People complain that this rule makes housing more expensive. It doesn't. It actually makes rent cheaper. Good luck saving for your own home if your rent goes up even more. Furthermore, housing investments get treated no differently to other investments, so the rules do not skew the market towards one particular type of investment.

Another tax rule up for change is the capital gains tax discount. If you hold an investment for more than 12 months, you only pay tax on half the capital gains. This is intended to be a simple rule to make sure you are not paying tax on inflation. For example, if you own an investment whose value goes up by 6% every year, but inflation goes up by 3% every year, you are really only making 3% on it, and that is what you get taxed on. If the investment value goes up by 3%, the same as inflation, you make no real profit, but you still pay tax on 1.5%. Last century, the rule was that you had to subtract the actual inflation from your capital gains. The rule got changed, presumably because the new rule is simpler.

Another rule that is up for change: trust tax rates. This is an extension of the concept that you only get taxed on the profit, and only once. Companies generally pay a tax rate of 30%. They then pass profits on to shareholders. If you are in a tax bracket with a 30% marginal rate, the tax is already paid. You do not get taxed again. If you marginal rate is 40%, you have to pay the extra 10%. If your marginal rate is 20%, the tax department gives you the 10% back. This way the share of company profits attributed to you as a shareholder gets taxed the same way as your other income. The reason the government does it this complicated way is to make sure tax gets charged on company profits that end up going to foreigners etc. A trust does the same thing, but gives you more flexibility on who the profits go to. If you have an investment trust and give 50% of the annual income to your child or a member of the trust, the tax department treats this the same way as if that child owns 50% of all the investments owned by the trust. Again, their is no real option for cheating the tax system here. Children under 18 pay far higher rates of tax than their parents - roughly 50% of all income over $500 per year. That is not a typo. You cannot hide your income in young children. Trusts merely formalise and standardise what people would otherwise achieve in a more ad-hoc manner - distributed ownership of a group of investments. The super-rich will still do this, but without trusts it will get too complicated for your average mum and dad investor, or the legal fees may make it no longer worth it. Changing this rule will be a boon for lawyers, especially if it gets changed again when the ALP gets turfed out. But it will be bad for everyone e

There's one other aspect that escapes the ignorant vis a vis NG. All of the expenses incurred during the period of ownership that are currently claimed via NG would simply become legitimate deductions from the profit of sale reducing the CGT payable by the same margin. The revenue collected by the government does not change. Only the date that the tax is paid is changed.

There's more to the 50% rule re CGT than you've highlighted. One thing often overlooked is as follows:

"Also, an averaging process was used to calculate the CGT. 20% of a taxpayer's net capital gain was included in income to calculate the taxpayer's average tax rate, and the average rate was then applied to all the taxpayer's gross income (i.e., including the capital gain in full). So if a large capital gain were to push a taxpayer into a higher tax bracket in the tax year of sale, the brackets was stretched out, allowing the taxpayer to be taxed at their average tax rate."

This is actually extremely important as it gets around the unfairness of having a one off sale pushing a taxpayer into a high marginal rate when the gain would have been earned over multiple years. This rule effectively allowed the gain to be amortised over 5 years worth of income.

It appears that Chalmers wants to go back to indexation but leave out the amortisation rule. If so, he is a prick.

freediver wrote Today at 7:22am:

 
Yes, the current system is much simpler and on average, same outcome. That was the reason for the change. Under the old system, one required accountants and lawyers to work it all out.

Bobby. wrote Today at 9:08am:


Yes, that's precisely why it was simplified to the 50% rule. Unfortunately, too many seem to think it is a perk. When properly understood it is quite fair and reasonable.

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A worker can claim car expenses. The same rules apply to both people. In fact, a worker is more likely to rack up high tax deductions this way, however in most cases the employer reimburses them directly (and tax-free) for the expense.

And FYI, a property developer who travels to site is working.

This has little if anything to do with negative gearing.

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Like I said, the same rules apply to both groups. There are no "special perks" for property developers.

Bobby. wrote Today at 2:16pm:


The same rules apply to everyone Bobby. It makes no difference whether you are working for a salary.