Negative gearing is under threat from both sides of politics and the media has been full of articles for or against it.
According to the Property Council, 2 million Australians own an investment property and 1.2 million of those negatively gear it, so you can understand why it’s headline news. Plus, the size of our property industry means there are plenty of people with vested interests lining up to scream loudly for its retention.
What is negative gearing? It’s the ability to make an overall loss on your property investments and claim it as a tax deduction against your salary or business income. Technically it isn’t unique to investment property, but share investors generally can’t borrow as much and there are none of the ongoing expenses that property has (rates, insurance, repairs, agents’ fees and the like) to erode the income, so losses are much less prevalent.
The goal of negative gearing is to reduce the tax paid at high marginal rates now and hope to make a capital gain down the track that’s taxed at a lower rate. There is plenty that could go wrong since you are effectively losing money on a wing and a prayer, hoping to make a speculative profit in the future. But if you pull it off, the taxman gives you a sweet deal.
Unfortunately as a nation we’ve become addicted to negative gearing. The Grattan Institute estimates that if the government allowed investors to write off their losses only against capital gains (and not salary or other income) the annual windfall to the budget would be $4 billion in the short term and $2 billion annually over the longer haul. This puts it firmly on the radar of Treasury which is scrambling to plug some of the budget deficit.
It’s worth pointing out that our system is quite unusual in a global context as most governments don’t allow potentially unlimited investment losses to erode their core tax revenue. Negative gearing is also at odds with other tax measures, such as the provisions that prevent losses from small farms being used to offset unrelated income.
Property has been a sacred cow, but based on Labor’s policy initiatives (and rumoured Liberal policies) that might be coming to an end. The lobbyists want you to think this would be the end of the world but fortunately (for property investors) it probably won’t be. Let’s explain why.
Don’t panic
Firstly, if you own an investment property today, your tax deductions are unlikely to be dramatically affected. The mooted changes under Labor’s proposal only apply to investments made after 1 July 2017, exempting existing owners. We suspect, no matter the changes and who introduces them, some sort of ‘grandfathering’ would apply to protect investors (or, at least, small investors) who currently rely on the tax deductions.
Secondly, you’d still be able to claim tax deductions for property expenses (including mortgage interest) – it’s a core feature of our tax system. It’s the ability to deduct net overall losses from your employment or ‘normal’ income that’s the weird feature of our current system and the bit that’s at risk of change.
Even if you’re a new buyer and you can’t offset a net loss against your employment income, it should remain deductible in some shape or form. Also, losses on one property should remain deductible against profits from another (and most likely against dividends and other investment income). In a worst case scenario you should still be able to carry the losses forward and offset against future income or your ultimate capital gain (assuming there is one).
New buyers, borrowing a substantial amount of the purchase price wouldn’t be able to rely on tax refunds to keep their head above water. That would make it tougher for them, but again, it wouldn’t be the end of the world.
Are these the buyers driving capital city prices to dizzying heights? Definitely not.
Will rents go through the roof? It’s unlikely in a low interest rate environment where debt is easily available and new buildings are coming on line. But if interest rates increase, the removal of negative gearing would have a greater impact, although the interest bill itself is the bigger concern to the overall economy.
Do we really expect negative gearing to go any time soon? Not really. Tax reform doesn’t make the political opinion polls sizzle and testing tax reform in the media seems to be par for the course these days. If there’s enough noise each party will probably dump it.
Whether they dump their policies or not, the key takeaway is that, if and when the time comes, the impact of any negative changes will be in the detail and we’ll probably find they aren’t such a big deal.
Richard Livingston and Annika Bradley represent the online financial advice service Eviser (www.eviser.com.au). This article contains general investment advice only (under AFSL 469838).
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs.
Add Comment