Has the halving of capital gains tax benefited the economy?

[sydboy007]

Re: has the halving of capital gains tax benefited the economy??

Nottings reply was related to



From Syd.

Personally I prefer the US system:

Under 26 U.S.C. § 163(h) of the Internal Revenue Code, the United States allows a home mortgage interest deduction, with several limitations. First, the taxpayer must elect to itemize deductions, and the total itemized deductions must exceed the standard deduction (otherwise, itemization would not reduce tax). Second, the deduction is limited to interest on debts secured by a principal residence or a second home. Third, interest is deductible on only the first $1 million of debt used for acquiring, constructing, or substantially improving the residence, or the first $100,000 of home equity debt regardless of the purpose or use of the loan.

I think in Australia the combination of CGT relief and negative gearing encourages over investment of Property, and the CGT free status of the primary residence encourages a great deal of overcapitlisation of property, and it benefits the very rich far more than the avg or even above avg. The sale profit of most high end property is far in excess of what us mere mortals can hope to achieve.

We need a tax system that is neutral. Where you invest / save your money should not have tax as a primary consideration.

 

[McLovin]

Re: has the halving of capital gains tax benefited the economy??

I think in Australia the combination of CGT relief and negative gearing encourages over investment of Property, and the CGT free status of the primary residence encourages a great deal of overcapitlisation of property, and it benefits the very rich far more than the avg or even above avg. The sale profit of most high end property is far in excess of what us mere mortals can hope to achieve.

I think the biggest reason for over capitalisation of property is the high transaction taxes already in place. Although it's fitting with the mentality that the family home is a for profit business. Primary residence should not have any transaction charges associated with it. For whatever reason, people often need to move houses, it makes no sense to tax them for the privlege.

 

[sydboy007]

Interesting to note that since the halving of CGT that net rental income for IPs has been negative in Australia

 

[drsmith]

I am making an argument for what has made the contribution for what has changed. Negative gearing was in place long before this bubble started.

You can look at it that way if you wish, but in the broader context of tax reform, that serves little purpose.

Even going back to your argument, you could argue that deregulation of the banking industry and hence greater gearing ratios has more of an effect than negative gearing, as negative gearing only applies to IP with loans and gearing applies to all investments with loans.

My views on negative gearing of salary based income against unrelated investment activity is not limited to property.

I guess I disagree with the possible strawman, and I stand by that of the changes made, lowering of the marginal tax rates has provided much more cash to be geared (for personal or investment properties) for purchase price increases, a bit like the FHVB allows geared speculation as well.

There's no strawman. We are simply looking at the issue from different perspectives. If you still wish to limit your context to what changed, consider the graph in the post above. That being said, I still prefer to consider tax reform from the broader context from which I have made my point.

 

[drsmith]

Interesting to note that since the halving of CGT that net rental income for IPs has been negative in Australia

Where did you find that ?

 

[Bill M]

Interesting to note that since the halving of CGT that net rental income for IPs has been negative in Australia

My rental income has been going up each year with or without the halving of CGT. What are you talking about? I am making more money now than what I was 3 years ago or 10 years ago and I will be further raising it later this year.

 

[FlyingFox]

My rental income has been going up each year with or without the halving of CGT. What are you talking about? I am making more money now than what I was 3 years ago or 10 years ago and I will be further raising it later this year.

What is the ratio of your rental income to the current property valuation? What was it 3 yrs ago? what was it 10 yrs ago?

Compare that with interest on your valuation (or loan) and you come to negative rental income.

 

[Bill M]

What is the ratio of your rental income to the current property valuation? What was it 3 yrs ago? what was it 10 yrs ago?

Compare that with interest on your valuation (or loan) and you come to negative rental income.

Ok I get where you are coming from. My situation is a bit different, my IP is mortgage free, I don't owe any money on it and it has been like that for 10 years.

The point I was making was that not everybody is the same.

 

[FlyingFox]

Ok I get where you are coming from. My situation is a bit different, my IP is mortgage free, I don't owe any money on it and it has been like that for 10 years.

The point I was making was that not everybody is the same.

That's true but there are more people in the situation pointed to by syd than in yours Bill as illustrated by the graph syd put up.

Your probably getting great returns. Even in your case, it's arguable that at the peak circa 2007 that you would have been better off selling your property. Obviously that has changed now with the decreasing interest rates.

 

[sydboy007]

My rental income has been going up each year with or without the halving of CGT. What are you talking about? I am making more money now than what I was 3 years ago or 10 years ago and I will be further raising it later this year.

What is the value of the IP?

What is the rent less all holding costs?

What maintenance costs have you incurred?

What is the net rent as a % of the value of the property?

I would be surprised if it was above 5%

What kind of capital growth do you expect over say the next 5 years?

 

[sydboy007]

Where did you find that ?

the graph i showed from the ATO shows that in net all IPs are running at a loss. Now there will be some that are positively geared, or have no mortgage, but the overwheling number of IPs with a mortgage are loosing in aggregate around 5B and that's with interest rates are historically low levels.

You can see that net rental income has been negative since 2000 which is the first tax year after the CGT changes were introduced (IIRC)

 

[Bill M]

What is the value of the IP?

What is the rent less all holding costs?

What maintenance costs have you incurred?

What is the net rent as a % of the value of the property?

I would be surprised if it was above 5%

What kind of capital growth do you expect over say the next 5 years?

Sorry for the late reply.

It is valued conservatively at around 420K. My net return after tax and all expenses is around 4%.

I expect it will grow in value by 20% in 5 years. There is no evidence to provide that this will happen, it is just what I think. If it stagnates then I will have to make do with my 4% net income. It is a risk I am prepared to take.

 

[sydboy007]

Sorry for the late reply.

It is valued conservatively at around 420K. My net return after tax and all expenses is around 4%.

I expect it will grow in value by 20% in 5 years. There is no evidence to provide that this will happen, it is just what I think. If it stagnates then I will have to make do with my 4% net income. It is a risk I am prepared to take.

4% less income tax??

I know people feel more secure with physical property, and when you have idiots like at JP morgan and Rio burning through shareholder wealth like a politician with a funding promise, shares can seem rather risky.

But I console myself with the fact that i can get 6% yield with little effort, and still make 5% after tax.

in a super fund the return is even better

 

[FlyingFox]

4% less income tax??

I know people feel more secure with physical property, and when you have idiots like at JP morgan and Rio burning through shareholder wealth like a politician with a funding promise, shares can seem rather risky.

But I console myself with the fact that i can get 6% yield with little effort, and still make 5% after tax.

in a super fund the return is even better

But you missed out the part about 20% cap gains .....

 

[Bill M]

4% less income tax??

I know people feel more secure with physical property, and when you have idiots like at JP morgan and Rio burning through shareholder wealth like a politician with a funding promise, shares can seem rather risky.

But I console myself with the fact that i can get 6% yield with little effort, and still make 5% after tax.

in a super fund the return is even better

No, it is 4% after tax as we both fall into lower tax brackets it isn't so high.

As for your yield elsewhere, I agree and that is why I only have the 1 IP. I too have a portfolio of hybrids and some bank shares all returning 6% plus, cheers.

 

[drsmith]

the graph i showed from the ATO shows that in net all IPs are running at a loss. Now there will be some that are positively geared, or have no mortgage, but the overwheling number of IPs with a mortgage are loosing in aggregate around 5B and that's with interest rates are historically low levels.

You can see that net rental income has been negative since 2000 which is the first tax year after the CGT changes were introduced (IIRC)

What I'm interested in is some background information/underlying document.

Do you have a link ?

 

[moXJO]

4% less income tax??


But I console myself with the fact that i can get 6% yield with little effort, and still make 5% after tax.

in a super fund the return is even better

He has access to cheap money. He may also in the future have the ability to build units. Too much of a simplistic view on property on this forum.

 

[FlyingFox]

He has access to cheap money. He may also in the future have the ability to build units. Too much of a simplistic view on property on this forum.

On the contrary. The above comments on serve to confirm what we are saying i.e that due to the way the system is setup (negative gearing, CGT concession etc etc), investors are only focusing on capital gains and not worried about yields.

If I have access to cheap money and can develop a property, I will want to sell it because the CG on it will most definitely outstrip any incentive to lease it out.

 

[sydboy007]

What I'm interested in is some background information/underlying document.

Do you have a link ?

Alas no. I got that graph off whocrashedtheeconomy

Philip soos seems to be a prolific writer regarding the giant ponzi scheme that Australian Property has now become

 

[moXJO]

On the contrary. The above comments on serve to confirm what we are saying i.e that due to the way the system is setup (negative gearing, CGT concession etc etc), investors are only focusing on capital gains and not worried about yields.

If I have access to cheap money and can develop a property, I will want to sell it because the CG on it will most definitely outstrip any incentive to lease it out.

There are plenty out there holding for the yield depending on the location. I can develop 3 townhouses and keep one at low cost for yield, or do the research and get in early on a future mining towns . Its not a one strategy suits every area.

If I have access to cheap money I can buy shares or business equipment without worrying about selling for cap gains, perhaps I want to wait and buy the houses next door as well. It depends how far ahead you look or if the figures and future profitability no longer make sense to hold.
I was getting at the fact that people seem to think everyone buys and holds property in a vanilla fashion and thats what you are limited. That and the attitude you cant make money at this stage of the cycle.
I think there are just some people peed off property near the center of town doesnt crash like shares.

I will agree that the system is setup in favor of quicker sales on the basis of grabbing more tax on transactions.