LABOR has clarified its policy on negative gearing after claims by Prime Minister Malcolm Turnbull that it would stultify the start up of new businesses.
Labor’s policy on its website says, “Labor will limit negative gearing to new housing from 1 July 2017.”
On Monday’s 7.30 Report Turnbull said that that policy would prevent people going into new businesses from deducting losses in the start up against other earnings from personal effort.
A spokesman for Shadow Treasurer Chris Bowen said Labor’s policy is to not allow deductions against personal-effort income for any negatively geared assets if they are passive investments (like residential and commercial property and a share-portfolio) unless the asset is new housing.
It says if an asset is part of a business (which includes the purchase of an asset like an office, shop or warehouse, for example), the loss from owning the asset can be deducted against personal-effort income.
Turnbull said on Monday, “At a time when we want Australians to have a go and be enterprising, start new businesses, start small businesses, they are — with their negative gearing policy — going to prohibit anyone from offsetting an investment loss against their personal income unless it is a new residential property.
“So that means, under the guise of housing affordability, you would not be able to not only buy an existing flat or a house and negative gear it against your personal income. You couldn’t buy a shop. You couldn’t buy a warehouse. You couldn’t buy an office suite.
“What’s that got to do with housing affordability? You couldn’t buy a portfolio of shares in public companies. What’s that got to do with housing affordability? You could not capitalise with a partner a private company to start a business and offset that against your income.
“Now, the reality is that most of us start off with only our human capital and we start off in life earning some money for ourselves in our profession, in a job and we leverage that. We borrow money and leverage that to start something else. Labor is saying you can’t do that anymore.”
I thought that if Labor’s policy did indeed mean this, it would spell enormous trouble for business, particularly start-up small business. So I put several scenarios to Bowen’s office. And got answers.
Example One. After 1 July 2017, I and my daughter jointly buy an office for $600,000, borrowing all the money (using our residences as security). We set up a real-estate business which runs out of the office which breaks even by the end of the financial year, but for the $30,000 interest on the $600,000 borrowed. Can we each claim our half of the interest against existing income – me against my $100,000 earned in journalism, her against wages she earned before we set this business up?
Answer: Yes. This is a genuine active business activity. The broad principle of our policy is that any costs associated with setting up a business will remain fully deductible.
Example Two. I am a lawyer. I buy an office for $600,000 and borrow all the money to do so (using my residence as security) and move my practice in to it. The interest, rates and other outgoings on the office come to $40,000. Can I deduct that from my other earnings as a lawyer?
Answer: Yes. As above, this is a genuine active business activity and losses will remain fully deductible.
Example Three. I buy a warehouse with $1,000,000 I have borrowed and lease it for a rent that would cover the outgoings including the interest. The lessee goes broke after a month. I cannot get a new tenant. I am down $70,000. Can I offset that against my fees I earn as a consultant surveyor?
No. Assuming the purchaser of the warehouse is not using it for his own business, this is not an active business activity. Rather it’s a passive investment.
So without the clarification you might be excused for saying on Monday, as Turnbull did, “They are — with their negative gearing policy — going to prohibit anyone from offsetting an investment loss against their personal income unless it is a new residential property. . . . You could not capitalise with a partner a private company to start a business and offset that against your income.”
But with the clarification it is now clear that, under Labor, people buying loss-making assets as part of an active business venture can deduct those assets against other income.
But Turnbull was right on Monday and is still right today when he says that under Labor you cannot deduct losses against non-investment income from buying a shop, office or warehouse and that that has nothing to do with housing affordability.
The confusion is really definitional.
Labor’s statement that “Labor will limit negative gearing to new housing from 1 July 2017” reveals a muddled view about what negative gearing is. Labor’s statement assumes it means making a loss from a passive investment and deducting that loss against wage or personal-effort income.
But negative gearing is not limited to that. It is where any investor borrows money to buy any asset and expects the outgoings – at least in the short-term – to be higher than the income the asset generates. And that is irrespective of the tax position. For example, an investor might buy a vacant office in Parkes knowing it will make a loss until the Inland Rail comes through, when its value will go through the roof. Tax deductibility might help, but it is not necessary to a negatively geared investment.
The best part of Labor’s policy is: “Labor will consult with industry, relevant stakeholders and State governments on further design and implementation details ahead of the start date for both these proposals.”
It might start by eliminating shops, offices and warehouses from its net.
And while it is at it, Labor and the Coalition should revisit their capital-gains policies. They should both remove their “discounts” and replace them with full indexation – so that people would pay tax on all their real gains and not on notional gains which are determined by the vagaries of the inflation rate and the length of time an asset is held – and may indeed result in a tax liability when no real gain has been made.
The episode reveals that Australia should have had a fuller debate on tax as promised instead of a tax policy to be pulled out of the hat on Budget night.
CRISPIN HULL
This column first appeared in The Canberra Times and other Fairfax Media on 26 March 2016.
The point about negative gearing is that it is means of reducing tax for salary earners in the higher marginal tax brackets – ask any accountant or financial adviser. Interest as a business expense has always been an allowable deduction. What Labor is attempting to do is quarantine borrowings for business purposes from borrowings for other purposes. This is consistent with other existing elements in the Australian tax law: for example certain deductions available to primary producers (as defined in the Act) are not available to a taxpayer who owns agricultural land and simply leases it out. Yes, one can always imagine (or contrive if one is a tax lawyer) situations where what Labor proposes may appear to be “unfair” – that is the sort of thing that has led to the tax law blowing out to metres rather than inches of shelf space and the reason for so many wealthy “tax planners”. At the end of the day, as in so many situations, it is the lowest paid workers who carry the burden on behalf of the better off.