Thunder and lightning over negative gearing and capital gains tax
A storm is brewing in Australian politics around the plans by Labour to change negative gearing and capital gains tax arrangements.
The plans limit negative gearing to newly built homes and halve the 50% capital gains tax discount for properties.
Labour argues the reforms will make the playing field fairer for first home buyers and it is an investment in the supply of more housing. Liberal argue it will disadvantage mum and dad investors, who make up the lion’s share of owners who negatively gear properties, and will likely decrease property prices and increase rents.
Our area is dominated by negatively geared investment properties. While Labour has not set a date for when these policy changes would take effect, there are implications for many in this community.
Given that, it’s worthwhile offering a snapshot of these proposed policy changes.
Capital gains tax
As many investment properties are negatively geared, one might expect investors are hoping to instead reap longer-term rewards for their investment. That is, the financial boost on the sale of the property, should the value of the property jump.
Investors can currently 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.
Should Labour’s current plans get passed, this discount will be reduced to 25%. Investments before a date, which is yet to be decided, won’t be affected and neither will business assets or investments by superannuation funds.
A negatively geared property runs at a loss. While not obviously ideal, often negative gearing is the only option for an investor.
But, right now if the income of an investment property is less than the costs of managing the property, then the owner can deduct these extra costs against other income.
It can be a significant reprieve in the short-term, while the investor looks toward gaining the benefit in the longer-term at sale time.
The Labour reforms would limit negative gearing to new dwellings. Tax breaks will only come to those who are adding to overall supply.
Given these are big policy changes to our property industry, no doubt we can expect a blustery storm of debate at election time!