Labor’s Rental Property Negative Gearing Policy

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It appears the Labor Party has released its plans in relation to Negative Gearing for investment properties.  What does it mean?  Who will it impact?

An article can be found here http://www.domain.com.au/news/labors-negative-gearing-plan-investors-could-be-1000-a-year-worse-off-20160214-gmu25c/

So what does it mean?

Basically, if elected, Labor will limit negative gearing on investment properties to “newly built properties” from 1 July 2017. At this stage we don’t know what “newly built” means. However, I suspect there would be a time limit such as properties completed within the last 2 years or similar.

They will also reduce the current 50% general discount on capital gains to 25% for assets owned longer than 12 months. As things currently stand, if you were to make a profit of $100,000 on selling an asset such as a rental property, Australian resident individual taxpayers would pay tax on $50,000 whereas under Labor’s plan they would pay tax on $75,000. I’ll come back to this.

Labor’s view is the changes would create up to 25,000 jobs by investors building new investment properties rather than purchasing existing properties. So what will happen to the market for existing properties if investors are effectively disadvantaged from purchasing them?

The article states “The Property Council says 840,000 of about 1 million Australians who negatively gear earn less than $80,000”. In other words, 84% of people negatively gearing are not what I would call high income earners but mum’s and dad’s trying to save for their retirement, making sacrifices to get ahead.

Is it not feasible the market for existing properties could crash thereby significantly affect middle income earners? And not just in the future but immediately. This could become a significant problem for those looking to move if their rental property/s as lenders look at loan to asset value ratios when considering loan applications.

An interesting aspect appears to be these changes don’t appear to impact on those who negatively gear non-property investments such as shares. There is a real possibility investors will simply dump property investment for other types of investment. Only time can tell.

It also references research conducted by Price Waterhouse Coopers showing 50% of tax benefits from negative gearing goes to the top 20% of income earners.

I read an article over the Christmas break (New Year’s Day I think) in which Dr Shane Oliver who is AMP’s Chief Economist was quoted as saying the top 17% of income earners pay 63% of income tax.

Given these top income earners are most likely paying the top marginal rate of 49% (including Medicare Levy and Budget Repair Levy) surely it is common sense they would be getting the bulk of the benefit? This isn’t rocket science.

New properties generally generate significantly higher depreciation deductions. In other words, newer properties generally allow investors to claim more deductions meaning refunds go up.

Newer properties can also be more expense to purchase than rental properties once the purchase of the land, building approvals etc are taken into account. Have you seen TV ads for properties in new estate quoting prices from $350,000 or similar?

Existing properties in Ipswich can be purchased for much less than this and are popular amongst our customers as many simply couldn’t afford to purchase a new property even taking into account the additional tax savings.

Now back to the proposed change to the capital gains tax general discount. There is a view, the current 50% discount which was introduced by the Howard Government is too generous and allows the “wealthy” to avoid too much in income tax.

The 50% discount was introduced to be a simple replacement for the old and somewhat complicated indexing method which was aimed to remove the effect of inflation for capital gains tax. There have been opinions shared in recent times suggesting a 33% discount (which currently applies to superannuation funds) is closer to inflation in the long term.

One has to ask the question, given the intent of the discount is to effectively not tax inflation why would Labor’s policy reduce the discount to 25%? Looks like it is not about fairness but a tax grab plain and simple.

What Labor is trying to target is not necessarily unreasonable or unfair. Long term it could also make housing more affordable for first home buyers and lower income earners. However, there is a very real possibility owning a rental property will become the world of the “rich” which is the direct opposite of what Labor is intending.

 

 

Troy Pearce

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