With the 2019 Federal Election fast approaching, negative gearing has become a key campaign issue as each of the major parties offer significantly different policies should they win the election.
Here we’ve outlined each major party’s election policies regarding negative gearing and the associated tax concessions.
We’ve also taken a deeper look at what’s driving the debate, some key data to be aware of, what’s happening currently in the property market and the potential impact the changes could have on investors.
In this article we will explore:
- What changes do the major parties propose?
- The impact of proposed ALP negative gearing and CGT changes
- Key facts to be aware of behind the negative gearing policy debate
What changes do the major parties propose?
The Australian Labor Party (ALP) have announced they plan to restrict negative gearing and Capital Gains Tax (CGT) arrangements from the 1st of January 2020. The ALP reforms will:
- Limit negative gearing to brand-new residential housing only from 1 January 2020. All residential property investments made prior to this date will not be affected by the changes and will be grandfathered.
- Halve the CGT discount for assets purchased after 1 January 2020, reducing the CGT discount from assets held longer than twelve months from 50 per cent to 25 per cent. All residential property investments made prior to the 1 January 2020 will be grandfathered.
The Coalition will make no changes to negative gearing or CGT concessions.
The impact of proposed ALP negative gearing and CGT changes
The clear outcome will be that second-hand residential properties will be more expensive for investors to hold. Under this policy, losses can only be used to offset income from the property itself.
Most properties run at a loss, any additional deductible losses over and above the rental income will be of no financial benefit while the property is owned.
When the property is sold, if the CGT discount is reduced, property investors will have an increased CGT liability payable on any capital gain achieved.
Additional economic flow on effects to the property market could include:
- a further decline in housing prices across the board
- less second-hand housing stock available on the market as investors hold on to grandfathered properties
- a possible reduction in the supply of new homes. Although owners of new properties will still be able to negatively gear, these properties when sold to investors will not be eligible down the track and this will affect their capital growth
- an expected decrease in available rental stock for tenants as investors withdraw from the market
- increasing rents as investors seek a higher rental yield to make up for the lack of tax concessions and demand outweighs available rental stock
- many property owners will fall into a negative equity scenario, where the size of their loan outweighs their property value putting them at additional risk of mortgage default.
Key facts to be aware of behind the negative gearing policy debate
The ALP argues property investors and the tax concessions they receive are helping to push up property prices. They believe first home buyers are being locked out of the market as a result.
When considering negative gearing policy changes, it’s important to be aware of fluctuating trends in markets across Australia. Property prices in different cities are known to move at different times and external factors such as employment, infrastructure, population growth, migration, housing stock shortages and changing demographics play a role in property prices and affordability.
Other factors, such as lending restrictions for investors by banks and depreciation legislation changes for owners of second-hand residential properties, are already having an impact on property markets.
While national dwelling values have been high in recent years, CoreLogic has reported the peak occurred back in October 2017. Since this time, there has been a 7.4 per cent fall in national dwelling values to the period to the end of March 2019. This fall translates to a $40,590 decline in national average dwelling values.
The peak (and subsequent fall) in property prices was led by Sydney and Melbourne. In Sydney, values are 13.9 per cent lower than their peak (a decrease of $124,739) and in Melbourne values are 10.3 per cent lower (a decrease of $71,404). Hobart is the only major capital city where values are yet to fall from their peak.
With property values already falling across most of the country, the Coalition argues changes to negative gearing tax concessions would be a sledgehammer to an already struggling property market.
Two other ALP arguments behind the party’s reason for changing negative gearing concessions are also critically flawed. They argue that negative gearing concessions:
- predominantly benefit high income-earners
- are allowing investors to expand their portfolios to buy their fifth, sixth and seventh properties.
The latest Australian Taxation Office (ATO) data shows 71 per cent of landlords had only one rental property for the 2016/2017 financial year. This same data also showed 64.1 per cent of investors had a taxable income less than $80,000 and accounted for 60.5 per cent of negatively geared properties. High income earners with a salary more than $180,000 accounted for just 7.3 per cent of those with negatively geared properties in 2016/2017.
BMT Tax Depreciation data for residential property depreciation schedule requests in the 2017/2018 financial year also shows that 93 per cent of investors ordered a schedule for just one property.
We encourage you to review each of the major party’s policies in more detail and make an educated decision on polling day.
To learn more about negative, positive and neutral gearing, read our negative gearing: basics for beginners article.
Should you have questions, we’d be happy to help as best we can.
It’s the 29th of May and we have a Liberal government for another term, the best of a bad bunch.
Why can’t political parties just present the facts, as BMT have done, rather than spruke their sensationalist spin all the time? We may have more respect for politicians in general if there was less spin and more facts.
I don’t have an issue with the 9 May 2017 changes, claiming depreciation over and over again (every time the property was on sold to an investor) on the same asset was gilding the lily, though not by much. And claiming travel to see your investment property on the Gold Coast twice a year (between tenancies) could have been rorted.
But the governments of either persuasion, and the rental property investment nay sayers, never look at the full situation when asking “Do property investors benefit society generally or are they self serving leaches?”
1. Not everyone wants to buy a house, but everyone needs a house to live in, therefore rentals should be affordable.
2. Negative gearing is only negative because property investors are losing money putting a roof over someone else’s head. If investors weren’t housing people then the government would have to do it, (at much greater expense), and would increase taxation on all of us to fund more public housing.
3. There’s never any mention by the nay sayers now the government gives with one hand just to take much more away with the other. Properties don’t stay negatively geared for long but then when the property is sold the government gets your marginal rate on 50% of your capital gains and the ALP wanted 75%!
4. Does anyone have the data that shows how much the government invests by partially funding the shortfall investors incur (while putting a roof over someone else’s head) vs the capital gains income they receive from investors? e.g. $10K in negative gearing relief vs $50K in capital gains tax! And not having to have a massive social housing portfolio!
5. My 19 year old daughter bought a $400k house in the Canberra market 5 years ago, entirely on her own, while paying rent, entirely through hard work and dedication to the goal. Yes she worked two jobs, but she did it at 19! So don’t tell me it can’t be done.
6. There is going to be a massive transfer of inter-generational property and wealth from today’s baby boomers to the millennial’s. Labor wanted to get their hands on some of that as well!
7. Self funding your retirement is something everyone should aspire to, not having to beg the government of the day for crumbs.
8. If you can’t buy a house to live in where you work, then buy one to invest in (houses range in price all over Australia – there is something for everyone) and rent somewhere close to work. The best of both worlds.
9. Millennial’s, don’t expect to be given everything on a silver platter. Put in the effort and you will be rewarded, but shutting down negative gearing hurts everyone!
I’m in my mid 20s and have never had the opportunity to NG before. What bothers me is that if there is to be an abolishment of NG, it should be one that affects all existing investor properties at all. None of this grandfathering business. Sure, add on a transition plan of phasing it out so it doesn’t destroy retirement plans overnight, maybe phase it out over 5-10 years.
Obviously this won’t be popular with existing investors, but not doing so will mean that the newer generation will not have the opportunity the previous generations had with building a hard earned investment property portfolio. Change it all or don’t touch it.
Hi All
We actually made the mistake of purchasing a rental property, as my husband is a self employed tradie (who is on less wages to 10 years ago) and as the retiring age keeps going up (as well as limits to adding to super fund), decided this was the way to go. We would have been better off taking out a loan putting half in a pile & burning it, rather than trying to be self funded retirees. This way we could have still had holidays and new cars, instead of getting 2nd jobs. People who rent can destroy a home, move on without consequences, go on holidays so can’t afford to pay the rent (agencies seem to support this)-but that’s another story.
Now does everyone realise that it’s our AFTER TAX MONEY going into these properties. If you are negative gearing, life is tough. All the income is added onto any job earnings & is taxed. We spent 40k of our AFTER TAX money completely renovating a property (after tenants destroyed it-yes it was rented through an agency) for someone else to live in. We cannot claim that money in the year we spent it, but can claim depn costs over several years, however any income in the year must be declared, so yes more tax. So we feel it’s a lose, lose situation.
If investors pull out of the market, rents will increase – which for us would be great. I think Rod Colley made a valid point in regards to first home buyers (though don’t think pensioners should be punished-they built the country & super wasn’t around then). My first home wasn’t new, wasn’t in the best suburb and wages and interest rates weren’t what they are today. I certainly wasn’t let off paying stamp duty because it was my first home and had to work very hard and go without to achieve it. Why punish the hardworking people, so the lazy or spoilt ones can have it all. Without investors, they’d be plenty of homeless people as loads of these don’t qualify for Govt housing. Although lots of people rent by choice.
Not sure why everyone is concentrating on investors. I personally don’t know anyone out there who has purchased a property who wants the market to drop anymore. Pretty hard to take when you purchase a property for $400K and is only now worth $320K or less, so it’s not only Investors affected-it’s all home owners.
It’s a myth that Investors are rich (really starting to think we could have been well off if we didn’t invest & worry about the future). Has anyone taken into consideration that negative gearing has increased due to the market crash? So less rent = less income, but it doesn’t decrease expenses like rate rises, insurance or maintenance costs. Rents might be cheaper but all other costs increase. I personally don’t know anyone who invests to make a loss – especially in our income bracket. Steve Bayley’s post 16/5 states it better.
At the end of the day, we are stuck with this property, as can’t afford to chuck away $100K (renovations + value loss). So maybe after 10 years with all the grief, debt and stress we might make $10-20K. Think would have been better off putting the money under the bed………..
Hi Jo,
Thanks for sharing your comment. We certainly hope the market improves for you sooner rather than later. Make sure you claim all the deductions available to you. If you need help with your depreciation claim or have any questions, you can call and talk to one of our specialists on 1300 728 726.
Thanks,
BMT Team