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.
The scare tactics are from the Labor party who demonize investors & property owners. Negative gearing has not been explained properly to the general public. It is not for the “Top end of town”. My daughter is a university graduate who was on about $50k gross when she started and now after 10years is on about $80k gross including superannuation. She moved back to live with us and saved very hard for a deposit, and was able to borrow from the bank to buy a modest property that she negatively geared by renting it out. When she could afford to move into it, she did, & it became her home, to this date. Negative gearing is a great mechanism for someone on a low income to buy their first home, with the small sacrifice of living with their parents. If you don’t have a job due to a badly performing economy, nobody will give you a house and no bank will lend you money. I don’t know what magic wand Labor think they will wave to give young people a house. My parents lived through the depression and saved hard and purchased their first home in their 40s and paid it of before they were 65 with hard saving (as labourers). Many young people are led to believe by Labor their first home will realize without a job. They also want to have the best house in the expensive trendy areas of the inner city, rather than going to more affordable alternatives. Also, investors are not a charity and will not go into risky debt, with high costs such as land tax, maintenance & repairs etc and end up with bad tenants that are generally being supported by the rental unions & tribunals. It could take 6 months to a year to get these out, with the property left in disrepair. The problems are endless, so if Labor gets in, Investors will go elsewhere and even overseas. They will leave property to the public housing system to supply housing. The flow on effects of the destruction of the building industry will affect everyone down to even the local milk bar.If there is no business investment, there is no employment. Look at Singapore with no resources, but a booming economy, due to government tax relief. It is even taking away industry from Australia. Dow Chemicals & others, left Australia to go to Singapore. If industry is not supported, we will end up being a third world country. So if Tax relief is not given to our industry, there will be no industry. Labor can go ahead and provide highly taxpayer subsidised child care other subsidies, that no one needs, as they don’t have a job to go to. If Labor gets in, its time to move to NZ.
Hi Tash,
Thanks for taking the time to share your opinion. We appreciate your perspective.
Thanks,
BMT team
The problem I see with negative gearing is that taxpayers are subsidising an investor’s loss, yet when a taxable gain is made, in many circumstances only 50% of that gain is to be included in that taxpayer’s assessable income. This seems to be a double win for investors, and a double loss for taxpayers. Surely investors should shoulder their own losses if they choose to speculate on future price growth?
The dislocation between deductions and taxable income has added to the inflation of property prices, so unwinding it should deflate prices somewhat. Is that bad? If eating cake makes you fat, do you bemoan the fact that you can’t eat it anymore if doing so improves your health?
I think you screwed up on your wording and your audience.
I read this yesterday, and the two points that stand out in memory are:
* The proposed changes will actually depress housing startups and push up rents. This is a valid point but needs to be well substantiated.
* The demonised group that is buying up tens of properties is smaller than most people think. The changes will impact ordinary people, not just those who are making unfair use of negative gearing.
Unfortunately you’ve come across as being aligned with the top end of town and concerned only with narrow investor interests instead of those of the whole of society. You also started out with a pretence of being “balanced” but ended up coming across as coalition supporters.
You could have done better.
Hi Greg,
Thanks for your opinion, we always welcome feedback. We believe the economic flow on effects to the property market could include a further decline in housing prices across the board, less second-hand housing stock on the market and a decrease in rentals which could increase rent prices for tenants.
Thanks,
BMT Team
Thanks for the info. I think it will be a quick death to neg gearing by ALP or the death of a thousand cuts by Libs who are well down that road already.
Great article, under Labor’s plan, what happens to the rental losses for tax purposes? Do they get rolled forward to the next year? or do they get added to the cost base for CGT purposes? or do they evaporate?
Hi Brendan,
We will have to wait to see the draft legislation for all the finer details. At this stage, we know Labor’s plan would limit negative gearing to new housing from 1 January 2020. All investments made prior to this date will not be affected by the changes and will be fully grandfathered. The changes will also halve the capital gains tax discount for all assets purchased after 1 January 2020. This will reduce the CGT discount from assets held longer than 12 months from 50 per cent to 25 per cent.
Thanks,
BMT Team