Labor's Policy for Negative Gearing - What Does it Mean for Investors?
The following article written by Terri Loy, National Manager of Wealth Management, discusses the implications of Labor's proposed negative gearing policy.
The Facts
- Labor's policy involves limiting negative gearing to new housing from 1 July 2017. From this date, investing into established housing will not attract the ability to negatively gear. Investments made prior to this date will be grandfathered. (As an aside, the Greens' policy is to remove negative gearing concessions altogether, regardless of the type of property.)
- A 50% discount is currently available on capital gains derived when an asset that has been held for greater than 12 months is sold. Labor proposes to reduce this 50% discount to 25% from 1 July 2017.
- The Coalition has confirmed they will not make any changes to negative gearing nor will they change the current capital gains tax discount.
Property Investment Markets and Negative Gearing
So what impact will Labor's proposed measures have on property investment markets, and in particular, investment properties already owned?
There have been arguments for and against the measures from all sides of the media and property industry. Some argue the changes will improve property markets while many argue the changes will negatively impact property markets. It has been argued it is not the wealthy investors who will be hardest hit but middle-income Australians who are trying to get ahead.
Let's consider what negative gearing is in the first instance and how it is derived when an investor borrows money to invest in an asset or assets (usually shares or property).
Borrowing to invest, or gearing, can be an effective way of building wealth over the long term. Essentially, you are "leveraging" the value of your investments through borrowing. Interest on borrowed funds is generally tax deductible provided the funds are invested in assets for income-producing purposes.
There are three basic strategies to consider:
- Negative gearing – where outgoing expenses, including the cost of borrowing, is greater than income received therefore a tax loss is incurred. This style is popular when investing directly into property.
- Neutral gearing – where outgoing expenses, including borrowing costs, are equally offset by income received.
- Positive gearing - where total income is greater than expenses, and is typical when investing in shares that pay fully franked dividends.
In terms of negative gearing, where a tax loss is incurred this loss can currently be offset against the investor's other income earned. In this way the investor can reduce their taxable income and thus reduce the amount of tax they pay. The ability to do this is only allowable thanks to the current negative gearing legislation.
Labor's policy, therefore, will reduce a potential investor's ability to claim a tax deduction for these losses if they do not purchase a brand new property.
What About Shares?
According to information obtained from Labor's website, it appears their negative gearing proposal will not curb the ability to negatively gear into listed shares.
"From 1 July 2017 losses from new investments in shares and existing properties can still be used to offset investment income tax liabilities."
What Does it Mean for Investors?
The attractiveness of investing into established housing is obviously curtailed. What does this mean for the property market?
Recent data from the Australian Taxation Office (ATO) released for the 2013-2014 financial year shows that of the 2.8 million Australians who receive a rental income for their properties, nearly 1.7 million do so at a loss. This means that approximately 60% of Australians who own investment properties are negatively geared.
A report just released by SQM research considers what impact Labor's negative gearing policy could have on the property market. Their research used the total number of housing finance approvals excluding refinancing of established dwellings, as recorded by the ABS.
According to the report’s estimates, dwelling sales would decrease by 17% up to 21% in the first full year following the scrapping of negative gearing. This would result in a fall in aggregate state stamp duty revenue of between $3.1 billion to $3.8 billion, the report stated. The report predicts a downturn in the property market which could last between two to four years. Thereafter, it is predicted the market would potentially return to equilibrium, having 'priced-in' the loss of the tax concession.
The report also identified a “very high risk” that investors purchasing new property could experience losses on a re-sale in the first three years of a property’s life, if Labor were to implement its policy.
Another key finding from the report identified rental yields could be likely to rise between 90 basis points to 1.1% over a two to three year period post the implementation of the new policy.
"Average acquisition yields therefore may rise from approximately 4.4% to 5.5%."
Managing Director of SQM Research, Louis Christopher, said “In short, there will be a market impact if Labor’s Negative Gearing Policy is legislated. While we take the view that negative gearing reform is a good thing, such reform should be done as part of a wider property tax reform that should include a broad based land tax and the elimination of stamp duties. Such reform should have a phase in period of up to three years. Doing so would reduce the risks of a significant downturn which would likely have wider ramifications on the economy.”
The Federal Election is less than two weeks away. If Labor is voted in investors can expect to see this policy in force given the Greens have indicated their support for legislation.
Contact your Morgans adviser if you would like to discuss the impacts of this potential policy on your own investment situation.
(Please note, Morgans Financial Limited is not advocating any political party. Our views are impartial for the purpose of this report.)