Breaking News | The Negative Gearing "Double Whammy"

Hey, couches, Ben here with just another breaking news episode, bonus episode for you all in relation to negative gearing. And this is off the back of a two-part presentation series that I've recently produced for the Property Investors Council of Australia as the chair of their association. So inside this video we're going to go deep into negative gearing. The other video if you haven't already seen it is on Capitol Gains Tax Reform because we know the federal government is looking at both of these very seriously to put into the May budget. So jump in, have a listen and let me know what you think. The federal government is considering a double whammy that could spook the property market into a dormant state and reverse one of their number one priority goals which is increasing housing supply. Now I'm talking about changes to negative gearing and Capitol Gains Tax reforms. And they can have a significant impact in terms of what happens to the housing market. I'm Ben Kingsley, I'm the chair of the Property Investors Council of Australia. And in this video I'm going to talk to you about negative gearing and the potential consequences that could come off poor policy settings. I also want to point you towards a recent video that I did focusing on Capitol Gains Tax reforms as well. You can check that in the link below. In this presentation I'm going to talk about the three things that you need to understand about negative gearing. I'm going to challenge the misinformation around tax revenue that the government's receiving. I'm going to break down the numbers and trends in this space including why it's important. And then we're going to look at a case study when things go wrong and what it does to housing supply. That's the Victorian story and then I'm going to talk about the actual policy that's being debated at the moment. And finally I'm going to share you pickers position. So we've got a lot to get through but there's a lot of education and learning so let's get into it. So what are the three things you need to know about negative gearing? First you need to understand that it's not actually a tax policy. But there's nothing written in the tax legislation that says this is the negative gearing position or tax position. What it actually is is an outcome and it's an outcome based on the cost or loss offset against income. That's number one. Number two, how does it actually work? Well how it works is any investment losses are adjusted against your salary or wages income. And by doing that if there is a loss it will reduce the overall tax that you'll have to pay through that year. But vice versa if you're also receiving a positive return in terms of income it will actually add to the tax that you have to pay in that financial year. So the whole concept of negative gearing is this idea that you're running a investment at a loss so you can get a lower tax return but that doesn't make sense which brings me to point number three. It's just a moment in time. I mean why would someone invest in something to forever receiving a loss just so they can get some of the tax that they had paid back? No, it forms part of an overall investment thesis which says that I'm going to invest and over the long term of that investment I might when I first invest experience a loss until my business sets up and then over time I do expect that that business will return me some passive income or some capital growth as part of that story. So point number three there it is a moment in time. So they're the fundamental things that you need to understand when it comes to negative gearing. So if we understand that over time negatively geared properties turn into positively geared properties we understand that yes there might be a tax loss to the government in the earlier stages but there's also tax that's eventually going to be paid when the property turns positively geared and of course if the property is sold. And this is one of the big miscommunications and disinformation that we see out in the market all the time in this debate. It's this debate that's sort of saying that property investors are getting huge tax benefits and everyone else is missing out and that's causing this inequality in terms of what's happening in the market. So I want to just make sure that people understand the actual numbers when it comes to this. So let's turn our attention to the data and see what we can learn. First of all I want to focus in on and this is ATO data stats. So and this is the latest data that we have in 2223 and this is on individuals in terms of income, rental income and deductions over this period. And you can see there that we've got five years of showing this information. And if we break it down we can see we've got gross rental income and I'll just focus on the 2223 year on the chart that we're looking at now. That's 56.1 billion dollars of rental income. Then you got rental interest deductions which is $24 billion of interest being charged. Then you got capital works deductions of $4.6 billion and then you've got other rental deductions of $25.4 billion. Now when you sum all of those up you can actually see there that the government is receiving tax on $1.6 billion of rental income. So they're actually net positive when it comes to just the income story here. And you can see in the previous year where the interest bill was a little lower the government was net $6 billion. Meaning that $6 billion of income was then taxed arranged by the obviously PAYG tiers that are associated with our tax policy. So that's the positive story about the income that's being taxed by government when the broader aggregate of the portfolio across Australia is positively geared. So let's learn a little bit more about the breakdown of investors and the mix in terms of the number of properties that they own. And this chart again going back to the 2223 tax year we can see that there's 1.6 million people who own one property that represents around 71.8% of the split. Then you've got 423,000 who own two properties and that's 18.7%. So the combined of those two is 90.5. Then you've got people who own three properties. It's 129,000. And so that's around 5.7%. And this is the kicker here. Greater than three properties. There's only 84,984 people that have greater than three properties. And so it's important to understand when certain politicians, certain people in the media and commentators talk about these property hoarders are massing multi-million dollar portfolios with multiple properties. There's not a lot of them around. Most people just own one or two. And then if we bring it back to the revenue story, which is what I wanted to highlight, take a look at this chart where it breaks down the net rent loss and also the net rental neutral or profit that's being made. And in every one of those breakdowns, so from 1 to 2 to 3 to 4 to 5, or greater than 6, in every one of those categories, there is more investors who are paying tax on their rent than it is receiving a negatively geared benefit. Let that land. There are more in every one of those categories, as you can see by the table here, where they're actually paying tax on the rent that they're receiving on the property. It's a misconception to think that the government's actually losing money when it comes to the income being produced. But it gets even better when we look at the capital gains that the government receives. One of the benefits of property values going up sustainably over time. I'm not interested in speculative bubble growth. I'm interested in good policy settings that allow for growth to occur over a longer period of time. But this is where the rubb hits the road in terms of the revenue that the government receives. Now, it is important that I put a caveat on these numbers. And that is that this is money received from not only residential property sales, but all types of properties that produce a rent or a lease. So it does mean that there will be commercial properties in this mix as well. But it's a staggering number in terms of the overall number of which there's 44.1 billion dollars of revenue that the government has received in terms of capital gains. So that is where capital gains tax has been charged. And you can see individuals 33.1 billion companies, 7 billion and super funds, $4 billion. So all of those are turning those properties over. And then that is then going to be taxable in terms of government receipts. So in closing out this section, it really does allow you now to be informed in terms of the level of taxes that are being paid by property investors in both the income that they're receiving and also in the capital gains that they produce over time, which brings me back to that important message that I'm trying to say earlier. Negative gearing is only a moment in time. Okay, so all investors are looking for longer term [BLANK_AUDIO] returns because why would you again invest in something that continually keeps running it a loss? You want to get a return on that money for the risk that you're taking. So that brings us to another important area that we want to talk about. And that is that there has been some changes when it comes to looking at the data. And I want to explain these changes to you about what we're seeing in the data in terms of the behaviour and why we're seeing that behaviour. So using the same data set again, because this is where we get the most accurate data, we can see here that the total number of individuals who have rental income has actually flattened and in some cases is falling slightly. So we saw between 2022 financial year and 2023 financial year, there were 7,081 less individuals who are actually investing in property and receiving rental income off their properties. So we have seen a significant shift. Take a look at the table below where I'm highlighting what we did see. So in the previous five years, we've only seen an increase of 0.48 in regards to from financial year 2019 to financial year 2023. So the average number of new individual investors coming into the property market is slowing down. We're down to 10,637. Now if you take the previous five years before that, the average was 53,000 per annum. And then the five years before that, the average was 57,000. And then the five years before that, the average was 64,000. So we're already naturally seeing a decline in the number of investors investing in property. Now that is challenging in terms of the future supply of rental accommodation. Why would that be the case? So why would there be reasons in terms of why we are seeing this downturn? Well, let me explain what I believe are some of those important reasons. Number one is simply affordability. So it's not necessarily anything else like in terms of what else is happening. It's just common affordability. So as property prices get higher, it potentially limits the number of people that can invest in property through borrowing power. And that leads us into point number two, which is government intervention. And we know through all of the data and the research that if there is credit availability, property prices can continue to keep rising at a fast eclipse. So APRA intervention into the market has reduced the amount of borrowing power. The next point is around state government interference and interventions. So they've done a lot of reforms that are increasing the cost of running your small private rental accommodation business. So that is also a deterrent for future investors. And finally, the one I'm talking about is investor confidence. Investor confidence comes off the back of sentiment and understanding what's happening in the marketplace. And whenever there's talk about rental freezers or rental caps that are going around, that scares off those investment dollars coming into the residential property market, which is obviously affecting future housing supply. And with tight supply, you get upward pressure on prices. And of course, you get upward pressure on rents. In continuing on our deep dive in terms of looking at the data, we now turn our attention to the number of companies that are claiming rental or lease income. Now I do again highlight that this is not just residential property. It is also commercial properties because the ATO cannot separate that data. I have asked them many, many times and they would love to know the answer that to, but it's all collected on those tax forms and they don't actually segregate whether it's residential or investment. And so that could also mean, you know, basically individuals could also have investment properties that are commercial properties as well in their personal names. So we can see here though, in looking at this table, look at that strong increase in terms of the number of people who are investing through entity structures as opposed to investing in their individual names. And we can see here when we look at the increase, you can see the percentage increases over the years that are being tracked by the government and by the ATO that we're seeing here. In the last couple of years, we've seen a 2.5% increase and then a following subsequent 3% increase as part of that story. So you've got to ask yourself, why? You know, what has happened? What has happened during that time? And so that's a lot of the research that I have been looking at and certainly appers lending restrictions on individual capacities has meant that investors are looking for other ways to get into the market. So we can see that they've certainly been increasing that lending activity through trusts and also potentially through self-many super funds. But we'll get to that in a minute. All right. But the other interesting one here is, I'm not sure if you can remember, probably not as old as I am, but in 2017, the government of the day and Scott Morrison as the treasurer announced a Housing Tax Integrity Act, which effectively from one July 2017, they were going to ban travel and depreciation on plan and equipment claims for individual taxpayers. But guess what? If you owned a property inside a company or inside a trust entity and it was a rental property business, you were able to claim travel expenses. As well as all of your plans and equipment. So remember that time 2017? Let's go back and have a look at the data and let's see what happened. Everyone initially panicked and then worked out, well, wait a minute and look at it. It's taken off again. So there's a lot of people who are now doing that. Now what's the relevance here for negative gearing? Well, as a side note, it's really relevant because if we see changes to negative gearing and individual names, will we see an explosion of people who are going to buy through entities to invest in residential property? Or are they going to, we don't know the rules yet, but are they going to pivot to buying commercial property? We don't know the answer to that yet. But what we do know is that's further evidence that when government change policy settings, they get a response, whether they like it or not, in terms of people looking at ways to get around those types of policies. And let's go and have a look at now self-managed super funds. What's happening in this space? So we did see a solid rise. For several years, they're in terms of the number of self-managed super funds who are claiming rent or also lease. So remember, we're not breaking down. Unfortunately, we can't break down rental properties from residential versus commercial. And we do know that there's a lot of people who have their own private businesses, who own their own commercial properties, and they set up a self-managed super fund to buy those commercial properties in. So, but we have definitely seen a decline in that area. So what's the reason potentially for the decline? And it totally, we did see through the COVID era that rent relief was introduced. And obviously, that did mean that those related parties didn't necessarily have thriving businesses through that time. So that could have been one of the reasons why we did see a decline during that period. In terms of the other thing in terms of rent reported as trust distributions, so people could have changed how they're reporting that income rather than sort of saying it's rental income, that they're rental incomes coming into the business, and then they're ultimately reporting those trust distributions. So that's the, that was what the ATO also said. There's seen observations around that. And then finally, in terms of exit from the market. So we're seeing government policy settings around higher taxes. So we have also seen significant increases in some states and territories around land tax for commercial properties, also higher rates and levies for commercial properties. And so that might have meant that those self-managed super fund or those business owners are now liquidating themselves of those properties as well. And of course, during that period and what we're seeing now, we're seeing a fair bit of business closures and small businesses. And so maybe that could also be a trend that's also through related business closures. And they've ultimately chosen to on sell that commercial property as well. So that just gives you a bit of an idea in terms of some of the behavioral reasons and what we're seeing in terms of individuals, versus companies, and versus self-managed super funds. But it's not clear and perfect data because of the challenges around breaking out residential versus commercial. But it's still important tonight. So if you don't believe me or you're being challenged by what I'm saying here, you may have a sunk-cost bias that is anti-property investor. Let me take you through a perfect example of what's happening in Victoria. In unpacking how it went so wrong, we need to go back in history and have a look at some of the decisions that were made by the government in Victoria and the consequences that then resulted. So let's start March 2021. We saw 133 new reforms introduced into the Tenancy Act. Now some of those reforms were really good and they certainly helped tenants in terms of allowing them to have safe and quiet enjoyment in the property. And a lot of landlords had no problems with them. But there were certainly several of those policy settings that really did take control of the property away from the owner. And that really had a negative sentiment impact to start with. And we talk about the government of the day, Dan Andrews, the Premier and the current Premier to center Allen in terms of talking about rental freezers, rental caps. So that scares people off in terms of their investment. and where they'll put their money. And then in September of 2023, we saw the government come out and pledge, building Victoria 800,000 new homes in the next 10 years. Hold that point 'cause I'm coming back for it. And then in November of 2023, we saw the government introduce higher land taxes because they're going broke with their excessive spending. So that also played a role. And then finally in November of 2025, we saw the release of increased minimum standards around safety and energy efficiency. So it's been nothing but reform after reform after reform, which from an investor's point of view is cost after cost after cost. So let's take a look at what happened to the marketplace. Starting with looking at the supply of rental accommodation. And this chart brings home that story so powerfully. We saw from the peak of the market to the bottom of the market, around 24,000 less rental properties are available for rent because of investors getting out of the Victorian market based on these settings that were put in place by government. So we can see that in this chart nice and clearly in terms of the number of rental bonds going in reverse over that period. In addition to that, we can also take a look at the vacancy rates. So this chart tells us quite strongly what happened to vacancies in Victoria. So what we've done is we've overlaid vacancies across Australia, vacancies in Victoria, and certainly you can see vacancies in Melbourne. And so those vacancies came significantly down, causing real tight rental supply in the Victorian market. And they eased off a little bit with some changes that the federal government made in terms of international students coming into Victoria. It was reported around 40,000 less international students. And so that's seen the reason why Melbourne still has some of that availability. But if you look around Melbourne today, you'll see that there's plenty of availability in the city locations. Well, not plenty. You can still see it's less than 1%. So it's still relatively tight. But the middle ring and the inner ring for houses, Tanna, very, very tightly held. And then when you do reduce that supply from investors coming in, the government says, well, that's good. First owned buyers will buy those houses. But is that what's played out? No, it hasn't. Let me take a look and show you this. Remember what I said about 800,000 new properties being built from September of 2023? Well, here's the latest data coming out. So we can see here that in September of 2024, we built 61,000 homes. Remember the target's 80 in September of 2025. We've only built 54,000 homes. So that's a reduction of that 11% that I just talked about. We're falling behind. In fact, in the last quarter that's just being reported, we only built 13,748 homes here in Victoria. Now that is the worst result in 11 years in that quarterly data. Now, to be fair to the Victorian government, you know, the reasons why they're not building as many homes is because they've also stuff the economy. So it's not just what they've done for investors. They're running a pretty poor economy, and that's having a general confidence effect in terms of anyone building new supply in this state. And it certainly brings home the evidence to suggest that if you continue to keep changing the policies and make it harder, you will reduce supply. And that comes down to the fact that again, when you're building medium density, high density, or you're building multiple developments, you need a blend of presales from investors and owner to get those developments out of the ground. And if you don't do that, then the overall supply and completions fall away. And so that's what the government is missing here, and especially the Victorian government. And this is a risk to the federal government in terms of their policy settings. So that's why we're highlighting it. In addition to that, to rounding out this important point about the need for supply is we've got to look at our population settings. And here's what we've learned. In Australia, our population grows by one person every one minute and 14 seconds. So in the time that I've been already recording this, we've probably had a population growth of about six or seven people. In addition to that, we have seen our number of population based on the ABS data move past 27,900,000 people. I should also add that the population is expected to grow to 32 million people by 2025. And if we look at the new arrivals coming in, yes, we are definitely reducing the number of new immigrants coming in, but we're still anticipating to see 260,000 people in financial year 2026. And also, sorry, calendar year and calendar year 2027 around 225,000 people. So that tells you that irrespective of what, you know, demand, there's more demand that's going to come. And if we can't organize that critical supply that we need. And if we don't deliver that critical supply, we're going to have a situation where tight supply, a gain will lead to higher prices and higher rents. So supply and the delivery of supply for both new housing and also rental accommodation is going to be absolutely critical. All this political problem will not go away. Let's turn our attention now to what the new policy settings are. We did understand that in 2016 and 2019 Fed election, Labor took negative gearing reform to the market and to the voting public and they rejected it. And that policy setting was that negative gearing wouldn't be available on existing property. It would be grandfathered, but you would be able to negatively gear any new construction property. But we're not going to spend a lot of time talking about that. That's old news. That's yesterday's news. What we want to focus on is this new proposal that's currently being modeled through Treasury. Now, we don't have a lot of detail. And that's important. We don't know what the actual settings are around it, but let me explain it. What we're talking about here is there's potentially a two limit. So two investment property limits, concurrent limits on properties. Now, we don't know whether that's a lifetime limit or whether that's a moment in time. That's number one. And the details do matter because what if you had one property that turned from negative to positively gear? Does that mean you can now add a second property in? That's negatively geared. And if you have three negatively added properties, does that mean that you can claim the highest lost properties? And what if you're in a spousal relationship? Is it individual-based or is there a limit on households where in spousal relationships? So in other words, I might be able to have two. And my wife might be able to have two. And what about any restrictions in terms of company or trust lending? They all remain unknowns. And so what we need to take into consideration when we're thinking about this policy is what is really relevant here. And that comes back to probably trying to understand what the government's intent is in terms of the narrative and what they're going to pitch to the market. But also what they're intent is in terms of politically. And so that's what I want to just draw our attention to now to focus in on those key points. First up is intergenerational inequality. That is going to be a really important narrative and message you're going to hear from the Labor Party. In addition to that, we're also going to understand that they need to raise revenue for all of the expending promises that they put out there. Or is there intent to deter investors from amassing multiple property portfolios? And I think we're also hearing from the government already around leveling the playing field or not crowding out home buyers or first home buyers. But the big message here, the one that I need to double click on and you've heard it right throughout this presentation is adding housing supply. And when everyone thinks about housing supply, they might think of just housing supply for owner occupiers. But make no mistake, they need to also deliver enough rental supply in all the locations around Australia to encourage human mobility and economic movement and economic growth in our regions and in all of our cities. So a critical supply of rental accommodation is also going to be needed. So when you think about those objectives and you put this policy through that lens, let's start to think about them. The first one, let's start to think about the inequality story here. Now the government's not done. They want to stay in power. And the vote is what keeps them in power. And they also know that millennials and also Gen Z's now form the biggest cohort of voters in the future. So they are people sub 45 years of age. And so they need a policy that's going to appeal to that younger voter in terms of them having the great Australian dream and that opportunity. So does this policy do that? Well, the narrative can certainly position this policy into doing that. Restricting investors to only owning two in their personal names will help with that narrative. Will it level the playing field and stop crating at? Yes, it will also help with that narrative. Will it help with the narrative around the deterrence of investors building multi-property portfolios of 6, 7, 8, 9, 10 properties? Yes, it will help with that. Will it also help increase revenue? Yes, it will. That will certainly be a part of that. But on the big question, the big question of adding future supply and making sure that those investment dollars and we are talking about tens of billions of dollars of private individual investment into the housing market, that's the question mark. If those investors are spooked by this particular policy or they're already tapped out with their two depending on what the settings are around, it's just two and only two properties. You can't interchange those properties. All of those things matter when it comes to this housing policy. And that's why at Picker, our housing position is one that we don't believe there should be changes made to negative gearing policy. Remember, it's only a moment in time and remember as those investors who hold on to those properties over the longer period of time, they start paying tax on the passive income that's being generated and if they sell those properties, they also pay capital gains tax. We think its number one priority around delivering housing supply is going to be impacted by a policy position like this and that's the one thing we all need. If we want to slow down and have sustainable property price growth, we need supply. If we want to make sure that rents only grow at inflation or around that level, we need more supply. And so that's again, while we think and we're calling on the government to consider their position around negative gearing. We've in the previous video and the one I mentioned at the start of this video, you can go and watch that where we do advocate for potential changes to capital gains tax, but that also has a policy setting that ensures that investors will accept those settings and continuing to keep invest to adding to supply whilst also delivering on the revenues that they're looking to increase and also in respect of leveling the playing field. So that's a wrap on this presentation around negative gearing and what we see. There's a lot of unanswered questions and until we have that, our position is government, we wouldn't do it. But if we know more about what this policy setting is going to look like, then we're okay to continue to be in dialogue with the government to see if they can get those policy settings right. It's definitely a better policy than the original one that they took to the 2016 and 2019 elections, but we would love to be in dialogue with the government to make sure that we can have the confidence of the investor to help deliver the tens of billions of dollars investments that are needed for this government because we all know that they don't have that spare money sitting around to provide that supply themselves. So thanks for watching. Make sure you check out all of the picker information. Go to our website, the Property Investors Council of Australia. If you're not a member, we would love to have you as a member of our association as we advocate for the interest of all property investors around Australia and through that strong voice in that United Voice, we're able to get a seat at the table and to be able to deliver important feedback to government and to the regulators so they get those policy settings right. So thanks for watching and tune in next time when we have an update on this important topic. So there you have it. There's a lot of hopefully new information and facts and figures that you can better understand. And of course, as Bryce and I have always said, you know, two or three good properties held in concert with super is potentially the best way to get the balance right. And so when we're starting to think about this policy setting compared to what Labor has presented in the past, we believe that this is a better policy setting in terms of leveling the playing field as well to allow first home buyers to come into the market. But we still have some unknown information that we need to get our hands on to see whether it is going to be good policy or not. And that's why if you like this video, please share it with family friends who may have an interest in property investing or property in general so they can also be informed in the debate because it's coming up to the May budget and these decisions are going to be made over the coming weeks. And then announced to us inside that federal budget in May. So thanks again for watching. Always remember we're here to guide you, try to drive you on the journey that you want to be on and knowledge is empowering, but only if you act on it.