After several years of pursuing policies aimed at changing negative gearing and capital gains tax deductions for investors, the Labor government has finally axed their proposals and committed to leaving negative gearing and capital gains arrangements alone. This is good news for investors who have been unsure whether investing in Australia’s property market is a calculated step to take, and it’s also good news for renters.
What exactly were the cuts Labor was proposing?
Labor’s capital gains tax policy proposed halving the 50% tax discount on assets that were sold after having been held for at least 12 months. Their negative gearing policy would have confined the tax deduction to newly-built properties. Both policies, first flagged in 2015, exempted assets that were already held and would only have applied to those purchased after the policies became law.
The abolishment of negative gearing on investment properties proposed the risk that rental prices would increase. It has been argued that any changes to negative gearing would result in increased rental prices, based on rental increases between 1986 and 1988 when the Hawke Government extinguished negative gearing deductions. After 2 years of abolishment, the Hawke Government reinstated full negative gearing in 1987.
The Property Council of Australia suggested Labor’s decisions are a welcome recognition that these policies would have hurt the economy, cost construction jobs, and had little impact on housing affordability.
Here is an example of how negative gearing works:
Let's say you bought an investment property that earns you $25,000 per annum. Your mortgage repayments are $22,0000 per annum and you have an additional $7,000 in property expenses, therefore your investment property costs you $29,000 per year. Considering your investment earns you $25,000 per year, you are $4,000 out of pocket and because you are out of pocket, your property is negatively geared.
So, how is negative gearing a positive for investors?
Let’s say your income is $85,000. As you have $4,000 worth of annual expenses on your investment property, you are only going to pay tax on $81,000. There is an incentive for people to invest because if the investment is hurting your cash flow, you can offset against it.
Who are the winners and losers in this situation?
Labor’s proposed cuts negatively affected those who were thinking about investing as there was uncertainty whether negative gearing and capital gains were eventually going to be taken away. The change in policy provides a lot more certainty for renters too, as it will relieve some of the pressure that we are now seeing on rental stock by allowing more people to contemplate taking on an investment, making more properties available for the rental market. The rental market needs more properties out there as there is a lot of squeeze on rental prices in both cities and regional areas of Australia.
The losers in this situation are those who are not yet in the market and first home buyers - auctions will continue to be competitive with seasoned investors ruling the market.
Overall, if you are considering getting into the property market then the recent news that negative gearing and capital gains tax deductions are going to be left alone by the Labor Government is a positive. If you’ve got any questions or would like to know more, please reach out.
