The Labor Government’s proposed changes to negative gearing and capital gains tax – if implemented – would have minimal short to long-term impact on those investing in areas forecast for good growth like Brisbane and outer Newcastle, however there’s likely to be a short-term impact on areas with lower rental returns and growth forecasts like Sydney and Melbourne, write’s inSynergy’s Richard Sheppard.
Negative gearing: is when the total cost of an investment property – such as interest, rates and depreciation – are more than the rental income it generates. In this case, the difference can be claimed against tax. So, when rental returns are low, there is a bigger cost and therefore more tax back from the current negative gearing tax laws, however if the law is changed, there will be greater costs to hold property until rents increase enough to cover the costs.
Labors Proposed Policies
Labour has drafted the policy it intends to implement IF they are elected and IF it is approved by government. Key points are:
- It will apply to all investments, including shares, not just property, however there will be an exemption for new property to help encourage construction;
- It would only be applied to investments purchased after the date of the change, so will not directly impact people who currently own property;
- The tax benefit will only be lost temporarily as it will be rebated from future gains when the cash flow is positive, or it is sold for a gain.
- The current capital gains tax discount payable on net profit of a sold property will be reduced from 50 per cent to 25 per cent.
Labor’s proposed policies should increase rental yields and/or reduce interest rates:
If implemented, Labor’s proposed policies should temporarily reduce the number of investors purchasing property, which would mean less properties for the same number of renters. This must put upwards pressure on rents, but also downward pressure on the economy – and therefore interest rates. So it’s likely that the gaps between interest and rent will close faster, as it did in the UK where negative gearing does not apply.
The effect on property investment would mostly be felt by those buying in Sydney and Melbourne, where yields are low, and properties cost more to keep than the income they generate, enabling negative gearing.
Conversely, investment properties in predicted high-growth areas like Brisbane – where net yields are 50 to 80 per cent higher than those in Sydney and Melbourne – are often cash flow positive and so negative gearing may not apply anyway.
However, it’s likely that – if implemented – the policy won’t last that long anyway. The last time negative gearing was abolished in 1985 it slowed the economy far more than property, the stock market crashed coincidently, and the policy was promptly reversed within two years.
Invest for equity growth, not tax breaks:
Tax breaks should not be the reason for a property investment, but rather a benefit of that investment.
Australia’s property market has a proven history of long term equity growth. Buying in the right area will significantly increase the speed of that growth and in forecast high growth areas like Southeast Queensland – which is seeing 300 new households move there every week – tax breaks will have little impact on that growth.
While any negative gearing and capital gains tax changes may affect short term property holding costs, the resulting increased rental yields will soon offset any lost tax breaks.
Furthermore, those buying new can still access the full benefits of negative gearing, just be wary of the risks of buying long-term off the plan.