Negative Gearing - Swan says landlords safe from another wealth tax
by John hopkins_Executive Chairman
Politics can be a dirty business. It doesn’t matter which party they belong to or how senior or junior they are, it seems some politicians cast aspersions on an opponent’s character, exaggerating from time to time, wanting to win favour, maybe even trotting off to church on a Sunday (a lack of faith often no barrier), and even – heaven forbid! – kissing babies with gritted teeth and smiles – almost anything at all if it’ll garner them a few extra votes.
One of the current stories being spun out of Canberra by certain politicians is all about landlords being little more than tax cheats, and that the so called tax breaks they enjoy make their activities inappropriate at best, illegal at worst. It’s an easy enough story to spin: attacking the rich – or those perceived as rich – is always a sure way to appeal to the majority.
A two way street for landlords
But putting aside the moral issues and the politics for the moment, what upsets me more than anything is that landlords aren’t being placed on pedestals and praised for their endeavours, for their initiative, and for their self-reliance. Because they should be. Landlords should be universally praised by politicians, by those in the public eye, and by the media because they are most definitely – as you and I well know – not tax cheats, nor are they bludgers living off the system.
Being a landlord is a two way street. You provide accommodation for those that need it, and by doing so you provide an income for yourself when you stop work. So you reduce the cost to the public purse in two ways: public housing isn’t required on so great a scale, and you do n’t need to be provided for when you retire.
One of the foundation stones of the Australian taxation system is that taxpayers, whether individuals or corporations, can claim expenses for a particular venture against income in the year they occur, if those expenses have been incurred because of an expectation that it will create income in the future.
For instance, a mining company that spends a decade exploring, researching and preparing a mine before any minerals can even be extracted, can claim those expenses as a tax deduction against their income today.
A means to an end
If your intention is to establish a property investment portfolio so that you’ll reap an income in the future, it’s legitimate for you to claim those costs in the year they occur. And if those costs exceed the rental income – in other words, if there’s a loss (commonly referred to as ‘negative gearing’ in the property world), you’re legally and morally entitled to claim those costs against your other income streams (whether from investment, employment or business) in that year.
The justification for this is that your intention is to create an income for yourself in the future.
However, you can be sure it wasn’t the legal or moral correctness of your position that influenced Mr Swan, the politician, to recently claim that negative gearing was safe from any government axe.
I’m certain many politicians would see a move against landlords as a great vote winner, a kind of Robin Hood rob-from-the-rich-and-give-to-the-poor move. But the reason you’re safe in this instance is not, as I said before, because of any moral or legal correctness on the part of those we elected to Parliament, but because our country simply cannot afford to replace the rental accommodation you, as a landlord, have created through your admirable endeavours to provide for yourself.
The resultant shortage of housing if negative gearing was eliminated would be acute, and the impact on the finely balanced housing market could be catastrophic. And politicians know this.
This government certainly won’t have forgotten the days when Mr Keating quarantined negative gearing in 1987. It had such a devastating impact on the supply of housing that the Labor government reversed its legislation within eighteen months (who said politicians don’t learn from history!).
And if you add today’s rapid population growth to the equation, it’s not surprising Mr Swan was quoted as saying on March 27th, that suggestions of a clamp down on negative gearing by the Rudd government were “hysterical.”
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