Where there’s smoke, there better not be fire

Where there’s smoke, there better not be fire

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Contrary to the shrieking of some commentators and bleeding hearts, negative gearing is not welfare for the rich. Many investors who provide rental accommodation stock and enjoy this modest tax perk are mum and dad investors.

We’re less than a week away now from the next Federal Budget and it’s unlikely to be a cause of celebration. The government has been at pains to ease the blow that’s likely to come by announcing some measures early – the Medicare levy increase and changes to top tier super tax rates.

In the world of politics, it’s what is often referred to as “softening the ground”. After extended dry periods, a sudden burst of rain is likely to run straight off a dry, parched earth. A little bit of moisture just before though and that downpour will be absorbed into the soil.

So when newspapers, blogs and even a primetime news chat show start talking about negative gearing, you’ve got to wonder what’s going on.

Negative gearing-related stories started popping up a few weeks ago. The first were random in their purpose and unknown in origin – an analysis on how much the policy costs the government. Not new figures, no new angle, just an unexpected rehash of what we already know.

That story, naturally, led to outrage from those in the community who consider property investors on the same level as white-collar criminals or the Kardashians. They’re all greedy, tax-dodging millionaires sitting in ivory towers and counting their pennies, according to some.

Inevitably, that early splattering of discussion about negative gearing across various mediums led to questions about whether it’s time to ditch this longstanding tax incentive. By this week, it was all but deemed a necessary move.

When a government earns itself a reputation as an overspending, under earning and tax happy administration, selling tough policy can be as difficult as pushing a gallon of, er, pudding up a steep hill with a teaspoon. How convenient that the ground is now well and truly soaked.

Few know what’s in the Budget that’ll be handed down next Tuesday. If true to form, the guts of it will be leaked in the days before so there won’t be too many surprises.

My theory could be completely off the mark, and I certainly hope it is. Perhaps I’ve spent too many long weekends glued to my box set of The West Wing. I’d get little satisfaction out of being right, as I believe negative gearing is an essential incentive for the common but overlooked property investor – ordinary folks with one or two investments – to stay in the market.

The removal of this policy would deny investors the legitimate right to claim a valid deduction. And it’s my view that those utilising negative gearing probably aren’t rolling in rental income.

Property investors are taxed on the purchase of a property, on the income it earns and on any profit they make when they sell it. There’s a whole other argument to be had about the absurdity of stamp duty, but that aside, those who are taxed up the wazoo should be able to claim legitimate offsets, and negative gearing is one of them.

Consider the type of property market we’re just emerging from. In the wake of the GFC, we were plagued by an extreme lack of confidence – almost a sense of fear-induced hysteria. What would happen to housing? Were there bigger drops to come? Would the economy collapse?

For years, few made a move. Buyers weren’t buying, developers weren’t developing. Things came to a frustrating standstill. Only recently have some been optimistic enough to come out of the wilderness. The last thing the housing sector needs is another kick in the teeth.

As a result of this pessimism and other pressures like a growing population and demographic shifts, the rental market boomed thanks to strangled supply. Vacancy rates contracted sharply and rents went through the roof. The number of suburbs where it was suddenly cheaper to service a mortgage than shell out to a landlord ballooned.

Do we really want to give mum and dad investors yet more disincentive to stick around and hold on to that rental property? Do we want to avoid a massive influx of stock on the sales market, depressing a sector that is only just starting to get back on its feet? Do we want to make it harder for stretched renters to make the transition from tenant to homeowner?

It’s the last thing investors, renters, homeowners and the economy need. Hands off negative gearing.

Shannon Molloy is the deputy editor of Australian Property Investor magazine, www.apimagazine.com.au