What Labor's negative gearing policy means now

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Recent leadership instability in the national government has shortened the odds of a Labor Party victory at the next federal election.

Labor has proposed significant changes to property taxes if it wins government, the implications of which if implemented may cause further disruption to housing markets and an economy already charting unknown waters.

The key elements to Labor's property tax amendments are abolishing the blanket negative gearing tax offset allowance for residential property investors and a reduction in their capital gains tax discount.

negative gearing bill shorten labor

Current negative gearing arrangements allow residential investors to claim a loss from a property's rental income due to loan interest repayments and other outgoings as a tax deduction against other income such as salaries.

Investors can also currently claim a 50% discount on the tax payable on any capital gains accrued from the sale of a property held for more than one year.

Labor proposes abolishing negative gearing allowances for all but new homes and reducing the capital gains discount from 50% to 25%.

Labor's justification for these changes are to improve the government's balance sheet by reducing the current $10 billion in tax deductions provided to property investors, to increase the supply of housing through tax allowances targeted only to new buildings and improve housing affordability particularly for prospective first home buyers by reducing competition in the established housing market from investors.

Much however has changed since Labor announced its property tax policy in 2016 - particularly in regard to housing markets performance and the economy.

House prices in the previous boom markets of Sydney and Melbourne continue to fall and are now tracking lower than a year ago with buyer and seller sentiment remaining fragile in most capital city markets.

Residential investor numbers have crumbled over the past year in the face of higher interest rates and tighter lending conditions directed specifically to this group through the financial regulator to offset risks from perceived overborrowing.

negative gearing labor

Tens of thousands of first home buyers have surged back into housing markets over the past year, particularly in NSW and Victoria courtesy of recent changes to the stamp duty paid by this group in those states, with first home buyer activity now near, at or above long-term average levels, in all states with the exception of NSW.

Capital city markets are now awash with unsold new apartments with the peak of the recent new supply boom providing a highly competitive and challenging environment for developers.

Given recent dramatic changes in housing markets and ongoing uncertainty and fragility in the national economy, proposed changes to key property taxes need to be carefully managed.

The potential for increased downward pressure on house prices as a consequence of tax changes in an already fragile market environment will be of significant concern to homeowners particularly with household balance sheets already under pressure from higher debt levels, continued near-record low wages growth and rising inflation.

Labor however has not committed to a specific introduction date for its proposed new tax policies and may prudently, if elected, take a wait and see approach until the uncertainties surrounding the current housing market environment and national economy dissipates.

Beware the law of unknown consequences.

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Comments
Greg Byrne
November 9, 2018 12.37pm

It's interesting to read and hear that everyone's view except the average investment property owner. My view is that I couldn't care less about capital gains tax because of the type of properties we have are unlikely to accrue above the indexed amount, however I do believe it will deter others, and restrict renovation prior to sale as it will only go straight to government coffers after sale.
As for negative gearing, I predict it will go the same as in 1985 when it was abolished, it lasted only lasted 3 months before it was quickly reinstated, the housing market ground to a halt and virtually nobody was buying or selling. No money was coming in and government revenue from stamp duty and taxes!. I personally might have to pay $3000 tax bill. My option most likely would be to keep the property that's neutral and sell the one that's not. To be honest, really its not worth having an investment property, as you always are paying out with the hope to make a good return on sale, but not everyone makes a return, some like my sister who sold her house for $10,000 less than she paid for it 10 years earlier. The old saying goes, you must have risk for return, however, if there is no return, there is no point in investing in the first place. There are better investments.

Mickey
November 15, 2018 9.47pm

Agree with Greg's comment, it didn't work when Keating did it years ago and Labour seem oblivious to this fact.
If prices do drop, as expected, due to all the investors vacation the property market.........where will all the tenants live.
Are Labour assuming that there are a whole heaps of tenants just sitting on $100,000, waiting for prices to drop?
I for one will need to raise my tenants rent. I've never raised the rent during my leases, no matter how long they last but I won't be able to keep that up.

Grant Tracy
November 19, 2018 9.04pm

how stupid are the labor party to ignore history. Rents will double overnight and the meltdown will occur again. its up there with giving everyone $900 which mostly went straight into poker machines. if there wanted to do something clever then introduce generational loans like they have in Japan. They would show common sense..never a labor strongpoint!

Peter
December 2, 2018 3.52pm

The Labour Party's initiative to scrap negative gearing is fundamentally irresponsible to say the least. Having an investment Property isn't just about tax deductions. It encourages long term investment with the added benefit to be more financially independent and self sufficient in retirement whether it be through selling the house or receiving weekly rent. This in turn makes you less reliant on the Governments pension. After all that's what we are encouraged to do. The returns or tax benefits from rental properties goes back into the economy.
The generational loan as mentioned by Grant Tracy seems a great initiative. Labours history speaks for itself. The Aussie battler doesn't have the privilege to dip into a Union Slush Fund Bill!!