Federal Opposition Leader Bill Shorten has unveiled plans to change negative gearing rules for property purchases if they win the next Election The changes under a Shorten government would not affect the tax arrangements for investment properties purchased before July 2017.A Labor Government would also reduce capital gains discounts from 50 per cent to 25 per cent .Mum and dad investors who have a house or apartment that is negatively geared right now will keep the deductibility, but after 1 July 2017, negative gearing can only be accessed for new houses. With pressure on the current Governments to reduce the growing Budget deficit and the Treasurer Mr Scott Morrison’s refusal to rule out any changes in policy across the board, negative gearing would seem to be the one area squarely in the sights of both the Government and opposition especially when you look at the statistics. Currently 1.2 million people negatively gear and most of these are middle class Australians. Australian Tax Office statistics show negatively geared property investors claim over $13 billion in losses and the average loss per negatively geared investor is over $11,000, but this loss doubles for those earning more than $180,000 to over $24,000. Should our Governments look beyond the numbers, and is it a false economy just to think that by tinkering with negative gearing it will solve the budgetary problem?
Here are 5 reasons why the Government shouldn’t change negative gearing.
1. Growing Population
With Australia’s population set to grow significantly over the coming decades our Governments should be asking ” how will we house these people”. The Government does not have the capacity nor the finance to provide public housing for the growing population so this is left to the private sector. Negative gearing allows more Australians to invest in property as the tax benefits assist with the cash flow to invest and hold onto the property. If negative gearing is changed and Capital gains concessions reduced it will mean less investors, less demand and less houses, and it will place further pressure on Government to fund and provide for housing.
2. Pressure on the cost to fund the aging population
1.2 million middle class Australians invest in property in Australia to generate capital gain and increase their asset base for retirement and subsequently to ensure that in their retirement they can maintain a standard of living and not rely solely on the aged pension if at all. If the Government creates a blockage into entry for property investment by chipping away at the tax benefits or reduce capital gain concessions property investment becomes less attractive and we will see more Australians reliant on Government pensions meaning less self funded retirees therefore placing further pressure on future budgets. The Government has to take a long term view and look beyond today. A change will only make matters worse in the future.
3.Drop in property prices
Will a change in negative gearing and capital gain concessions disincentivise investors and if so what will the impact be on property prices? In the short term we may see a dip in prices due to lower demand and increased supply which will have an impact on the economy across the board. State Governments will miss out on a large chunk of revenue via loss of stamp duties and a loss in this revenue can mean less to spend at a State level on things like education, hospitals and infrastructure. The Federal Government will then have to fork out more to the States to compensate ….could it be that the Government are simply robbing Peter to pay Paul with no great saving?
4. Knock on effect to the economy
Will the changes in Negative Gearing policy and capital gain concessions disincentivise people to invest in property. Due to the loss of the tax benefits people will not be able to fund the cash flow of the investment, they will stop buying property and we will see a knock on effect similar to what we have seen in the Mining industry after the boom. It could mean a rise in unemployment in the building sector and associated industries such as white goods, electrical and service related industries like real estate and everything that goes with it. As previously mentioned, State Governments will be impacted with less revenue from stamp duties to spend on State infrastructures which could means less jobs.
5. Short term thinking which is just plain dumb
For all the reasons above…. yes I can understand why our Government might look at the numbers in front of them and think short term for budgetary reasons, they need to take a deep breath sit back and carefully consider what impact this would have on the economy long term. Any change may increase revenue today but they or should I say we, could be paying for this ten, twenty, thirty years down the track …. short term gain for long term pain and that is not good business . With 1.2 million Middle Australian property investors impacted it would be highly unpopular and could be a game changer for either political party …….to put it simply, it is just plain Dumb
What do you think…should the Government change Negative Gearing? Vote below, then select the tick button and see the result.
David Naylor – Founder & Non Executive Chairman Chan & Naylor Accountants
Disclaimer: This article contains general information. Before you make any financial or investment decision you should seek professional advice to take into account your individual objectives, financial situation and individual needs.