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.
Thanks for the education from a company looking after the people who do business with you. I didn’t see it as political but as factual. There will be an effect on investors pure and simple. Here’s something political though: interesting how some governments prefer to have you come rely on a government pension saying of course that they are trying to protect the young all the while increasing other costs like land tax, vehicle rego, road tolls, etc. These taxes affect the young and their aged parents.
Who or what is Bill Moss and what evidence underpins the estimate that a change in policy will result in a reduction in house prices of 30%?
Thanks for comments Stephen. Bill Moss is the former head of the property division of Macquarie Group and Founder of FSHD Global Research Foundation. For Bill’s interview regarding how factors such as housing supply play a role visit http://www.2gb.com/audioplayer/177121
We are currently building a new house, which will become our principal place of residence. However, we will be moving away, after which the house will no longer be our principal place of residence as we will be purchasing another property. The house will be rented out after 1st July 2017. So because the house has originally been used by us and will not be a new house when we rent it out, from what I am reading we will not be able to claim negative gearing on the house and the CGT discount will be reduced to 25% if Labours restrictions are in place, is this correct?
Hi Michelle, Thank you for your query. From what we are aware of, the rules will apply based on construction completion date.
With the government expecting us to be self reliant for our retirement now, there isn’t a lot of ways the mum’s and dad’s of this country who are living on standard wages, can possibly achieve that. But owning an investment property could at least help to supplement our income. Most of us couldn’t do this on our own, without some form of tax break. And making it for new housing only, makes it unattainable for a lot of us. We aren’t necessarily purchasing one or two properties to get richer but to use as an income stream for when we retire. It’s our children that will benefit from selling it, when we are gone. I find myself in a generation of people that have to help their parents to survive because they have no superannuation and our adult children can’t afford to move out of home because the rents are so high. This all adds extra costs to us. Then we try and help our children get a deposit together but the housing prices just keep getting higher, making it unachievable. In amongst all this we are expected to put extra money into our own super, so we aren’t a burden to society. Meanwhile the governments continually change the rules of super and make us pay taxes over and over again. Our money gets taxed going in, while it’s in there and again coming out. It’s the same for our savings in the bank. Why aren’t they means testing it and put a cap on negative gearing instead? Once you own investment properties past a certain value point, you can no longer claim tax breaks on anything above that ceiling cap. Why should millionaires be able to access negative gearing, when they leave their own money sitting in the bank and borrow instead, to avoid paying taxes. What’s the government doing about all those businesses that are doing tax avoidance in Australia. If they made them pay their proper share of taxes, our schools and hospitals might actually be able to get more money that they so desperately need, instead of continually having it taken away from them. I can’t believe that we are in 2016 and there is still so many wrongs going on in the tax world. With the unfairness of the little guy lining the tax mans pockets, instead of big business and millionaires.
Hi Brad,
I was wondering i have a property which is empty land and i am looking at sub dividing to build 3 on it. if i don’t build all 3 by July 2017 will this still be existing property or considered new or do i have to do sub division by the 1st July 2017. ( i am thinking if the sub division stays in the same entity it hasn’t been re sold).
Hi Chris, Thanks for your question. As far as we know, this scenario has not been clarified. We will update our followers as we find out more should there be any changes.