Foreword
Although the negative asset-liability ratio is widely described as “tax torture for wealthy investors,” it is not a tax concession (tax relief, not tax exemption or refund). However, as the Financial System Consulting’s Murray Report concludes, this does encourage over-investment and over-leveraging in the Australian housing market.
Therefore, although not the only reason for rising housing prices and affordability issues in some areas, negative asset-liability ratios have become the focus of debates on tax reform and review of housing policies during the election year. From Waleed Aly to the Prime Minister on his own blog, negative factors are triggering a lot of backgroundless speech.
Where did this idea come from?
The gearing ratio describes the use of borrowing to raise funds for investment. When the interest cost of servicing a loan exceeds the net income of the investment, it is said to be a negative asset. The concept of negative asset-liability ratio is relatively simple: when an individual (or business) incurs costs related to income generation, these costs can be deducted from income. As it applies to investment properties in Australia, when the interest cost of a mortgage exceeds the property’s net rental income (ie, negative assets), individuals can use the net loss of investment properties to offset their ordinary salary income.
This is because in accordance with current Australian regulations, investment property losses will not be “isolated”. That is, the loss of investment property can not only be deducted from the income of investment property. Therefore, the higher your total income, the greater the tax deduction benefit of the negative gearing ratio. Isolation loss is the main difference between the application of negative assets in Australia to the rest of the world, and it is also a key area targeted by Australia’s previous reforms.
International examples
Compared with the rest of the world, Australia’s negative debt policy is one of the most generous policies for real estate investors. Among OECD countries, New Zealand and Japan treat negative returns most similarly to Australia. In these countries, negative gears are allowed, but the restrictions are relatively small.
On the other hand, the United Kingdom has strict isolation rules for loss-making property. The loss of investment property can be applied to the income pool of investment property and carried forward, but the loss cannot be deducted from wages (ie non-passive income). However, this summary should be treated very carefully. International comparisons of negative leverage approaches are incomplete, and capital gains rules have not been examined to distinguish them from other housing markets, such as owner-occupiers and investment properties, as well as new and existing developments.
In the United States, although not a desirable system, even the interest on own homes can be completely tax deducted from ordinary income. In contrast, in Sweden, tax deductions on negative assets of leased assets are allowed (although segregated from income from other capital assets), but the estimated rent for own homes is taxed. Net welfare gains are difficult to measure and are entangled with government policy.
Previous reform attempts
In 1984-85, Australia underwent a major reform of its negative asset-liability policy. Prior to the Hawker government’s tax reform, negative asset-liability ratio rules isolated investment property losses and allowed investors to carry forward those losses to offset future gains, or when assets become positive assets.
Within six months, the isolation of loss of investment property (to increase the stock and affordability of leased houses) was removed and then removed. From the perspective of real estate investors, this final reform is grim: losses are segregated item by item and cannot be carried forward to offset future income.
Although this reform was not retrospective (that is, it only applied to real estate purchased after July 1985), it was widely criticized at the time and the idea that a sharp rise in rents was prevailing. Although these analyses were questioned in recent debates, in September 1987 the reform was abolished and to a great extent established today’s system. A major subsequent reform attempt was to reform negative assets, which was proposed in the 2010 Henry Tax Review. The main recommendation for a “fairer” and more efficient housing market is to eliminate or limit negative asset-liability ratios. Specifically, losses on negative assets and liabilities should be limited to 40%.
For more information about debt ratio, you can follow the article to be released tomorrow or consult Wanjia’s public platform.
https://theconversation.com/policycheck-negative-gearing-reform-58404