Taxation Law & Practice

Question: Housing affordability is a goal of governments and opposition parties in Australia. A topic of discussion in the media is whether negative gearing combined with the capital gains tax discount (tax concessions) increases speculative activity in the housing market to the disadvantage of the first home buyer.Identify and evaluate key arguments both for and against retaining these tax concessions if housing affordability is to be achieved. In your response you must explain what is meant by negative gearing and how capital gains arising from property investment are treated. You should refer to sections of legislation, tax rulings and cases where relevant. Answer: Introduction The lawful combination of the Capital Gain Tax Discount and negative gearing has distorted the residential property markets. This particular act has encouraged speculations among investors and the individuals having higher incomes to use this law to their advantages for saving tax use this. These are one sort of tax benefits given by the governments and a recent survey by the Australian Institutes has revealed that the Australian government is incurring loss to the tune of $7 billion per year. On the other hand, the same study revealed that the middle class who bear the most of the tax burden does not get many benefits from this legal action. Moreover, about 67% of the benefits are received by the top 20% of the taxpayers, whereas the 4% of the lower income group individuals are benefitted by the scheme. On the other hand, the above combinations are found to boost the number of investments in the Australian residential properties, which in turn is inflating the prices of the housing property. Moreover, the number of genuine ownership of housing is not increasing at genuine ownership of the houses at that rate. The number of investments in the housing finance has increased at a great pace and the concentration of such investments by the financial houses in a particular is raising alarms. Investors in the housing markets can book loss on the rental income and at the same time gain the advantage of tax benefit. Negative Gearing Negative gearing in the taxation parlance, is the advantage that a taxpayer gains from the loss booked from an investment in properties. In case of purchasing a property, the investor uses leveraged money and then puts the purchased property on rent. The taxpayer can claim deduction, when the expenses incurred by the investor is higher than the rental income received by them, then he can claim deduction on the previously mentioned investments. In this case, savings of tax on other incomes can compensate the loss incurred by the company from the investment in housing property and deductible expenses include payments of interest on loans on the investment properties. The investments on the housing properties are considered to be offbeat investments as the loss is met by the exchequers whereas most other investments are typically made to earn profits. On the other hand, the main target of the investments in this particular sector is to make loss and the intentions of the investments in this sector are to get deductions in tax. The investors have found a loophole in the acts, they are misusing the acts, and at the same time, they are speculating on the investments of the housing investments. It is interesting to note that, although the investors are incurring loss, but the value of the property is increasing with each passing day. Capital Gain Tax CGT, stands for the capital gain tax and the when an investor sells the property, it is normally made at a profits. This sort of gain, is termed as a capital gain as per the laws of Australia, it is termed as capital gain taxation. It is calculated as the net value attained on the sale of the assets and the expenses that are incurred by the investors for the maintenance of the property. As per the Australian Taxation office, a taxpayer gets a 50% discount on the capital gains, if the property is hold by the taxpayer for more than 12 months and he is still the owner of the property. The main motive of the agency is to promote the holding period of the assets and allow a discount on the amount of the tax payable of the invested property. As per the current negative gearing theory, the investor is able to deduct the current revenue loss and the at the same time the theory makes the investor helps them to pay taxes on the proportionate gains made by the investor on the sale of property. The catch of the existing rule is that the discount received by the investors helps to collect the total value of the investments, at the cost of the exchequer. Workings of the Act Critics claim that the government is lenient towards the investors of the rental properties and as compared to other developed countries; the country does not set any deductible expense limits that are made by the investors. Moreover, in case of Australian property only half the tax is paid by the investors, the taxpayers are totally sing these in their advantages. On the other hand, it is to be noted that the investors are trying to make loss from the investments and at the same time the value of the properties are being increased by each passing day. Moreover, the capital gains are not levied on the property unless the property is sold. It is to be noted that the capital gearing method helps the taxpayer to levy tax at half the original rates and at the same time after the sale of the property, the taxpayer has the authority of deducting unlimited amount of expenses from the tax. This particular system helps the investors to leverage money for investing in the house property market and do endless speculations on the housing property markets. CGT, Negative Gearing and Housing Affordability Critics claim that with the advent of the negative gearing policy and the CGT taxations, the exchequer is losing a great deal of money from the taxations and at the same time, this method is creating a problem of the housing affordability problems in the whole of Australia. On the other hand, the rampant speculative process is increasing the prices of the property that is beyond the reach of the common citizens and this is creating problems of the affordability in the housing markets. The genuine buyers are not able to buy the houses due to the hike in the prices of the houses due to the speculative purpose and are creating an imbalance in the housing markets. Among all the OECD members this country has the second highest ratio of the housing prices to the income ratios and this factors is becoming a strong reason for the lack of the affordability for the housing markets. On the other hand, it is observed that the prices of the houses are high among all the economically developed countries. Since, 2000 the tax revenues from the housing markets are showing a declining trends. Rents and Negative Gearing The Australian investors of the housing markets are not at all concerned with the rental yields from the markets but they are much bothered about the capital gain taxability of the rental properties. The negative gearing as well as the CGT has formed a nexus among them and the benefits of the nexus is gained by the speculators and at the same time the investors. On the other hand, many of the government officials have suggested the removal of this current system, so that the revenue in the form of taxation increases to the governments exchequers and instead of the speculators and the investors the governments are benefitted from the transactions and the financial conditions improve of the federal governments and the benefits ultimately trickles down to the common public. At the same time, the prices of the housing will decrease largely and the benefit will be accrued to the genuine buyers of the housing who search for the housing facilities for living. On the other hand, the investor s put their rationale in a way that the negative gearing factors is a way of keeping the rent of the houses at a lower price and for this reasons the lower income group is able to afford the housing facilities. At the same time they argue that without the existence of this law, the lower income groups will not be able to afford housing and they in turn are doing a good work by speculating the housing markets and keeping the rentals at a low price. Negative Gearing Facts and Myths Fiction 1: The restriction of the governments on the negative gearing since 1985-19/87 had resulted in a rent increases and the current government must act in a way, so as to decrease the rent and make the housing affordable for the lower income groups as well. Reality: The higher rental income was not the result of the policy undertaken by the government but it was the result of the higher interest rates, boom in the share markets and at the same time, the good condition of the overall market, which has resulted in the higher interest rate. When the market is in the boom phase, there automatically comes inflation in the markets and inflation causes the prices of everything to rise. Rise in the rental income is one of the results of the inflations and the prices automatically increase of all the accompanying factors. Moreover, the inflation in the market led to the rise of the diversification in the markets and the investors shifted from the investments in the housing properties to other greener pastures. Throughout the Australian continent, the rental income rose by 42% and the only exception in the given case was Perth and Sydney. Myth 2: In the recent phase negative gearing prices does not lead to the increase in the rental income, as has been the case of the past two decades Fact: Speculation is the prime reasons for which there has been a rise in the rental prices. Behind speculations, there is always the fact of the negative gearings and it has helped in the housing booms in each cases. In the current phase, due to the rise in the credit facilities, the speculators have enough cash and that has led to the rise in the number of speculations and made things worse for those who genuinely search for the houses. On the other hand, the scheme of giving discounts at the rate of 50% has been a lucrative options for the speculators who intentionally make losses on the ventures to reap the benefits of the deductions available on the capital gains and reduce the expenditures at the same time. Myth 3 Speculators belonging to the middle-income segments reap the benefits of the negative gearing system Fact: The Tax Statistics shows wrong estimates of the assessments after allowing reductions that they are eligible for the capital gains. The profits of the concerns are already reduced by the negative gearing strategies and it does not matters whether they belongs to the lower income segments or the higher income groups. The reality is that most of the households, which belongs to the middle-income segments, actually belong to the upper income brackets and the prices are considered before the deductions, that they are entitled to get. This particular fact creates a disparity in the income brackets and they are confused with the other income groups. A recent study that was conducted revealed that about 10% of the income segments those belongs to the income groups of over $100000 and more than 30% have earned above $500000. This particular statistics clears all the confusions and brings clarity to the all the data. Changes that are to be made in CGT Discounts and Negative Gearings In case of the proposing of the changes to the Capital Gain Tax Discounts and the negative gearings methods, it is of utmost importance for the authorities to retain the good aspects of the current policies and also they should consider the transitional arrangements. Negative gearings have the capability of pushing the sales of the houses and at the same time that will happen at a very small number. On the other hand, the negative gearings must consider the implementations of the act only for a decade and make amendments if required. The investors will find the investments in the new housing sectors to be attractive, the inflows of the capitals will leads to healthy conditions in the housing markets, and slowly the condition of the market will become better. On the other hand, any sort of abrupt policy changes in the market will not be healthy to the markets as they may lead to unsold investments in the markets and it will suddenly to an abrupt changes in the markets. This situation leads to a changes in the price of the housings which will leads to the price instability and at the make the market unhealthy for the housing markets. Conclusions The recent housing policy, which is the brainchild of the Australian government, has stirred much controversy in the markets. People are debating whether the thing is good or bad for the economy and there is a lot of controversy surrounding it. The reason for this is that the speculation varies from person to person and not all of them speculate at that level. This particular fact is very much important for all those who hold investment properties or are in the verge of changing their properties. Few of them may contemplate to move from an expensive area to a lower expensive area or vice versa. In case of fixation of the taxation policies, the governments must consider equity as well as efficiency of the markets. In the given case, governments have failed in both the cases and they must try to rectify their act in the near futures. 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