03 May The housing debate: Is it time to say goodbye to Negative Gearing?
I’m not one to talk politics, they say it’s not good for friendships! However, there has been much heated debate in the lead up to the election concerning Labor’s proposed changes to negative gearing and capital gains tax concessions for property investors aimed to take effect from 1 January 2020 for all newly purchased second hand homes. So, I thought perhaps I could shed some light on the proposed changes and at least spark some conversation and thought. You may think if you are not a property investor then it will not affect you. However, the housing market contributes significantly to the economy so any changes around such policy will undoubtedly affect all Australians. So, what is negative gearing? In a nut shell negative gearing allows property investors to apply any rental expenses above the rental income they make each year (rental losses) to their other income (from salary and wages for example), to reduce their overall taxable income and therefore their tax payable. It has been a fantastic tax incentive for many mum and dad investors who make up a large percentage of the property investment market, many of whom see property investment as a form of ‘self-funded retirement’. With an ageing population likely to continue to put increased pressure on government spending in coming years, personally I can only see this ‘self-funded retirement’ notion as a positive. In fact two thirds of investors who have a negatively geared rental property have taxable income less than $87,000 and around 72 percent of these have just one investment property. So, it’s not the ludicrously wealthy who will be most impacted by Labors proposed changes.
Labor argues that removing this tax incentive will significantly increase tax revenue enabling the government to invest in other areas and that it will make housing prices more accessible for first home owners as property investors have less of an incentive to buy so demand decreases and therefore property prices fall. They also argue that it will encourage investors to build new homes instead, which will also be beneficial to the economy.
However, others argue that such changes could have catastrophic effects on our economy, causing property values to drop drastically, meaning that despite the ‘grandfathering’ being offered to current property investors many of their properties may potentially be worth less than what they still owe on them when they go to sell. There’s also concerns that such changes will result in increased rental prices, as new property investors try and offset the loss of these tax incentives being available to them, therefore hindering many first home owners ability to save for their first home as they struggle to pay rent. Some of the major concerns are the timing of the changes given housing prices fell 5.1% nationally last year and are continuing to fall leading to fears by some of a recession. Interestingly, former Labor minister, Wayne Swan had been quoted as saying ’it would be economically disastrous to do anything to negative gearing.’
Perhaps most concerning are Labors proposed changes to capital gains tax concessions available to new property investors which will reduce the discount available to them from 50% to 25%, increasing investors capital gains tax payable when they actually sell and seeing Australia subject to a rate that’s amongst the highest in the world.
Whether you’re for or against the policies Labor are proposing one thing is for certain, they will have an impact. Personally, like many other Australians I would like to see further review of the impact of these policy changes, particularly in light of the recent and ongoing fall in housing prices before any policies are implemented should Labor be elected. I’m supportive of helping first home owners, it wasn’t so many years ago when I was one myself, however I’m not convinced that this is the answer.
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