Do You Need to Worry about Negative Gearing?
Australians will be heading to the polling booths on 2 July this year and a key policy for both the Coalition and the Labor parties in this election will be negative gearing and the capital gains tax (CGT) discount for property investors, which has got a lot of homeowners worried about what a change of government could mean to the value of their home.
If you’re wondering why negative gearing and the CGT discount has made a surprise appearance in the upcoming election, then let me explain. For decades, both the Labor and Coalition parties have been in agreement about a provision in Australian tax law, which allows people to offset income losses relating to a business, stocks or property against their personal taxable income, which is known as negative gearing, and is a fundamental component of the Australian tax system.
Negative Gearing and the Property Market
If you own an investment property and the cost of owning that property exceeds the rental return, then you’re allowed to claim those losses as deductions against your personal income. Negative gearing has been around since 1936 when the Income Tax Assessment Act was introduced, and except for a brief period in the late-1980s when the Hawke/Keating Government disallowed negative gearing for property before reinstating it again, both Labor and the Coalition have been in a bipartisan agreement about negative gearing as a part of our tax system.
In 1999, the Howard Government further strengthened negative gearing, by introducing a 50 percent discount on the CGT payable once an investment is sold. Since then, the number of property investors have doubled and there’s been a marked increase in property values in Australia, which many economists and property observers attribute to negative gearing and the capital gains discount. However, negative gearing alone isn’t the cause of Australia’s increase in property values.
It’s Population Growth, Not Negative Gearing, that’s Pushing Prices Up
According to the Australian Bureau of Statistics, around 1 million Australians use negative gearing to offset the cost of owning an investment property against their personal income, a figure that, contrary to the Prime Minister’s claims, does not represent 30 percent of buyers in the property market, and so there’s no risk that Labor’s plan will wipe 30 percent of buyers out of the property market.
Nor is there any risk that property values will decline in a manner not consistent with previous market trends, simply because the demand for housing in this country consistently outpaces the supply of it. In fact, every three years since the turn of the century, Australia’s population has grown by roughly a million people, which equates to a city the size of the Gold Coast needing to be built every 18 months.
Labor’s negative gearing plan, then, is just one small step towards addressing Australia’s housing shortage, by encouraging more owner-occupiers into the property market, while at the same time, encouraging investors to make smarter investment choices.
Grandfathering Any Negative Gearing Changes
It’s important to remember that Labor’s proposed changes to negative gearing will be grandfathered (the old rules will continue to apply to existing situations) thus they won’t affect any current investors who are already negatively geared. Those properties can remain negatively geared until they are sold — preventing the large-scale sale of negatively geared properties. Furthermore, the changes will only apply to existing dwellings, which means investors can still buy and negatively gear new homes.
To be clear, Labor’s changes to negative gearing and the CGT is designed to encourage more productive investments, rather than unproductive ones in the form of loss-making property — which, in the 2011-12 financial year, cost the Australian economy $14 billion.
In conclusion, you won’t be affected by Labor’s proposed changes to negative gearing and the CGT discount. You won’t even be affected if you currently negative gear your investments, as the changes will only apply to investments moving forward — and that’s only if Labor is elected and if they can pass their reforms through the senate. There’s still a long way to go yet.
So if you’re just a homeowner on Sydney’s lower north shore and you’re thinking of selling your home, contact me for an obligation-free market appraisal of your property. Alternatively, to learn more about selling property on the lower north shore, subscribe to receive access to my series of educational videos, or continue reading my blog.
