Negative gearing changes, capital gains tax, superannuation are all under attack! Or are they? There has been a lot of fear-mongering going on in the lead up to this July’s Federal election and it seemed until last week that property investors needn’t worry because the Libs were most likely to return to power. But with recent polling, it looks like Labor have a chance of taking the reigns. If this happens, what do property investors need to fear?
Well, firstly, for existing investors it looks like nothing much will change as your tax breaks will remain in place for all property purchased up until 1 July 2017. Opponents to Labor’s policies say that property values will plummet and rents will skyrocket, so as long as you view property as a long game, you could even be better off in the short term if these predictions come true.
It’s the would-be future investors that have more to worry about since they won’t have access to the various tax breaks and incentives that have been enjoyed by many for the past few decades. But are Labor’s property tax policies as bad as we have been led to believe?
Here is a rundown of Labor’s policies and how they will impact on future property investors:
Positive Plan on Housing Affordability – Capital Gains Tax Reform
Labor will reform the capital tax discount effective from 1 July 2017, a policy which will help put the Australian dream of home ownership back within the reach of middle and working class families. Labor will half the capital gains discount for all assets purchased after 1 July 2017. This will reduce the capital gains tax discount for assets that are held longer than 12 months from the current 50 per cent to 25 per cent.
All investments made before this date will not be affected by this change and will be fully grandfathered.
This policy change will also not affect investments made by superannuation funds.*
- If you already own an investment property (purchased after 1985) or buy one before 1 July 2017, you will have to pay tax on 50% of your capital gain if you sell.
- If you want to buy an investment after 1 July 2017 it might we worth talking to an SMSF advisor to see if it makes sense to buy one with your super.
- If that doesn’t suit you and you buy an investment property (and it looks like this applies to both new and existing) then you will have to pay tax on 75% of the profit if you ever sell it. Not as good as 50% but better than 100%…
- You always have the option of never selling, then it doesn’t matter what the capital gains tax discount is (or isn’t).
Positive Plan on Housing Affordability – Negative Gearing Reform
Negative gearing refers to the situation where investors make an investment (mostly in property) that loses money in the short term (e.g. loan and related costs are greater than rental income), in the expectation of making capital gains in the future.
The investor can deduct any losses associated with the investment from their salary and wage income.
Labor will limit negative gearing to new housing from 1 July 2017. All investments made before this date will not be affected by this change and will be fully grandfathered.
This will mean that taxpayers will continue to be able to deduct net rental losses against their wage income, providing the losses come from newly constructed housing.
From 1 July 2017 losses from new investments in shares and existing properties can still be used to offset investment income tax liabilities. These losses can also continue to be carried forward to offset the final capital gain on the investment.*
- If you already own an investment property or buy one before 1 July 2017, you will be able to use negative gearing to offset your wage income.
- If you want to buy a brand new property after 1 July 2017 you can still use negative gearing changes to offset your wage income. BUT PLEASE BE CAREFUL AS THIS IS ONE OF THE RISKEST AREAS OF THE PROPERTY MARKET!
- If you want to buy an existing investment property after 1 July 2017 and you receive income from other investments (for instance, shares or positive cash flow property) you will still be able to use negative gearing to reduce your tax. FOR YOU, NEGATIVE GEARING IS STILL AN OPTION!
- You always have the option of saving up your losses to claim against your capital gain when you come to sell, which will be a handy offset for the reduced capital gains tax discount referred to above. Just make sure you get advice from your accountant before you buy to ensure you have the best structure in place.
There are a few things I think will happen if Labor gets in and make these changes.
- There will be a rush to buy existing investment properties between the election and 1 July 2017 and this will mean a sharp increase in prices.
- After that date, there will be little appeal for “rentvestors” (first-time buyers using an investment property to get onto the property ladder) because they will pay more tax on the capital gain and therefore be further away from using this as a way to leverage into their first owner occupied home.
- More naive investors than ever before will favour new builds and off-the-plan property for the negative gearing changes tax breaks and they won’t realise that they are taking major risks and sacrificing long term capital growth for these short term gains.
- Property investors who already own an income producing portfolio will be able to take advantage of any fall in the price of existing property after 1 July 2017 and add to their portfolio with the added benefit of being able to use negative gearing.
So it’s not necessarily bad news all around after all if Labor gets in but you can see how existing property investors are going to continue to benefit and it won’t necessarily be any easier for new entrants to get into the market.
Published:- 9 June 2016
Good Deeds buyers tips are intended to be of a general nature. Please contact us for advice that is specific to your individual circumstances. You may also need to get advice from other professionals such as an accountant, mortgage broker, financial planner or solicitor.