Scott Pape is wrong on negative gearing: Margaret Lomas

Scott Pape is wrong on negative gearing: Margaret Lomas
Scott Pape is wrong on negative gearing: Margaret Lomas

Prominent property investment adviser and Sky Business host Margaret Lomas has slammed ‘Barefoot’ investment adviser Scott Pape following his comments that the government didn’t have the “ticker” to abolish negative gearing tax rules.

Lomas warned that removing negative gearing would cause a “sudden market crash” leave 600,000 homeless and a “government unable to house them under public housing programs”.

“Private housing is a must and removing the capacity to claim loan interest [under negative gearing allowances] would create far more problems than it solves,” she said.

Pape said in a post-budget newsletter that abolishing the concessions could save the government $5 billion in lost tax revenue having previously called it a “dud” policy that does little to increase the supply of new homes, "since the majority of investors buy established properties".

Lomas said in response that Pape wasn’t a property investor and “does not consider the full picture”.

“I like Scott but he needs to stick to his specialty,” she said.

Lomas says there is an inherent misunderstanding of negative gearing.

“It’s not a strategy, it's a tax outcome.  Therefore any discussions about negative gearing versus positive gearing are completely moot.

“The strategy is property investing.  Two people could buy exactly the same property and it would be negatively geared for one of them and positively geared for the other.

“It’s about tax, interest rates and income, not about the property,” she said.

Lomas said removing negative gearing rules –as Pape contends – would remove the ability for investors to claim the interest on their loan, “which is what negative gearing is”.

“Contrary to popular belief, removing it means you can still make tax claims for everything but the interest and probably more than half of them would sell,” she said.

However, not all agree with Lomas.

Bank of America economist and former ANZ chief economist Saul Eslake told Fairfax Media ahead of the budget, but following the publishing of ATO figures showing one in three property investors negatively gear their investments - that it should be abolished.

"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,” he said.

Eslake said removing negative gearing would be top of his list of priorities calling the decision to halve the headline rate of capital gains tax [in 1999] decision that made negative gearing attractive “the worst tax decisions of the last 20 years".

 


The recently published ATO annual report revealed that around two-thirds of 1,811,174 property investors - 1,213,597 taxpayers – claimed losses on their investment properties for the 2010-11 tax year up from 1,110,290 who claimed losses in the 2009-10 tax year.

The average loss recorded for negatively-geared property investors was $10,947 in 2010-11, up from $9,132 in 2009-10.

Negative gearing is likely to become more attractive and drain more from government coffers in the next few years as house prices start rising again and interest rates remain low.

A high interest rate environment makes investors less willing to take on debt while a falling property market means less certainty about future capital gains.

The 2010 Henry Tax Review did not call for the abolition of negative gearing perhaps due to the polarisation of views.

“Some submissions suggest that 'negative gearing' for investors and the exemption from CGT for owner-occupiers benefit high-income Australians.

Others argue that negative gearing supports the provision of affordable rental housing,” the report said.

The review received a number of submissions that claimed that “'negative gearing' has reduced housing affordability by causing speculation in the housing market”.

“Several submissions propose restricting negative gearing or directing it so that it promotes the supply of affordable housing.

“The housing industry argues for the retention of negative gearing on the grounds, among others, that the temporary removal of negative gearing lead to an increase in rents in 1987.”

The contention that the “quarantining” of negative gearing between 1985 and 1987 caused rents to spike is often used to argue against it being removed.

However, those in favour of removing it claim that high interest rates, which peaked at 19.4% in December 1985 and not the removable of negative gearing alone, made property investment unfavourable while the implementation of the capital gains system in September 1985 is also believed to have been a factor.

Analysts also point to rents not rising evenly across all capital cities (rents rose the most in Sydney and Perth, were flat in Melbourne and Canberra, but fell in Brisbane and Darwin) while negative gearing for property investment purposes was briefly abolished as evidence that the quarantining of negative gearing was not the sole factor behind rent rises.

In September last year, finance minister Penny Wong responded to questions from Greens leader Christine Milne about negative gearing.

Wong said it would be “difficult to quantify whether limiting the ability to offset rental losses against other income would lead to a decrease in the rate of return on investment property, or just a one-off fall in prices”.

“The impact of changes to negative gearing on house prices is difficult to quantify because of a number of factors.

“These factors include the ratio of negative geared properties to owner occupied housing; the extent to which the benefit provided by negative gearing is reflected in housing prices or whether the benefits are shared with renters through the provision of lower rents; and a range of other factors which impact on housing supply and interest rates,” she said.

 

 

Larry Schlesinger

Larry Schlesinger

Larry Schlesinger was a property writer at Property Observer

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