With a federal election expected to be held at the end of 2016, political parties have already started on their campaign trails using changes to negative gearing as an election promise and a way to save the Australian Government millions of dollars.
Since negative gearing is one of the main benefits of property investment, we take a look at what’s being proposed, and asked ParkTrent Properties Group CEO, Ron Cross, how he thinks the proposed changes could affect property investors and the economy.
What is negative gearing?
In simple terms, negative gearing refers to a net rental loss – in other words, when net rental income is less than the interest on borrowings after expenses are deducted. This provides a situation where investors may be eligible to claim a tax deduction for rental expenses incurred within that financial year. Allowable tax deductions include: body corporate fees, interest on loans, land tax, property agent fees and commissions, repairs and maintenance, etc.
The Australian government introduced negative gearing in the early 1980’s as an initiative to encourage income earners to purchase investment properties to enhance availability of rental properties for individuals not in a position to purchase their own home.
What changes are being proposed?
The Labor party were first to reveal their policy changes when Bill Shorten made the announcement on Saturday, 13 February. Their proposal outlines the following:
• Only new homes purchased after 1 July 2017 could be negatively geared
• There would be no limit on the number of new properties that could be negatively geared
• Existing investors would not be affected by the changes
• Capital gains tax deductions for investors, who sell a property after holding it for at least 12 months, would be reduced from 50 % to 25 %.
Labor’s rationale is that its policy would cause a boom in new home construction with an estimated 25,000 construction jobs created a year. This in turn would take the pressure off house prices by keeping cashed-up investors away from existing housing stock.
It was anticipated that the current Government’s plans would be outlined on Wednesday, 17 February when Treasurer Scott Morrison addressed the National Press Club. Whilst no defined policy was announced, Mr Morrison did criticise the Labor’s policy saying the Opposition did not understand who accessed the current policy and why.
“I have always understood that for the vast majority of Australians who use negative gearing, they are modest income earning Australians,” Mr Morrison said.
“I know the Labor Party doesn’t agree with that and there are probably some in this room who don’t agree with that, but the figures speak for themselves.”
Read more about the National Press Club address through ABC online.
How will the proposed changes affect the property market and investors?
Whilst ParkTrent CEO Ron Cross believes the proposed changes will increase demand for new building construction, he fears it will result in an increase in the price of new constructions causing a disparity in the property market.
“There is a limit on how many new constructions can be built each year based on available building sites and labour,” Mr Cross said.
“Demand will outstrip supply making housing affordability far more expensive.”
Mr Cross also fears the proposed changes to negative gearing will not hit the so called ‘cashed-up investors’ at all, but rather the middle-class and Aussie battlers.
“At ParkTrent, the majority of our clients are in their mid-40s and earn $60,000 – $80,000 per annum. They are blue-collar workers trying to create a better retirement for themselves, and to take care of their children,” Mr Cross said.
“Property investors will still purchase established properties; they may be forced to increase rent prices to compensate for the removal of negative gearing.”
What is the best solution?
Mr Cross believes there is a solution to appease property investors whilst still saving the Australian government millions of dollars, and that’s considering changes to depreciation, not negative gearing.
“Established properties are not a burden on the treasury as people might think; you cannot negative gear an established property to the same extend as a new build,” Mr Cross said.
“Depreciation deductions are the most generous part of negative gearing, namely construction costs.”
Construction costs are the costs of building the investment property. Property investors can claim 2.5% per annum for 40 years – that’s how long the tax department says a building lasts before it needs replacing. Mr Cross proposes a change of 3% over 20 years.
For example, a new building that cost $200,000 to build would give investors a $5,000 tax claim each year for 40 years. Under Mr Cross’s proposal, it would be $6,000 each year for 20 years, a total of $120,000. That’s a saving of $80,000 per investment property.
“Most property investors are well established within 20 years and on the verge of retirement. In this scenario, both the Government and property investor has something. It’s a win, win,” Mr Cross said.
How should property investors respond?
Until the federal election is held, and a final outcome is known, is it difficult to know how property investors should respond. Mr Cross suggests acting based on your current knowledge base.
“Take advantage of negative gearing now whilst you still can.”