Amidst Labor’s plans to abolish negative gearing on existing properties and reduce the Capital Gains Tax (CGT) discount if they win the next federal election, let’s recap what gearing is and what the proposed changes would mean for property investors.
A property is referred to as negatively geared if the rental income is less than the outgoing expenses including deductible losses. The investor will be making a cash loss on their investment property and can offset these losses against other income earned, including their salary. In turn, this reduces investors’ taxable income, meaning they pay less tax to the Australian Taxation Office.
Investment properties can also be neutrally or positively geared. Positively geared properties have a positive cash flow as the investor receives a higher rental return than the outgoing expenses. In this situation, an investor must pay tax on this income earned at their top marginal tax rate. Properties are neutrally geared when the outgoing expenses and generated income are the same.
Negative gearing is a popular investment strategy for Australian investors, with the greatest benefit being the reduction to their taxable income. This provides them with both a short-term financial boost and the opportunity to achieve long-term capital growth from the property.
What impact would the proposed negative gearing changes have on property investors?
Investors could no longer purchase existing properties and offset their salary and wage income with the net losses. However, investors would still be able to negatively gear new properties, as these would be unaffected by the proposed changes.
Investors who currently negatively gear their properties also wouldn’t be affected by the changes as legislation would be grandfathered. This means that the proposed changes would directly affect investors who purchase existing properties.
If Labor wins the next federal election and their plans become legislation, there is no doubt that this would change the property investment landscape in Australia.
There is a widespread fear that investors would be turned off property investing and there would be a fall in new housing construction. A report from Master Builders Australia predicted that changes to negative gearing and the CGT discount would result in 32,000 fewer jobs and a $12bn downturn in construction activity within the first five years.
It’s important for investors to be prepared for major changes to property investing in Australia. The extent of the effect of Labor’s proposed changes remains yet to be seen.