Monday, October 19, 2015

Six year rule ... yet another reason why private renting is so insecure

(Money, The Sydney Morning Herald, 14 October 2015, pp 4-5)

Private rental housing is both legally and structurally insecure.

It is legally insecure because in NSW (and other Australian jurisdictions) landlords may give termination notices without grounds. The Tenants' Union of NSW calls for greater legal security by reforming the law to provide for termination on reasonable grounds only. Read more here.

It is structurally insecure because the private rental market is enmeshed in the owner-occupier market. Most landlords are individual persons who own a single rental property for speculative purposes. They sometimes are referred to as 'mum and dad' investors, but we call them amateurs. Indeed, there's a myth that most 'mum and dad' investors are on average incomes.  This assertion is debunked here.

Up until 2010, studies found that between 7 to 10 per cent of income units across Australia were investors in the residential rental market, although this figure was closer to 5 per cent in New South Wales.  Research into the motivation of landlords in the private rental market may be found here. There have been no more recent studies.

It is highly likely that the above figure is much greater today, because of a significant increase in funds being lent by financial institutions for investment in residential housing. Indeed, figures published by the Australian Tax Office in April of this year show that just over 15 per cent of individuals who lodged tax returns in the 2012-13 tax year, both across Australia and in New South Wales, reported receiving rental income. You may view these figures at Tables 4 and 13 here for Australia and Table 2 here for New South Wales. Also, results from Australian Bureau of Statistics' 'Survey of Income and Housing', published in October 2015, show that across Australia in 2013-14 there were 1.5 million households that owned residential property other than their usual residence. This property can include properties purchased as holiday homes as well as an investment. Read more about this here and the analysis by The Sydney Morning Herald's Peter Martin here.

We have previously argued why the current structure of the private rental market in Australia does not deliver just outcomes for tenants.  Read more here.

Taxation policies encourage speculative activity. Let's look at three such policies...

Firstly, negative gearing ... an individual who negatively gears is operating at a loss: that is, the rent coming in is less than the repayment of the loan. However, they are relying on capital gain when they sell in order to make their profit. Our tax laws allow landlords to deduct interest payments from all their income, not just their rental income or capital gains, thus reducing the amount of tax they pay. For 'mum and dad' investors to maximise their capital gains, they need to be able to sell their property with vacant possession when it suits them, selling to either owner-occupiers or other landlords. This means that a sitting tenant receives a termination notice. Out they go! You may wish to read some of our previous posts about negative gearing here and  here .

A second policy ... when the owner of a property, acquired before 20 September 1985 dies, then generally that property must be sold within two years, otherwise the beneficiaries of the estate are liable to pay capital gains tax. You can check this out here. Again, the estate will want to sell the property with vacant possession. Again, out goes a tenant in order to maximise the capital gain!

And a third, little publicised policy ... it is not just when the landlord sells a property that the tax laws may entice them to give a termination notice to the tenant. Read the first Question and Answer in  Noel Whittaker's column in Money in The Sydney Morning Herald (14 October 2015, pp 4-5) which you can view here.  Well, there's more about this here.  And, this is what the Australian Tax Office says here.  In order to claim an exemption from payment of capital gains tax, the owner of that property must not rent it out for more than six years at any one time. They need to establish that it was part of their principal place of residence for some of this period. But each time that the owner moves back into the property (it again must be their principal place of residence), they revive the six year rule. So after just under six years, out goes the tenant and the landlord moves back in. But then the landlord moves out again ... and in comes another tenant, but with no capital gains tax when the landlord eventually sells.

'Six year rule' goes something like this ...

Only your main place of residence is exempt from capital gains tax.

A dwelling is no longer your main place of residence once you stop living in it. However, in some cases, you can choose to have a dwelling treated as your main place of residence for capital gains tax purposes, even though you no longer live in it.

This happens when you lived in the property straight away after buying it (being a date after 20 August 1996), but subsequently you rented it out for less than six years.

And, each time you live in the property (it must be a genuine main place of residence), you revive the six-year rule ... and here-in lies the lurk!  

If you rented out the property straight away after buying it, the Australian Taxation Office deems it to be purely an investment property.

Such strategies are encouraged by our tax laws. Tenants in the private rental market will only achieve greater structural security by policies that discourage speculation in housing and that, instead, foster an increased number of institutional landlords. Institutional landlords would be motivated more by the pursuit of rental income and less likely to trade properties in the owner-occupier market. You can read more about the structural changes that we believe would deliver greater housing justice to tenants in the article called 'New face of poverty: older private renters' (Tenant News, No 110, August 2015, pp 10 -11) which you may view here.

And so 'Six year rule' is yet another reason why private renting in Australia is so insecure ...

1 comment:

  1. A good, clear article.
    Makes you understand why a lot of Landlords will not commit to long leases, are happy to go year by year or even month by month.


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