What is the likely impact of Labor’s proposed negative gearing changes?
The Federal Opposition has proposed significant changes to property taxes if it wins government at the next election. What exactly will this mean for the property market?
Current property tax arrangements are undoubtedly favourable to property investors.
Negative gearing tax arrangements allow residential investors to claim losses as a tax deduction, in situations where rental income is less than interest and other expenses related to the property.
Investors can also currently claim a 50% discount on the tax payable on any capital gains accrued from the sale of a property that has been held for more than one year.
There’s no doubt that these tax incentives have stimulated interest in property investment over many years. This, in turn, has created a strong rental market across the nation – providing homes for hundreds and thousands of Australians.
Labor’s proposed property tax reform
Prior to the 2016 election, the Labor Party mooted its intention to institute proposed property tax reform if it should find itself in Government.
While Labor’s proposal is yet to be completely finalised, this has been confirmed: Under Labor property tax policy, the negative gearing tax offset allowance for residential property investors will be abolished for all but new homes and the capital gains discount will be reduced from 50% to 25%.
Labor’s justification for these changes is primarily to reduce the current $10 billion in tax deductions provided to property investors.
It also wants to increase the supply of housing through tax allowances targeted solely at new buildings, as well as improve housing affordability to first home buyers by reducing competition in the marketplace between investors.
It is important to remember that Labor reforms were announced in 2016 – and the housing market has changed quite dramatically since that time.
Changes in the property market
For over 12 months now, we have been experiencing a ‘cooling’ of prices, particularly across the key residential markets of Sydney and Melbourne. This is part of a ‘natural correction’ within the property cycle – inevitable after many years of growth which, quite honestly, outstripped expectation.
Price drops have reignited interest from First Home Buyers, luring them back into the market. They have also been supported by key changes to stamp duty concessions, along with other FHB incentives particularly in NSW and Victoria. While the Reserve Bank of Australia keeps the cash rate on hold, there is further incentive for FHBs to buy now.
Additionally, over the past few years and in response to regulation, lenders have significantly tightened the criteria for investor lending. This coupled with the ongoing ‘negative gearing’ tax debate at both sides of Federal politics, has produced a level of uncertainty for investors, keeping them cautious for some time.
With prices stabilising, motivated vendors and low interest rates, now is a good time for investors to re-consider property.
A broker can help you find a lender along with the right loan.
Another advantage of buying before the next election, would be that investors already using the mechanism will not be affected by the proposed new policy when it is eventually introduced. This is because Labor has indicated that it would grandfather’ existing negative gearing arrangements.
Is now the time to invest in property?
Prime Minister Scott Morrison has indicated that the next federal election will be in May 2019.
He has also promised that the incumbent Government’s policies, tax and spending plans will be revealed early in the New Year.
It’s a ‘wait and see proposition’ in many ways however, if elected, while Labor would most probably take a prudent approach to introducing new tax policies, re-assessing the housing market and the economy before implementing anything new, it has already set property tax reform firmly on its agenda.
For property investors it may be wise to buy now under the current regime, rather than face unknown consequences.