Posted by John, April 4th, 2010 - under Tax.



This is a copy of a letter I sent to the Canberra Times about tax matters raised in its pages.

Dear Editor

Allow me as a tax teacher to comment on 2 tax issues raised in The Sunday Canberra Times of 4 April.

Mike Bannon in Tax Word refers to Yasser El-Ansary from the Institute of Chartered Accountants who ‘noted the decline in Australia’s competitiveness by having a company tax rate of 30 percent.’

This is self-serving nonsense. Australia was one of only two developed countries to avoid recession during the global financial crisis. Perhaps the 30 percent company tax rate contributed in some small way to that success.

Australia is experiencing a minerals and energy boom. Lowering the company tax rate would be a direct gift to our very profitable mining companies and their foreign purchasers. There may be an argument to do that, but I haven’t yet heard it.

Further, despite all this talk of the 30 percent company tax rate impacting international competitiveness, 40 percent of large business paid no income tax at all in the 3 income years between 2006 and 2008. Not a penny.

And for those that did pay company tax most paid well below the headline rate of 30 percent. The finance industry for example has an effective tax rate of 20 percent.

When big business start contributing the appropriate amount to Australia’s revenue then, and only then, will I even begin to listen to their complaints about international competitiveness.

Second, in another example of self-serving comments Stuart Collins from the Housing Industry Association in his article ‘Negative gearing is under siege’ brings out the old furphy that attempts to curtail the rort in 1985 ‘put property investment into reverse. ‘

It did no such thing. In fact both investors and owner occupiers fled the market. Why? Because home loans and investment loans were 15.5 and 17.5 percent. In any event construction of new homes by investors during that period was higher as a percentage of GDP than in 2009.

It is true rents rose 22% in the two years negative gearing was curtailed. In the two years after that restriction was removed they rose 23%.

My thanks to Tim Colebatch from The Age for these figures. His articles Housing at these prices will leave us all a heavy debt to bear and Caught in the cogs of the tax regime are both worth reading, although I disagree about a tax on all family home gains. I’d be more selective and limit it to homes worth more than say $2 m.

We as a community subsidise investors who have negatively geared rental properties to the tune of about $5 billion a year. On top of that, the capital gains tax concession means these tax subsidised people pay only half the CGT on any gain on the property when they sell it.

As Tim Colebatch points out ‘in the 13 years to 2006-07, landlords as a group went from declaring net profits of $399 million to net losses of $6.4 billion. Those reporting profits grew by 36,000. Those reporting losses grew by 594,000.’

Those figures tell me people are in it for the losses and the big lightly taxed capital gain, not for earning rental income.

I teach my students that there has to be a link between any expenditure incurred and the production of assessable income for the expenditure to be deductible. It appears to me that the purposes of those who negatively gear are to get the losses, not to produce income and hence the loss should not be allowable.

The Commissioner of Taxation could (and in my view should) be testing this in the courts now.

But ultimately the negative gearing rort must be attacked legislatively, perhaps by allowing the losses made to only be offset against future rental income and by abolishing the 50 percent CGT concession.