With the election less than a week away on July 2nd, it seems one of the hottest topics discussed is negative gearing. There are two clear positions and diametrically opposing positions by the two major parties.
So whats their position on Negative gearing?
The Liberal Party’s take on Negative Gearing:
- They will make no changes to negative gearing or the capital gains tax concession.
The labor Party’s take on Negative Gearing:
- They have a policy to legislate the scrapping of negative gearing for established properties purchased and reducing the capital gains tax (CGT) concession from 50% to 25% for properties held for more than 1 year. These changes are for properties purchased after the 1st of July 2017. Your current investment property which was purchased as an established property will be grandfathered and will not be affected by the changes to negative gearing and CGT concession. Negative gearing losses on established properties purchased after the 1st of July 2017 can only be offset against a capital gain on the sale of the property.
Being in the finance and property industry, I guess I have a bias to keep negative gearing going as it’s helped hundreds of my clients get ahead with property. I have to disagree with the people that say negative gearing is only for the rich. I have numerous clients with modest incomes, who have been committed to growing their wealth through investment properties and the way they have been able to afford this is through negative gearing.
However, negative gearing has popped up on the political radar and debated due to the current budgetary and debt concerns of the Australian Government. The data shows that the top 20% of households by income receive approximately 50% of negative gearing concessions and the top 10% income earners receiving over 60% of the CGT concessions. This adds fuel to the debate on how equitable the current arrangement is.
We all wait in anticipation on how the electorate prioritises the issue on election day.
‘The Deal’
What is the impact on modest families’ budget and cashflow if negative gearing was removed? Let’s take a more detailed look as I’ve had clients come to me and say “I need a negatively geared property, to reduce my tax” without knowing exactly what it is.
To explain negative gearing in simple terms I often say the property is like your own small business. You have income, expenses and whatever the loss is at the end of the year is what you can claim as a loss off your taxable income. See the below example of a $600,000 investment property:
Purchase Price – $600,000
Loan Amount – $640,000
The total loss of $15,445 which you have paid out of your pocket to hold your investment property can now be claimed as a tax deduction. Assuming an income of $100,000 and paying 37 cents in the dollar, this is how negative gearing makes holding the property more affordable:
$15,445 x 37% = $5,714 as a tax refund for the owner of the property.
Meaning the true holding cost after tax is $9,731
The percentage of negative gearing you can claim is dependent on your individual salary and the tax bracket you fall under. As you reduce your taxable income from negative gearing, you may fall into a lower bracket which will reduce the benefit of negative gearing.
Investors tend to maximise investment home loans and set as interest only as they can be tax deducted. That’s why they utilise the equity in their home to finance 100% of the investment property and the related costs (eg stamp duty, conveyancer cost, etc). At the same time, investors pay down non-deductable debt that include their home loan, personal loans and credit card debts.
If you have no non-deductable debt remaining, investors offset their investment loans as you’re better off not spending $1 to get 37 cents back.
Depreciation is something that is not factored in on the table as there will be no change under either major party. Depreciation is a reduction in the value of an asset over time, based on its useful life. A new property has new fixtures and fittings (eg ovens, stovetop, blinds, hot water systems, etc) that may have a useful life of 3-10 years. Purchasing an established property in its original condition that’s over 10 years old will have a large portion, if not all of the fixtures and fitting already fully depreciated. For the actual building itself, these are depreciated over a life of 40 years.
Whatever happens in the next week it will be a very interesting property market if negative gearing is scrapped. There are studies that show that Labor’s change will see falls in property prices of 30% or more and the Liberal Party are out there selling this point. However, most studies are forecasting that Labor’s changes will slow the rate of increase in the future value of house prices. The Chief Economist of NAB believes there will be no immediate impact and by itself not precipitate a fall in house prices.
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