It’s an election year and it’s almost impossible to miss that a big part of the battle is around the property market. Property is an emotional subject for many Australians because we either live in one, desire to have one, or are relying on one (or several) to provide us with capital and income in retirement. For the 2016 federal election, there has been a lot of talk about possible changes to the negative gearing laws. The Liberal Coalition is taking a hands-off approach with a commitment not to change anything at the moment; while Labour’s new property investment policy will restrict negative gearing to new properties only.
Before we delve any deeper, let’s briefly touch on what negative gearing actually is. In general terms, negative gearing is making a tax loss on an income producing asset, which therefore reduces your taxable income. The result of this is that you’re likely to pay less tax. What a lot of people don’t realise is that you can also negative gear shares, and companies negative gear by borrowing money to buy assets and structure their affairs in a way that gives them significant tax write-offs. However, the focus at the moment is real estate. The rent from a property is a taxable income. The interest on your loan, other running costs and depreciation (which is an accounting cost, not a real cash cost) is a deductible expense. If the expenses are higher than the income, you’ve got a taxable loss which you can claim off your regular income.
There is a lot of talk at the moment about the time that Paul Keating stopped negative gearing in the 80’s and the effect that it had on property prices and rent. The theory is that investors will leave the market, which will decrease supply of rental property and drive up rent. However if rent were to increase, then property becomes a more attractive investment, leading more investors entering the market. Keating’s policy was reversed after a short period, so historically we haven’t had the ability to see what could happen if negative gearing is stopped or substantially changed.
If there were to be changes to the negative gearing laws in the current environment, there are two factors to consider that should help you to sleep at night, whatever the circumstances.
1. Any changes are unlikely to be retrospective
This means that anyone currently taking advantage of the tax benefits is unlikely to suffer any change. You can make major financial decisions based on the environment at the time, which includes the prevailing tax laws. Anyone looking to invest now will have the ability to enter into a property contract based on full information, i.e. it’s unlikely that you’ll be subject to different tax laws by the time you settle on your property.
2. Interest rates are at record lows
While it may not be immediately apparent why interest rates play a role in this, when you examine the numbers it becomes a lot clearer. While some properties deliver terrible rental yields and are negatively geared to the tune of tens of thousands of dollars, with the help of the current interest rate many are positively geared. If there are any changes to legislation about negative gearing, the fact that there are more positively geared properties will help minimise any impact.
Further to the above, the Labour policy’s proposal is to keep negative gearing, but restrict it to new properties only. This will potentially create a split market and drive up demand for new and off the plan properties. On an economic front, this may promote construction which, as part of the property industry, is one of the largest contributors to the Australian economy. However, history has shown that one set of tax rules for one asset and a different set of rules for another has been problematic.
While there have been constant references to housing affordability and specifically first home buyers, the only material changes that either party has discussed are those relating to negative gearing. So for those looking to invest now, it’s business as usual. The tax benefits of investing in property have increasingly become less of a factor and as always, making well-informed investment decisions is the best way to minimise your risk and give you the greatest chance of a positive return.