06 Dec Too much fuss about negative gearing – Ian Rodrigues
Carmel has posed an interesting question about negative gearing. She cannot understand what all the fuss is about and Ian Rodrigues tends to agree with her.
Kevin: We welcome into the show Ian Rodrigues. Ian is from BishopCollins.com.au.
Firstly, hello and welcome to the show, Ian. Nice to be talking with you again.
Ian: Yes, always good to be here, Kevin.
Kevin: Ian, I’ve had a question from Carmel Taylor. You and I have talked about this off air; we’ve had several discussions about it. I’ll quickly read it.
Carmel writes: “I’m struggling to see the benefits of negative gearing and I’m wondering what all the fuss is about. Would someone please explain why it even exists? It does not make sense to be losing money on an investment.”
Carmel, you raise a few very good interesting points there, and I know that Ian will be champing at the bit to talk about this one.
Ian, what would be your comments initially to Carmel?
Ian: I’m in total agreement with Carmel. Negative gearing is one of those things that is a pet topic of mine that people misunderstand and then it gets a bad rap and people think there’s something wrong with gearing overall.
The first point I’d make to Carmel is gearing to buy property – which means borrowing some money to buy a quality investment asset – there is absolutely nothing wrong with borrowing money to buy a quality investment.
Two things, one is you’re borrowing money, so you’re using the bank’s money to magnify your investment return, and you’re buying a quality investment asset. They’re the two key things that I like about gearing.
Kevin: That process you just talked about, that is gearing.
Ian: Gearing full stop; we haven’t talked about negative gearing yet.
Negative gearing is a point in the investment cycle where you’re outgoings exceed your incomings and you’re making a loss – either a cash flow loss or a tax paper loss – and getting some tax benefits back in those early years.
But the point I’d make is if you’re going to be negative geared forever on an asset, you probably have a pretty poor investment because at some point that asset should become positively geared, where the income is greater than the outgoings, particularly from a cash flow point of view.
A tax loss is another thing; that’s a benefit you can get. But to me, if your investment is not going to ever be positively geared from a cash flow point of view, you are hoping for or backing yourself that you’ve picked an asset with incredible capital growth to make up that.
Kevin: There’s enough data and information to allow you to be able to assess how long it’s going to take for you to turn it around from being negatively geared to be either neutrally or positively geared, isn’t there?
Ian: I think there is. The thing about it is there’s enough data to say “This is what I’d expect to happen with capital growth and where it will head,” but I think you could be the best in the business but no one has a crystal ball to predict how markets and investment values will move in the future. Anyone who tells you they can do that on a share market or property market, no one can guarantee it because it’s not guaranteeable; it is subject to future things that may or may not happen.
I still think you can make a pretty good investment decision, notwithstanding that, but it can never be guaranteed. So, the income is more known, what you can rent property for is more known because you have a lease agreement and money comes in each week or month. But capital growth is predictable but not as certain.
Kevin: When someone comes to you and says, “Ian, I want to develop a strategy, and I’m interested in talking to you about negative gearing,” what would be the first comment you’d make to them?
Ian: Usually, they’re looking at it from a tax savings today point of view, and when you look at the investment, they will get some tax savings for the first couple of years, which is great. They get a refund from the tax office, and money back from the tax office has a special character to it, I think. People value that more.
But ultimately, you need to plan for when that asset is going to become positively geared and when you’re going to sell it and make this capital gain, as well. If it doesn’t make that… The point is I think saving some tax is a good thing in the short run, but I want to be paying lots and lots of tax, which is a funny thing for an accountant to say, isn’t it? Because if you are, you must be making lots and lots of income or capital gains.
Kevin: Quite often, I’ve been to an accountant at the end of the financial year and he said to me, “Oh, you’ve made all of this money,” but there’s nothing in the bank account. That’s always fascinated me, Ian.
Ian: Yes, profit and cash flow don’t often match up. But there are plenty of things you can do to minimize tax and that’s what we’re advising our clients on. As I’ve said many times, you can have the same economic transaction in different tax structures and have an outcome that’s 50% tax or no tax.
You do need to get advice about structure, but don’t get carried away with negative gearing being this tax saving bias for your decision. You still need to buy quality investments and you still need to structure it right, and it should be positively geared eventually.
Kevin: Well said, Ian. Thank you very much for your time. Ian Rodrigues is from Bishop Collins Group, and you can reach them at their website, BishopCollins.com.au.
Ian, thanks for your time.
Ian: Great, Kevin. All the best.