On negative gearing
Richard Davoren writes: Re. “What the hell is negative gearing anyway?” (Thursday). Clear as mud. Let us suppose I have an investment property, or two, that brings in a rental income. These rents are my source of income and of course I have expenses but fortunately these expenses don’t exceed my income. So presumably, I would not be affected by any change by a future government’s plans by “reducing or eliminating negative gearing”.
But what say I decide to increase my portfolio and purchase another investment property and the expenses on that one exceed its income? Would I not be able to claim the expenses as a tax deduction? Or what happens if one of my positively geared properties fails to attract a tenant for at least one financial year and my portfolio becomes loss making in that year? Are my expenses then ignored?
Being able to reduce your income by the costs associated with one component of your business is normal practice in every business. Or are only wage earners who invest in real estate to be singled out?
Dissolve away
James O’Neill writes: Re. “Poll Bludger: a double dissolution on the cards for July?” (Friday). The problem seems to me to be entirely self-inflicted. Quite why we persist with our impossibly complicated Senate voting system escapes me. The committee that is looking at possible changes seems to have an extremely limited brief.
Why not adopt a proportional voting system? The voter simply puts a cross beside the party of their choice. If they get 50% of the vote, that party gets 50% of the available seats, knowing in advance who will be elected because the party (as now) has candidates listed in order of the party’s preference.
Having a 5% threshold (as in Germany and New Zealand for example) excludes the lunatic fringe with minimal real support.
At a stroke you have done away with “preference whisperers”, people getting elected with less than 1% of the vote; the need for complicated counting software etc. Too innovative and agile for a political class that is not interested in real reform and never will be.
James, while your proposal does have the benefit of simplifying the system, it has the drawback that it is open to manipulation by introduction of new candidates. Basically the same reason why first past the post is a bad idea, it is less of a problem in a multi-member electorate but still a problem, you can field extra candidates to take away votes from your opponent. Also, if one “side of politics has a split they can be adversely affected.
It also forces the voter to vote strategically, you have to guess who is going to be popular to avoid wasting your vote, and this tends to entrench established parties.
Richard,
I own two residential investment properties, which are positively geared. I imagine that if I wanted to buy another property, I’d borrow money on the first two properties to partly pay for the third. The interest payments on the first two properties should be deductible since the purpose was to generate income.
And actually, I don’t think that it would be necessary to borrow money on the first two properties anyway, provided the three properties together aren’t negatively geared. The circumstances would be exactly the same as when I drew down on a margin loan to pay for the recent entitlement on CBA shares. I’ll be able to claim the entire interest on the ‘new’ CBA shares, even if the dividends on the shares don’t cover the interest, and I’m relying on some of the dividends from the ‘old’ CBA shares to cover the shortfall – I’d still be paying tax, albeit less than before.
Unless I’m missing something regarding a possible abolition of negative gearing.
Richard, Wayne,
I think you’re right Wayne. It wouldn’t be too difficult to write legislation that grouped all those incomes and expenses as one ‘investment’, so the nett position for all three would lead to the ultimate calculation of whether there would be a gain or a loss, either of which cannot be ‘geared’ to income from non-capital investments.
That is the key to the proposal and would be fairly easily drafted. I could write it!
Regardless of whether “it’s time to simplify’ it’s clearly well past the time by which Crikey should ask someone who’s competent in these areas to provide an article, isn’t it.
Are my expenses then ignored?
No, they’re carried forward to be offset when the property becomes positively geared or is sold.
Being able to reduce your income by the costs associated with one component of your business is normal practice in every business. Or are only wage earners who invest in real estate to be singled out?
Being able to offset unrelated business expenses against your salary income is not normal when your business runs perpetually at a loss, as most negative gearers do with their property (because the purpose of negative gearing is first and foremost to dodge income tax). You can only do it if your business has turned a profit in three of the previous five years – otherwise the ATO will come a-knockin’.
Real estate is the vehicle that currently gets special treatment.