Over the past few months most of you would have read or heard about negative gearing in the media. There has been heated discussion both in favour and against current negative gearing policy, as well as examination of the potential risks and benefits for investors.
Although we would prefer to remain apolitical, we at BMT are concerned about the current proposals to make changes to property tax concessions and the potential impact on our clients.
We are therefore including some information to help you to understand the impact of the different policies.
What is negative gearing?
As you know, when you invest in a property, the cash flow position will depend on the income earned and outgoing expenses such as interest repayments, council rates, insurance, property management fees, repairs and maintenance or other miscellaneous costs.
In a situation where an investor is receiving a higher rental return than the outgoing expenses, the property will have positive cash flow and the owner will pay tax on this income earned at their top marginal tax rate.
By contrast, a negatively geared property has a rental income which is less than the outgoing expenses including deductible losses. Therefore the property investor is making a cash loss on their investment.
Currently, income producing property owners are entitled to offset these losses against other income earned, including their wage or salary.
By offsetting these losses, investors reduce their taxable income and will reduce the amount of tax they need to pay as partial compensation for making these losses.
The ability to claim the losses that are over and above the income generated against wage or salary income is only allowable because of negative gearing legislation.
Any proposed restrictions on negative gearing will be reducing a property investor’s ability to claim a tax deduction for these losses.
Recent data from the Australian Taxation Office (ATO) released for the 2013-2014 financial year shows that of the 2,842,139 Australians who receive a rental income for their properties, 1,691,355 do so at a loss. This means that 59 per cent of Australians who own investment properties are negatively geared.
Policy matters
Each of the parties have outlined their position in regards to negative gearing in the lead up to the 2nd of July 2016 federal election. Below is a summary:
- Labor plan to restrict negative gearing tax concessions from July 2017, next year. Negative gearing will no longer be available on any second hand properties purchased. At this stage, no changes are planned for investors who purchase brand new properties.Capital Gains Tax (CGT) exemptions will also be changed under Labor. Currently, individuals or small business owners who hold an income producing property or other asset for more than twelve months receive a 50 per cent discount from CGT. The change proposed by Labor will mean that investors will only be able to claim a 25 per cent CGT discount from July 2017. An incoming Labor Government will be in a position to enact their policy as they are very likely to have the support of the Greens in the Senate. Labor’s policy would not be retrospective
- The Greens plan to get rid of negative gearing tax concessions altogether. They also plan to reduce CGT discounts by 10 per cent each year from the 1st of July 2016. From the 1st of July 2020 there will be no CGT discount at all. The Greens are likely to seek support for their more restrictive policy from an incoming Labor Government as part of negotiations in the Senate
- The Coalition has advised they will not be making any changes to current negative gearing concessions or to CGT exemptions. Negative gearing and CGT exemptions will remain in its current form under a returned Liberal/National Government.
The risks
Should the current Labor or Greens proposal be enacted, commentators predict that property prices will fall as a natural consequence of property investors largely deserting the marketplace. This is a real concern for all property owners.
Predictions vary from between 2 per cent price fall (Grattan Institute) to up to 30 per cent fall (Bill Moss). Obviously price declines will vary by geographical area and will be largely determined by the balance between supply and demand.
Education and proper understanding is key. We encourage you to review the policies in more detail and make an educated decision on polling day.
Should you have other questions, we’d be happy to help as best we can.
Authorised by Bradley Beer, BMT Tax Depreciation
Level 33, 264 George Street, Sydney, NSW 2000.
Hi Brad
I purchased a one bedroom unit 4yrs ago as PPOR, (its approximately 15-20years old) however will be moving out in September 2016 and will rent it out as an investment property. Because it was purchased few years ago, will the labour proposed legislation still effect my ability to negatively gear, or is it at the time of renting it out for the first time (being sept 2016)?
Hi Chris, Thanks for your query. We believe it will be based upon purchase or build date, therefore you can still negative gear.
Hi Brad,
Great summary, thanks very much. It might have been asked and answered already.
I understand the proposed negative gearing legislation changes would only affect properties purchased after July 1 2017 but can you clarify whether the CGT changes are also only applicable to new investment purchases or will they affect all current investment properties as well?
Owning two investment properties already I guess I could deal with the negative gearing changes and just not purchase any more but the CGT impact (if applied to existing properties) is a different matter.
Kind regards,
Bruce
Hi Bruce,
Thank you for your comments. Yes. Labor plan to halve the capital gains discount for all assets purchased after 1 July 2017.
Hi Brad,
Thanks so much for the information on negative gearing I have a much better understanding on the situation now and appreciate it, thanks again.
Hi Brad, I work in the Pine River’s area (outer northern suburbs of Brisbane) and a couple of weeks ago it was hard to find a “For Sale” but just in the last two weeks everywhere I seem to go I see “For Sale” Signs pop up. I believe the tide has changed already and investors are jumping ship.
Thank you BMT for clarifying the issues. I have supported BMT as they are efficient in handling tax depreciation. If labor wins this election its going to affect the entire economy of this country, currently due to the demand for investment homes, there massive employment in this area, win by labor will lead to disruption in this industry as many will stop investing and this will lead to collapse in this area.
People have stopped investing in mining shares due to mining collapse, now building industry will collapse as well, disastrous!! God save this country…….
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