Removing negative gearing?
With a landslide win for the Labor Party in Victoria over the weekend, one would be entitled to predict a Labor Federal Government may be at the helm in Australia come February 2019. Bill Shorten says Labor will remove Capital Gains tax concessions for investors of existing property and other investment assets if they win the next election. Negative gearing tax concessions will only apply to new property investments if Labor wins and implement this plan.
There has been a lot of conversation in the press on this recently. Liberal Treasurer, Josh Frydenberg was on Sunrise a few weeks ago speaking about the impact of removing negative gearing and who it will affect. He cited figures and if true they are very interesting. He said:
20,000 police officers and emergency services personnel own property and negative gear.
Who typically owns negative geared property? According to the Treasurer Josh Frydenberg, “two-thirds of those who use negative gearing have a taxable income of under $80,000.” So, not so rich.
Click here to view the full interview.
In the same speech, he said that over 1.3 million Australians use negative gearing as a wealth creation strategy. I believe the intention of negative gearing is to help Australians create wealth for retirement. If Labor brings in these changes, Josh Frydenberg believes that all these property owners will be affected as well, because when they sell their property they will be selling into a market with fewer buyers.
So, should Labor be further deliberating three key issues before making sweeping changes to negative gearing?
1. Lost tax revenue, versus
2. Ordinary Aussies retiring in comfort and providing housing for lease, and
3. Vote winning headlines and promises, possibly without care for what the changes may do to our economy.
If this negative gearing primarily affects the rich and assists them to avoid paying tax, couldn’t we keep negative gearing and introduce a tiered system, similar the taxation thresholds. So if you earn over $150,000 the benefits of the scheme reduce for you? Maybe that’s one suggestion that would improve tax revenue for the Government.
Personally, I think that closing the loopholes on corporate and international tax evasion should be the first priority, but I work in property so am probably biased.
I’m not sure how many Aussies will be able to fund comfortable retirements, with capped superannuation contribution limits being quite low, many women not contributing significantly whilst in childbearing years or out of the workforce, lots of Aussies working in casual employment due to a difficulty for employers terminating staff if they are permanent. The quality and quantity of rental stock could diminish if Labor removes negative gearing.
In Victoria, 130 changes are coming to the Residential Tenancies Act and they are mostly biased to the tenant. Costs will go up for landlords and if there is no financial benefit of owning property, why bother. With stagnating market conditions due to the tightening of lending policies, increased and onerous legislation and land tax, many investors will buy other assets, not real residential property. Also, older landlords many sell and get out of the market.
In the ’80s when Paul Keating cut negative gearing, rents went up. He ultimately reversed this decision.
So, the major argument that Labor has is that the rich are avoiding tax because of negative gearing, this lowering the government’s revenue. Of course, if the rich choose to negative gear, they benefit more because they pay more tax. It’s only logical. However, many don’t negative gear. Rich people have clever accountants to advise them on tax minimisation strategies. The often own real estate in trusts or in their superannuation fund or other structures. They are looking to minimise tax when they sell and taking an overall and long-term view.
As a Buyers Agent, I believe that we need to look back to the ’80s and ask why Paul Keating reintroduced negative gearing after its removal? The USI predict that removal of negative gearing will lower property investment demand and result in lower residential property prices. Potentially, it will also have other undesirable impacts. Upward pressure on rents. Reduced supply of rental housing. Landlords cutting back on maintenance, repairs and property improvements in an effort to reduce their net rental losses. How can Labor in Victoria be planning on forcing landlords to enhance and maintain properties, whilst federal Labor takes away tax incentives to help do this?
Malcolm Turnbull says “ In the US and UK, which have removed negative gearing, the resulting crisis in rental markets has caused serious hardship and forced governments to spend millions of dollars in subsidies.” So raise more tax and spend it on homelessness? Not sure this is very smart.
Obviously, I am biased, however, I don’t want to see more homelessness locally in Victoria or nationally. It’s a major problem. Also, I rarely buy new property for investment purposes. This should only be done selectively and not just for taxation reasons like depreciation.
Change is coming and you will need a savvy Buyers Agent to interpret and help if you are buying real estate. Why, because this won’t just affect property investors, it will impact the whole property market.