What’s the deal with Negative Gearing?
The Liberal Party
The liberal party will make no changes to negative gearing or the capital gains tax concession.
The Labor Party
Labor has 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.
Let’s say you had a net loss on your property of $5,000 over the course of a year. The current policy allows you to claim this as a deduction against your income. So assuming a tax rate of 37% you would be entitled to a Tax refund of $1,850. This means the costs of holding your investment property is effectively reduced to $3,150 per annum.
Labor is proposing to scrap this policy which means that the costs of holding that same investment property is $5,000 per annum. Under Labors policy you can still deduct the expenses of your investment property to offset rental income earned, this means for positively geared properties there is no change. Depreciation is something that is not factored in as there will be no change under either major party.
The result is that it will be more attractive for Investors to purchase new properties from July 2017, which in turn will increase the supply of new houses. In the short term there would likely be a spike in the property prices as existing and new Investors try and secure the properties before the July 2017 cut off, with investors holding on to their existing stock.
Remember only around 25% of the property market is made up of Investment properties. You can’t negatively gear your owner occupied property under either Party, so the other 75% of the market will go on unchanged.
Accordingly leading Economists predict this policy to have only a small impact on the growth of property prices, around 2% per annum. Of course the Liberal Party are selling the fact that this will result in a crash of the property market. But we will leave it up to you to decide.
DT Funding are investment specialists who can offer advice for your investment strategy. We welcome you to get in touch now to discuss your options.