With so much talk about negative gearing and whether the Federal Government should support it or dump it, we seek the opinion of an accountant – Allan Mason – who once looked after the finances for one of Australasia’s richest men. You might be surprised at his response.
Kevin: My next guest is Allan Mason. Allan is from Encore Accounting. We’re going to talk about negative gearing. I can hear you almost groan, Allan, at the thought of “Oh, goodness, doesn’t everyone know about negative gearing?” But there is such a lot of talk about it, and I want to try and dig a little bit deeper with you, just to understand what it’s about and whether it’s a good or a bad thing.
Firstly, Allan, thank you for joining us on this show.
Allan: That’s great, thank you. Thanks, Kevin. My pleasure.
Kevin: Allan, tell me what is negative gearing?
Allan: Basically, negative gearing is where the word negative means that you’re losing money, and you’re losing money in the first few years of ownership, so your operating costs or your costs of running the property – interest, depreciation, agent’s fees, maybe a few repairs – exceed the rent that you receive, so it’s negative.
Kevin: So negative gearing, when we hear about that, we firstly think about property, but negative gearing doesn’t apply only to property, does it?
Allan: Of course. In many, many cases, people buy a share portfolio. To buy that portfolio, they’ll be paying interest on the money. The dividends they receive will not cover the interest that they pay, hence it’ll be a negative.
The reason people look at it is they want a negative so that they can offset their tax. If they’re paying 45, 46 cents in the dollar tax, that negative means – to use a simple example – if they’re losing $1000 a year, they’re getting back $450 in their tax, so their loss is a little bit less.
Kevin: A number of the people that I talk to in this show – commentators and so on – they will actually say, “Look, negative gearing is not a strategy; negative gearing is an outcome.” Can you explain to me and to our audience just what that really means? And where do you stand on that debate?
Allan: Well, it’s an outcome because it’s an outcome for that particular tax year, so that if you’ve lost money on an investment – and we’re talking a trading loss; we’re not talking a capital loss – if you’ve lost money during the year on your rental property, if the rent hasn’t covered the cost of ownership, then you’re obviously getting that back in your tax.
And remember, you don’t pay 100 cents in the dollar tax, so any criticism by governments or by various people about negative gearing, a lot of it is unfounded because while you might get some sort of subsidy, you’re not getting 100% back because nobody pays 100 cents in the dollar tax.
Kevin: There’s been a lot of criticism, of course, about negative gearing, and it’s always aimed at – I use the term in quotes – “greedy” property investors who are gaining all these benefits. Is it really that bad, Allan?
Allan: Definitely not. Most of our clients who own property, they’re just moms and dads just like you and I. They have one or two investment properties, some have more, but they’re certainly not greedy. They’re trying to look after their future retirement, they’re trying to buy assets that they hope by the time they retire will go up in value to a point that it will provide a pension for them, to give them income and not be receiving a pension or be part of the social welfare system.
Certainly, it’s not greedy; it’s just people looking after their own affairs and trying to do the best they can to do that without having to be getting a pension or dipping into Consolidated Revenue.
Kevin: Allan, what are your thoughts about affordability of property? And once again, I know this is a far-reaching conversation we’re trying to distill into a couple of minutes, but what are your thoughts on affordability for property for first-home buyers and so on? Is it all that unaffordable in Australia?
Allan: Well, it’s getting that way. It’s getting harder. But I can tell you that when we look across our client base, there are many, many people who are making a lot of money, who are doing quite well in their business or outside of investments and they are looking for other types of investments to go into. So affordability, yes it’s getting harder, but all that means is there’s more future gain that can be had.
Let’s look at affordability. I can remember that argument 20 years ago. People would say no one can ever afford to buy a house 20 years ago and prices now are three times what they were then, so I sometimes think it’s a bit of a beat-up.
Kevin: Could we also talk then about first-home buyers or home buyers not approaching it as an investment but more buying from the heart? In other words, they’ll go out, they’ll spend more than what they could probably afford, and then when interest rates do increase, they find that they can’t afford to keep up those payments. Are they approaching it the wrong way? Should they in fact develop what I call an investor mindset?
Allan: I’ve always looked at a house as an investment and try to keep the personal side out of it. I know that when you go to live there and it’s going to be something that you’ll own for a long period of time – it would be your family home to bring your children up in – you can’t be silly about it.
You can’t go taking too many loans to the point where if you become unemployed, you can’t meet your commitments. You have to be sensible, you have to be savvy on your own income, how much you’re earning, how much you can afford, and don’t go outside that because the last thing you want is to have to sell if the property market goes down or if you get into a slump. You don’t want to be selling at that point.
You want to be able to hold, and hold to through any ups and downs. There will always be ups and downs, and if you don’t have to sell, if it goes down or there’s some sort of correction, you just wear it out, and you know it’ll come back.
Kevin: I’ve read a little bit about you, your background, Allan. I know that you worked in the early days with Kerry Packer at Consolidated Press. There must have been some great lessons that you picked up from Kerry, because as the richest man in Australia, you would tend to think that he has plenty of cash to spray around, but was he really that prudent?
Allan: Like any business person, he would certainly look at the profit and loss of any particular item projections. If we were going to him with an acquisition of some kind or a proposal, the numbers had to stack up.
And the numbers always have to stack up. In Consolidated Press – and any large company – we would do weekly figures. We would know weekly what our turnover, our expenses, our KPIs were, and if things were trending badly in a particular division, like maybe the snowfields… I remember 60 Minutes was one of our first companies that were involved in. When we started to run that, it was losing money. It was losing money hand over fist, and I think World Series Cricket too was losing money. It’s a case of monitoring it, managing it, making sure that you have enough money to cover all those ups and downs.
Kevin: Yes, great lessons. We’ll get you back to talk a lot more about some of that history, but I wanted to specifically talk to you about negative gearing. You’ve taken us through that quite nicely, Allan, and I want to thank you very much for joining us.
Allan is from a company called Encore Accounting. The website is called EncoreAccounting.com.au.
Allan, thanks for your time.
Allan: Thank you, Kevin.