Should Negative Gearing rules for Investment Properties be changed?

The first two months of 2016 have seen a growing debate on proposed changes to Negative Gearing rules for Investment Properties, with both major political parties throwing their pre-election ideas on the table.

To recap the principle of Negative Gearing, a negatively geared property is bought with a loan when the combination of annual interest repayments plus the deductible expenses associated with the property’s maintenance (e.g. using a real estate agent to manage the tenancy) exceeds the annual rent received from tenants of the property. The benefit of negative gearing is tax minimisation, with the loss incurred on the property allowed to be deducted from your annual wage or salary income, and then being taxed only on that reduced amount.

The driving issue that the Coalition government and the Labour opposition are trying to solve is reducing the ever-increasing gap in the Federal budget estimates in the coming years. However, are changes to tax concessions for property investment in order to plug the gaps the best way forward?

Whilst this debate is expected to continue for the major part of 2016 (at least until the Federal election), groups such as economists, finance gurus, real estate agents, property investment clubs, banks, lenders, and mortgage brokers have already put forward their opposite views to the position being taken by the political parties.

Most people are wrongly under the assumption that negative gearing serves one purpose – to help the high-end, wealthy investors become even wealthier. In reality, it is not the wealthy who will be affected, it is every day mums and dads who will not be able to afford to buy property without those tax breaks.  These are people who do not have a lot of disposable income, and losing the tax breaks would make it impossible for them to support the expenses on the properties. 

Historically, many Australians have invested in residential property as it is viewed to be a safe long-term investment, it creates a suitable income and, as an aside rather than a motivating factor, it also carries tax benefits. Now, if negative gearing is removed, they will no longer be able to afford to do this and will most likely end up having less on hand at the time of retirement - so the savings the government makes today will only be lost in the future with an increased welfare bill.

The other argument put forward is related to the issue of housing affordability. The political parties have taken the view that removing the benefits offered by negative gearing will reduce the ‘heat’ in the property market, with investors not rushing out and pushing property prices up in capital cities around the country.

Housing affordability is not only linked to property investment, it has a greater dependence on housing availability. Given that successive governments have not been prepared (or able) to commit more of the national budget to the provision of public housing, negative gearing was originally introduced to increase the number of investors, and therefore rental properties, in the market. In part this has worked, providing investors with additional incentive to meet the needs of the rental market.

With the Australian property market already in short supply, it would be seemingly remiss to change the current stance on negative gearing and further constrict supply. Fewer investors in the market means that fewer new properties will be built in the coming years. Over time, the inability of landlords to cover their expenses using tax breaks and rising gaps in housing availability will create a double whammy of both rents and property prices going up. At the end of the day, both investors and renters are set to suffer if changes of the nature proposed should come to be.

 

Do not hesitate to call me on 0421 206 543 or email julie.browne@mortgagechoice.com.au for a confidential no-obligation discussion on negative gearing using the purchase of an investment property, and I will assist & guide you through the process of reviewing your available options.

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