What is Negative Gearing? - TOP

The Labour Party have announced its flagship policy for cooling the housing market. It consists of ending the practice of off-setting fake losses on housing against other income, so called ‘negative gearing’. This change is in addition to their two existing policies;

  • Barring overseas investors from buying existing housing; and
  • Lengthening to 5 years the time you have to own an additional property (not the ‘family home’) before you avoid capital gains tax on its sale.

All of these ideas are just more of the same tweaks around the edges that we have come to expect from the Establishment parties. The trouble with these tweaks is that they all have rather nasty side effects. By contrast TOP’s solution will deal with the loophole at the heart of our housing affordability problem, rendering negative gearing irrelevant. 

Negative Gearing

In principle there is nothing wrong with negative gearing, it is a normal business practice. Many businesses start off running at a loss, and claiming that back against their income tax either now (tax from other sources) or in the future (as a tax loss carried forward). That reflects normal market practice and typifies the risk of starting a new venture.

The problem with property is that investors can purchase a house with a minimal deposit and reap untaxed capital gains while writing off all rental income and some of their other income against the rental property. In this context negative gearing is effectively a subsidy to those of us exploiting a loophole in the income tax regime. But instead of dealing with the root of the problem, which is the loophole that drives speculative demand for the tax-favoured asset (property) and creates untaxed capital gains, Labour is dealing with just one ancilliary contributor – the negative gearing on rental housing. Similar with the Greens policy of a capital gains tax (excluding the family home) it is not dealing with what’s causing the value of property to rise faster than overall income - which is why a capital gains tax hasn’t stopped a price bubble in Australia for instance.

The downfall of Labour’s way of avoiding the root of the problem is that they’ve removed the ability for businesses to make losses, which effectively reduces the incentive to build houses in the first place. Negative gearing is necessary in building projects, where all the expenses are upfront. So preventing businesses using income from other projects to offset those losses as Labour suggests, will reduce the number of companies taking on large building projects, and slow dramatically the pipeline of increasing housing supply. Everyone loses.

The real scale of the problem

We estimate the lost revenue from the tax loophole around housing and other property is around $11 billion each year. Labour’s policy will claw back around $200 million of this a year. In other words, Labour wants to close less than 2% of the loophole. At The Opportunities Party we want to close the loophole completely.

What will TOP do?

Our Fair Tax policy will address all of the same problems that the Labour policy will by dealing with the problem at its root cause. Our policy forces owners to declare a minimum level of income from non-financial assets like property. This minimum income of say 5% of the value of the equity in the property will then be subject to income tax at usual rates. If owners are already declaring for tax purposes an income of that amount (through say rental income) they are unaffected by the minimum income requirement.

Under our fair tax plan companies will be able to declare a loss in their initial years and carry that forward to future years, as is standard business practice. But over the life of the asset, we expect it to return the minimum level of income. Our policy makes it impossible to declare losses on property on an ongoing basis.

Contrary to Labour’s policy, our policy will encourage building. Our fair tax plan will encourage people who hold empty land to build on it, because we will be creating a cost to holding the land by applying tax to it.

Foreign buyers & Bright Line Tests

Let’s briefly look at Labour’s other measures to dampen demand. Firstly they have made a big deal over foreign buyers. One of the main drivers of overseas investors buying property in New Zealand is the gigantic tax loophole around property. If we close this loophole, pressure will ease on the housing market as all investors look for better value elsewhere. This will target local investors as well as overseas buyers, so our policy will have a much greater effect on house prices. Local investors are likely to have a much larger effect on price rises than overseas buyers. Labour simply doesn’t want to target local investors because they can vote, and overseas investors can’t.

Changes to capital gains tax will only target investors who are flipping properties quickly, rather than holding them for the medium-term. Again, investors holding for the medium- and long-term are likely having a much larger effect on driving up prices. Our tax policy will force owners to pay tax on their property assets every year, regardless of how long they hold them for.

As usual, the Establishment parties are too scared to offer you solutions on the scale that these massive problems require. Here at the Opportunities Party we believe in telling it like it is. These proposals from Labour are far too small to make any real dent in the housing crisis. The housing crisis has been building for over 30 years, we aren’t going to solve it with some tweaks around the edges. Only the Opportunities Party is offering a genuine solution to close the tax loophole on property and return housing prices to affordable levels within 15 years.

 

 


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