What is negative gearing?
Negative gearing is a hot topic at the moment as the Federal Government and the Opposition are each looking at major shake-ups. Negative gearing occurs when the cost of owning a rental property outweighs the income it generates each year. This creates a taxable loss, which can generally be offset against other income including your wage or salary, to provide tax savings.
In the housing market, negative gearing has long been accused of offering a tax break for the wealthy, contributing to soaring house prices. Many claim it’s locking first home buyers out of the market as they struggle to outbid cashed up investors for their first home. But the theory that we’re awash with property moguls buying up everything in sight isn’t necessarily the case. Of the 8% of Australians that own an investment property, only 27% own more than one and only 0.8% own more than five properties.
What will happen if there is a change in legislation?
A change to the negative gearing laws will be of concern to some, but not everyone. With record low-interest rates and money available at a little over 4%, many properties are now positively geared.
If you currently own an investment property that is negatively geared, you’re not about to lose your tax deductions. Both the Government and Opposition have expressed that any changes to the current laws will not be retrospective, that it’s “unfair to investors who made a large financial decision based on the rules at the time”.
This may not be the case though for the few that are highly negatively geared across multiple properties, as there has been talk of limiting the total deductions to a maximum annual amount. Typically, those that are heavily negatively geared across multiple properties should have the cash flow to back that up, so again it will be less of an impact.
What’s the outlook for the future?
Moving forward, it’s possible that the negative gearing laws will not be as generous. There has been talk of limiting negative gearing to new properties only. There have also been suggestions of cutting back capital allowances, putting a total cap on the amount of deductions you can claim and changing the capital gains laws for when you sell your property. All of these moves will lower the long-term returns on property by increasing the tax you pay, but none of the rules that we’ve reviewed so far appear to undermine the essential ingredients of the current tax regime. Narrowing negative gearing to new properties is the only suggestion that we’ve seen that will reshape the market as it will lead to greater demand for new properties, causing a spike in new property prices.