Back to Research Insights >> HOW WILL A CHANGE TO NEGATIVE GEARING AFFECT YOU?

Much of the property market news has shifted from our never-ending housing affordability crisis to the impending property market crash. There’s also been a spotlight placed on the Labor Government’s plans to reform negative gearing policy.

To appease those struggling to enter the property market, changes to current negative gearing policy were positioned as a way of limiting investor demand and in turn improving housing affordability. What wasn’t considered was the cyclical nature of markets and the natural slowdown in the Sydney and Melbourne markets, meaning in many ways what they have set out to achieve has already been achieved.

The tightened lending environment means that investor demand particularly in the Sydney and Melbourne markets has already fallen. We’ve begun to see a correction particularly in Sydney.

This proposal was introduced in 2016, the peak of Sydney’s property cycle. Currently, investors can claim a loss from a property’s rental income due to interest repayments and other outgoings as a deduction against taxable income. Investors can also claim a 50% discount on the tax payable on any capital gains accrued from the sale of a property held for more than one year.

The Labor Government proposal

Labor proposed the abolishment of the blanket negative gearing tax deduction for residential property investors and a reduction of the capital gains tax discount from 50% to 25%.

The original negative gearing benefits will still be applicable to properties purchased prior to these rule changes. Beyond these changes, only purchasers of brand-new properties will be able to negatively gear their properties. This change then becomes another major benefit to the already superior proposition of new property vs old.

Market impact

In 1985, negative gearing was removed entirely and what followed was a significant increase in rents which peaked in June 1987. Research suggests that there’s a heavy concentration of investor-owned dwellings in the inner and middle-ring suburbs of our largest capital cities. Without this, rents will undoubtedly rise, having a negative impact on this aspect of housing affordability.

Negative gearing also helps to create the supply needed to accommodate our growing population. The Labor Government often discuss the savings it will make by removing negative gearing however, they fail to mention that without investors the cost to the government of housing is far more.

On a $500,000 property, that is fully financed, the average annual tax benefit paid out by the government is around $8,000, this is far cheaper than the annual cost to the government of housing a household. Between 1985 and 1987, the numbers on the New South Wales housing wait list increased by over 30%, this occurred in only 18 months, and the trend was reversed by the re-introduction of the previous negative gearing rules. In 1985 investor finance accounted for only 13% of total housing finance. Now, this figure sits around the 40% mark indicating that the affects this time would be far more significant.

Based on what occurred between 1985 – 1987, we are likely to find that this isn’t a very successful strategy.

Business as usual for Blue Wealth clients

For existing Blue Wealth clients, the change will not affect them if the policy change does occur, it will only affect future investors who invest in an established/second hand property.

From the negative gearing change perspective, these changes will reduce the market’s investor demand for second hand properties. What this means for investors is that it’s extremely important to have purchased properties which appeal to the owner occupier market, this will expand your potential buyer pool and improve resale value.

Considering an exit strategy and owner occupiers

If you’re already a Blue Wealth client, you’ve done this. Our strict research methodology has been in place for many years, ensuring our clients have invested in properties which were larger than the average, more efficiently designed and of the highest level of quality. These aspects make them desirable to the emotional owner occupier purchaser for whom negative gearing policy is not a consideration.

Buying well is the key to a successful strategy and for many years we’ve stressed the importance of buying a well-valued property rather than a cheap property, these policy changes make this principle more important.

You would’ve heard us talk about exit strategy and the importance of buying a property which appeals to the largest portion of the resale market, owner occupiers. We will continue to provide options which meet this criterion to our clients to ensure they continue to buy highly desirable assets in great locations, that are less susceptible to the risks of a changing market.

Capital gains tax

In terms of the changes to the capital gains tax laws, the current scheme allows a 50% tax discount on any capital gain if a property is held for more than 12 months. For example, if a property is purchased for $500,000 and sold 2 years later for $700,000, the purchaser has benefitted from a $200,000 capital gain.

Under the current law, you are only taxed on $100,000 of this gain. The proposed change will see you taxed on $150,000 of this capital gain.

In summary, time will tell if these proposed changes occur and what affect they will have on the market. One thing’s for sure though, these tougher markets are putting us in a position to negotiate some of the best opportunities for our clients we’ve ever seen. Our clients will continue to buy high quality assets that appeal.

 

 

2 comments on “HOW WILL A CHANGE TO NEGATIVE GEARING AFFECT YOU?

  1. Timely article Dom. In the last section on CGT, under the proposed changes in your example, won’t the seller be taxed on the gain of $200,000, not $150,000 (excluding allowance for any negative gearing benefits claimed)?
    Did you make an error to see if anyone was paying attention perhaps!

    1. Hi Steve,
      Thanks for question.
      The Labor Government proposes to reduce the current capital gains discount for properties held longer than 12 months from 50% to 25%. In essence, a $200,000 capital gain currently sees you taxed on $100,000 of it (50% reduction). If the proposed changes are passed you will only receive a 25% ($50,000) discount meaning you will be taxed on $150,000.

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