Labor totally out of gear on negative gearing

THE worst thing about Labor’s attack on negative gearing is not what it might or might not do to property prices, but the way it would seriously hurt the battler property investors, writes Terry McCrann.

Shadow treasurer Chris Bowen’s negative gearing plan a trap for the unwary.

THE worst thing about Bill Shorten and Chris Bowen’s attack on negative gearing is not what it might or might not do to property prices, but the way it would seriously hurt not the supposed property investor ‘fat cats,’ but the battler property investors.

Even worse, what the Labor duo proposes actually sets a vicious trap for the unsophisticated and financially unaware investor, who is just trying to build a property investment nest egg.

Now let me start with an important overall statement. It would be entirely appropriate for Labor to propose some reining-in of the tax benefits in and around property negative gearing.

Indeed arguably, whichever side wins the election, the next government should move to cut the benefits back. And the same, incidentally, applies to superannuation.

In both cases the benefits and how they both work and interact with capital gains tax, have got out of whack both with what’s reasonable and with what’s fit, as the latest hottest cliché goes, “for purpose.”

But the way Labor has gone about doing it is not just utterly cack-handed but would actually be malevolent in impact — although, I would ascribe that not to deliberate intent but to simple stupidity.

Although again, one shouldn’t be ‘too kind’ to Shorten and Bowen: they quite deliberately chose this negative gearing package, with their four eyes wide open, for basic squalid ‘don’t frighten the horses’ political reasons.

I might also add, perhaps a tad ingenuously, that it would be better if the two sides could agree a sensible negative gearing reduction policy. Maybe, in some fantasy future.

The core problem with the Shorten-Bowen proposal is that it would channel all future — battler — investment into exactly the wrong sort of property; and then viciously ambush them when and if they tried to sell it at a profit to make some money on their investment.

In really quite appalling contrast, higher income earners who didn’t have to gain maximum year-to-year tax benefits from negative gearing, or could afford normal gearing on an investment, or had existing investments of either property or shares, or just more basically were more astute investors, would avoid the trap.

Bill Shorten has come up with an impressive policy disaster. Picture: Getty Images

And even worse, those higher-end investors would actually benefit from better prices in their (established house) market segments because the battlers had been siphoned off to invest (sic) in apartments or new houses on the city fringes.

Shorten and Bowen’s ‘too clever-cynical-stupid by half’ policy, is composed of three elements.

First, all existing negatively geared property investments would be grandfathered. That’s grandfathered for the annual deductions against other taxable income, and for getting the 50 per cent CGT ‘discount’ on the property sale.

Now that means people who are already inside the negative gearing tent get to keep both their tax deduction benefits and the CGT ‘discount,’ so long as they hold the property. Clearly higher-income earners would be better able to do that, and both benefits are bigger for them than for the battlers.

Talk about favouring the ‘big-end of town:’ Bill and Chris take a bow.

Now it’s important to note that the so-called CGT ‘discount’ is highly misleading. Originally CGT was only paid — and quite properly so — on real (after inflation) gains. Now CGT is paid on the straight money gain, to make calculation simpler, with the 50 per cent so-called discount introduced to mimic the inflation impact.

With the way asset inflation has increased so much faster than normal inflation, the 50 per cent factor is now too high. It could reasonably, it should, be reduced; hopefully, bi-partisanly.

Second, under the Labor proposal, future negative gearing could only be used on the purchase of new properties. By definition, that means new apartments — and so, mostly (but not exclusively) off-the-plan purchases; and new houses, which are mostly built in estates on the city fringes.

You could no longer negatively gear the future purchase of existing properties — easily the biggest component of both the property market generally and investment purchases in particular. In both cases it’s for the same reason: they make the best investments.

If of course, you can afford them. Lower and middle-income earners can usually only ‘afford them’ for investment if they get to negatively gear them. Labor would now effectively ban battlers from buying these better investments.

Those first two elements bait Labor’s trap; it is the third element — which is not stated — which springs it. On sale, that new house or apartment becomes an existing property; the ‘next’ buyer can no longer continue to negatively gear its acquisition.

Suddenly, the only thing that made a house on a postage stamp block in a dreary subdivision with no services or easy access to public transport and 40-50 km from the city, attractive, has evaporated.

More broadly, breaking properties down into two categories — one that you could negatively gear and one that you could not — will work to fundamentally distort the market; and distort it in a way that is most definitely not to the advantage of lower income earners.

Labor’s negative gearing plan will throw a spanner in the works.

For it gets worse: apart from channelling lower income earners who are desperately seeking to build up some property investment for their financial future into the properties with the lower growth prospects — reserving the better investment properties for higher income earners — it will set these investors bidding even more directly against first-home buyers in those outer suburban estates.

This is one impressive policy disaster. Shorten and Bowen have not only managed to conspire to hurt battler investors, they have set out to ensure first home buyers get hurt as well. If nothing else this tells us that Shorten is totally unfit to be prime minister and Bowen equally fails and fails utterly the most basic test of competency for treasurer.

NEGATIVE NONSENSE

IT’S not just Labor; most of the comments around negative gearing has been abysmal or embarrassing and mostly both.

The most stunning statement of the bleeding obvious is that negative gearing mostly benefits higher income earners.

You mean to say that your average $50k-$80k or so income-earner — maybe struggling to bring up two kids, perhaps with a partner who doesn’t work or works only part -time, already paying maybe $1400-$1500 a month on the mortgage on the family home — is unlikely to have a second, negatively-geared property?

The other big thing about negative-gearing is that you have to be able to live with a negative payments outflow each week, every week — albeit eased a bit once a year with a partial tax-refund; and your ‘pay-off’ only coming with the property sale.

Not too many $50-80k earners are in that category. None of this renders negative gearing necessarily wrong or even unfair. It does mean it should not be unduly excessive.

Originally published as Labor totally out of gear on negative gearing