For years, negative gearing has been a key strategy for Australian property investors. It’s a tax concession that allows property owners to offset losses made on investment properties against their taxable income, reducing their overall tax liability. The Australian Labor Party (ALP) has long proposed changes to this system in the name of housing affordability, but their plans have sparked intense debate among investors, policymakers, and the general public.
In this post, we’ll break down the ALP’s proposed changes to negative gearing, the reasoning behind them, and the potential implications for investors and the broader housing market.
What is Negative Gearing?
Before diving into the proposed reforms, it’s important to understand negative gearing itself. When an investor borrows money to buy an investment property, they often rely on rental income to cover the costs. However, if the rental income is less than the expenses of owning and maintaining the property (such as mortgage interest, maintenance, and management fees), the property is said to be “negatively geared.”
In Australia, investors can claim the loss on the property as a deduction against their taxable income, which reduces their tax bill. For many years, this has made property investment an attractive option, particularly for high-income earners seeking to reduce their tax obligations.
The ALP’s Plan for Negative Gearing Reform
The Australian Labor Party has argued that the current negative gearing system contributes to inflated house prices, making it harder for first-home buyers to enter the market. Their proposal for reform aims to reduce the demand for existing homes by limiting negative gearing benefits for investors. Here’s a closer look at what their plan entails:
- Restrict Negative Gearing to New Builds: Under the ALP’s proposal, negative gearing would be restricted to newly built properties. Investors who purchase new homes would still be able to deduct losses from their taxable income, but those who invest in existing properties would no longer be able to claim this benefit.
- Grandfathering of Existing Investments: For current property investors, there’s no need to panic—at least not immediately. The ALP’s proposal includes a “grandfathering” clause, which means that any properties already negatively geared before the policy change would still retain the tax benefit. However, this applies only to properties purchased before the changes come into effect.
- Capital Gains Tax Discount Changes: In addition to limiting negative gearing, the ALP has also proposed reducing the capital gains tax (CGT) discount from 50% to 25% for properties held for more than a year. Currently, property investors enjoy a 50% reduction on CGT when they sell a property they’ve held for over 12 months. Under the ALP’s plan, this discount would be cut in half, except for newly built homes, to further encourage investment in new housing construction.
Why Change Negative Gearing?
The ALP’s central argument for these reforms is that the current system disproportionately benefits wealthy investors, encourages speculative property purchases, and inflates house prices, particularly in major cities like Sydney and Melbourne. By limiting negative gearing to new homes, the ALP aims to encourage investment in property development, which in turn would increase housing supply and, ideally, moderate price growth.
The current system is also seen by critics as one that favors investors over first-time homebuyers. By providing tax incentives to property investors, the demand for existing homes increases, often pushing prices beyond the reach of many aspiring homeowners. The ALP believes that by restricting these incentives, they can level the playing field for first-home buyers, making it easier for them to enter the market.
Moreover, the ALP contends that curtailing negative gearing would improve the government’s budget position. Tax concessions from negative gearing and capital gains tax exemptions cost the government billions of dollars each year. The reforms are designed to reduce this tax drain and reinvest the savings into housing programs and other public services.
The Potential Impact on Investors
The ALP’s plan, while aimed at addressing housing affordability, could significantly impact property investors. For investors who already own negatively geared properties, the changes may not have an immediate effect due to the grandfathering provision. However, future investments in existing homes would lose their tax benefits, potentially reducing investor interest in this segment of the market.
This shift could have several consequences:
- Reduced Investor Demand for Existing Properties: Investors may become less inclined to purchase existing homes if they can no longer deduct losses from their taxable income. This could result in a cooling of the housing market, particularly in areas where investors have been a dominant force.
- Increased Focus on New Builds: To maintain tax benefits, investors would likely shift their focus to newly built properties. This could stimulate housing construction, increasing the supply of homes and potentially easing affordability pressures, especially for renters.
- Uncertainty in the Short Term: The uncertainty surrounding these potential reforms could lead to short-term volatility in the property market. Investors may rush to buy existing homes before the changes take effect, while others may hold off on making new investments until there is more clarity on the timing and details of the reforms.
Criticism and Concerns
The ALP’s proposals have not been without their critics. Opponents argue that limiting negative gearing could lead to a reduction in rental stock as fewer investors purchase properties, potentially increasing rents. They also caution that a sudden drop in investor activity could have a broader economic impact, as the construction sector and real estate markets adjust to the changes.
Additionally, some experts argue that the focus on negative gearing is misplaced and that other factors, such as interest rates and land supply, play a more significant role in driving up property prices.
Final Thoughts
The ALP’s proposed changes to negative gearing represent a bold attempt to address Australia’s housing affordability crisis. While the reforms are aimed at making it easier for first-home buyers to enter the market and increasing the supply of new homes, they also pose significant risks for investors, particularly those relying on tax concessions to offset the costs of property ownership.
For property investors, understanding the potential changes and how they might affect your portfolio is essential. While the ALP’s proposals may not be implemented immediately, they reflect broader concerns about housing affordability and taxation policy in Australia, and they are likely to remain a key issue in future political debates.
These changes – if enacted are likely to significantly (adversely) affect all property investors. We at Twenty Acres Accounting are offering special-priced strategy sessions to property investors to –
- review your current circumstances;
- estimate the impact of the changes on your portfolio in the future
- develop a strategy to capitalise on the changes should they happen.
To secure one of these places, book here:
