Post

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.

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 1^st 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.

Authorised by Bradley Beer, BMT Tax Depreciation
Level 33, 264 George Street, Sydney, NSW 2000.