The momentum is gathering on policy and discussion around the abolishment of negative gearing legislation. The Greens have recently issued a paper on their stance and of recent time Labor is considering a proposal to limit home buyers’ use of negative gearing to new properties only, in a move designed to drive the creation of new housing and deliver a $29.3 billion benefit to the budget bottom line over a decade.
The proposal contained in a policy paper by the Labor aligned McKell Institute, signals a willingness to reform negative gearing if it wins the next election especially as the government is under pressure over property prices.
Given the overall magnitude of negative gearing – in 2010/11 there were 1.2 million individuals with negatively geared properties – a shift in tax incentives towards new construction has the potential to have a material impact on housing supply.
We do not know what the future holds for negative gearing however it would be in every property investors interest to understand what each political party is proposing on how to deal with existing property investors, if negative gearing is abolished.
All Investors have made decisions based on the tax benefits of negative gearing and without these benefits may be placed in a financial position which forces them to sell or to increase rents to cover costs. Here is a summary of their current proposals.
- The Greens model is limiting the change to asset purchases after a particular date which basically means grandfathering and allowing the negative gearing to continue on any existing investment properties held. This will mean existing investors will not be impacted and for me this would be a fairer model.
- Some economists advising the Government are proposing a phasing over 5 years or more and would apply regardless of when the property was purchased, for example in the first year all investors could claim 85% of losses , then 70% in the second year with further reductions until it reached zero. They suggest its far better to phase in gradually which means you treat all generations the same and avoid a potential freezing up of the housing investment market. This proposal has some legs.
- Labor have talked about ending negative gearing as it stands while grandfathering existing properties similar to the greens proposal. However they are also proposing to allow new participants to negatively gear up to $1 mil of property, but this proposal is to allow negative gearing only for new housing construction whilst grandfathering existing arrangements. They believe this will create stimulus for new housing stock and has created more interest amongst the back benchers according to media reports.
- The Liberals stance is that the abolishment of negative gearing could see substantial increases in rents that landlords will need to offset to allow them to receive the benefits that they were getting with negative gearing. They believe Australians have invested to give themselves and their children some financial security. Joe Hockey has publicly stated negative gearing is not on the agenda, however with budgetary pressures anything is possible.
As an independent observer it appears to me that there will be changes made in negative gearing policy in the years to come. To what extent they go I am not sure, however the most popular and politically safe line of thought is that existing property investors will not be impacted by changes on properties they already own as the changes in legislation will be grandfathered. This may also see a short term spike in property values as Investors try to get in on the act over the coming years before changes are made.
Whether the tinkering with this legislation is a good or bad thing for the economy, that is a discussion for another day.
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.
Matt Golding cartoon courtesy of www.smh.com.au