While negative gearing for property investors appeared to escape unscathed from the Federal Budget, don’t expect the push for changes to disappear any time soon! I mean, there is a Federal election rapidly approaching.
Over the 3 months leading up to the 2016 Federal Budget, the politicians were constantly in disagreement over the issue. Labour proposed limiting negative gearing to new homes only, and reducing the capital gains tax discount down to 25% (instead of the current 50%). There was also talk form the Government to cap the deductions to $20,000 per annum, but they dropped those plans after facing significant backlash from interested parties. So all this lead to the status quo to remain with negative gearing.
With over two thirds of those tax payers taking advantage of negative gearing earning less than $80,000, it is clearly not just for the rich, and something that is taken advantage of by regular people just happen to consider property investment as a great addition to their retirement savings and Super.
The treasurer even stated that those taking advantage of negative gearing are “Teachers, nurses, police officers, defence force personnel, office workers and tradespeople”. He went on to say that “We do not consider that taxing these Australians more on their investments, including increasing their capital gains tax, and undermining the value of their own home and investment is a plan for jobs and growth.”
So why the attack on Negative Gearing?
There is a sentiment that negative gearing if the domain of wealthy investors, and that is out of the reach of everyday Australians, however, the numbers actually tell the opposite is true, with the majority of negative gearing claims being made by tax payers earning less than $80,000. Negative Gearing attracks investors into the property market, however it is not exclusively the domain of property investment, as most investment classes, including shares and managed funds, allow you to write off the expenses of owning those investments (such as management fees and interest) against the earnings on the investment.
Negative Gearing is also an important driver of economic growth and jobs
Negative Gearing also ensure that there is adequate housing available for our growing population, and allows this to provided competitively through private investors. The decision by the government to leave negative gearing and capital gains tax unchanged has been welcomed by many in the property industry.
The president of the Real Estate Institute of Australia (REIA), Neville Sanders said the 2016 Budget has recognised that the housing and construction sector have a role to play as the Australian economy transitions away from a decade long reliance on mining for growth.
“Investment in dwellings is forecast to grow at 8% in 2016-17 and peak in 2017-18 with a record number of completions,” he said. “The boost to infrastructure spending, the extension of small business concessions, modest tax cuts and the retention of the current arrangements for taxation of property investments will help ensure that the property sector remains an important driver of economic growth.
“We are pleased that the Treasurer in his Budget Speech reiterated that the government will not remove or limit negative gearing or change the capital gains tax, as this would increase the tax burden on Australians trying to provide a future for their families.
“This recognises that the current arrangements increase the supply of housing for our growing population, keep rents affordable and eases the burden on social housing. With forecasts of moderate growth, an improvement in the unemployment rate, inflation well within the RBA’s target zone, and [the] rate cut the Budget is good news for home owners and prospective buyers.”
There are still many who would like to see changes to Negative Gearing, and see it as a way to put more money back into the Government Budget, however, there are concerns in relation to this way of thinking. The property industry is a very large part of the Australian Economy, providing a significant number of jobs and in a young country with a growing population rate a necessary industry to ensure that there is adequate housing available.
As an Investor, you don’t consider property for it’s negative gearing benefits alone, however, you consider the overall benefits of the property, its location, its growth opportunities, it’s demographics, and ultimately the potential cash flow. While negative gearing can improve the overall cash flow on a property, if your decisions are made solely based on the tax implications, you are missing the big picture.
While I do support negative gearing, I am also not completely closed off to the idea of capping the concessions, or even the types of properties that can be negatively geared. It will be interesting to see what happens in this space in light of the upcoming election, however, I believe that negative gearing in some form will remain in place for many years to come.