As part of the platforms for next year’s federal election, the Coalition Government has decided to keep the present negative gearing regulations in place. Labour, on the other hand, wants negative gearing to apply only to newly built properties – those people who presently negatively gear will be able to retain their entitlements. Labour also has on it’s agenda to halve the CGT discount from 50% to 25% so 75% of the profit from gains will be taxable as income.
Almost 1.3 million people negatively gear residential properties amounting to about $11 billion dollars in tax deductions and more than half the people who negatively gear earn less than $80,000 per year prior to negative gearing reductions. So, negative gearing is not just for wealthy people.
Negative gearing assists young property buyers to get into property and reduce the already high tax rate. Without negative gearing the attraction for property lessens greatly and investment suffers, hence the availability of rental accommodation decreases and, as a result, rents rise.
Negative gearing has been widely used by investors since the 1980’s and the last time it was messed with was in 1985 by Labour and, after a short period, the benefits were reinstated after the rental market faltered and rents increased. In simple terms, Labour reneged on the changes to negative gearing after public pressure was exerted.
Negative gearing is clearly an incentive for investment and feeds rental stock into the market to put less stress on rental levels.
If these changes are made by Labour (assuming they get elected), it will add to the already suffering real estate market and effect values more severely than is already the case. The Australian economy is driven to a large extent by the real estate market and its associated employment. Labour’s policy may well drive the economy closer to recession and affect people’s borrowing power and spending habits. APRA has already put pressure on banks lending policies and the Royal Commission into banking has forced banks to look more seriously at their lending policies overall. The addition to this scenario of a reduction in negative gearing and Capital Gains Tax entitlements will only add to the problem
A simple example of negative gearing is:
Earn $100,000 per year and tax is $25,000. Buy a property that earns $50,000 per year in rent. If the interest payments are $60,000 per year, then you deduct the difference of $10,000 so your taxable income is $90,000 a year saving about $4,000 a year in tax plus the associated upkeep expenses meaning you can reduce your tax bill even further.
The end result of negative gearing is not just the tax advantages. It enables people to pay off investment property to add to their wealth in later life which adds to their superannuation wealth and, in turn, creates more spending to add to the general economy and takes pressure off future government welfare payments.
Even in uncertain times there is still money to be made out of property if you are a savvy investor and seek professional advice as to real estate procurement.
So, if you rent your home under Labour – you will pay more in rent! If you own your home under Labour – it will be worth less!
At this time, EAC has not been consulted by the Labour government in relation to these changes, nor has it sought EAC’s advice in relation to what impact this may have on the industry and the economy.