There have been many negative headlines regarding changes to property taxes should Australian Labor Party (ALP) form a new government in the coming months. Here’s our take on what the likely changes are, and what we anticipate the effects will be on the property market.
What is negative gearing?
A property is referred to as being negatively geared if the rental income is less than the outgoing expenses including deductible losses. The investor will be making a cash loss on their investment property and can offset these losses against other income earned, including their salary.
This negative gearing concept can be applied across a range of investments, and is not limited to solely property investments.
What are the proposed changes?
There are 3 main changes that have been proposed
- Negative gearing tax benefits will no longer be applicable to new purchases of established properties. Negative gearing benefits can still be applied to purchases of new properties.
- If investors currently have held an asset for more than 12 months, they are eligible for a 50% reduction in capital gains tax. This is now proposed to be halved to 25%.
- Negative gearing benefits can currently be applied to all taxable income, whether that be a taxable salary and incomes from investments. The proposal is for negative gearing benefits to only be applicable to investment income, so individuals will no longer be able to use this to reduce salaried income, only investment income.
- The proposed changes will be grandfathered into existence – existing investments will continue with the existing benefits, but new investments will be subject to the proposed changes. This distinction is very important if you intend to buy property in the short to medium term.
How do we think these changes will impact on the market?
We are seeing not only in our business, but anecdotally in the wider residential market, that smart investors are seeking to secure property prior to any potential change in government, and any changes to the current tax structure. Remember, the changes will be grandfathered in and will only apply to new investments. This is providing a stabilising element to the market that was previously declining. This is in contrast to the many gloomy headlines we saw when the proposed changes were announced, predicting a major down turn to the market. The dynamic will be more pronounced in the market for existing residential property, but will still be felt in off the plan and new home sales.
Intuitively this stabilisation in price makes sense – why, as a longer-term investor, would you not seek to invest in a market with assets priced at good value to achieve far superior tax outcomes in the longer term? And remember, the changes to capital gains discounts, could significantly impact once we return to a market with growth in housing values.
Once the changes are introduced, the investor community will be far more focused on new and off the plan purchases due to the superior tax structure for those assets. In simple terms, we believe demand will increase from investors, which may crowd out owner purchasers and drive up prices.
Many commentators also anticipate a lowering of the rental stock available should these proposals be introduced, pushing up rental values and yields. Clearly, this will be beneficial for investors seeking improved rental yields, but for yet to be homeowners, this should be a spur to enter the market to avoid higher rental costs.
What do we recommend?
We believe that market dynamics are changing and whether your purchase is your new home, or, if it is for investment purposes you should be prepared to act quickly.
Investors will logically be seeking to maximise your longer-term tax advantages that will no longer be available to newer investments.
Owner purchasers will take advantage of the value on offer in the current market, before they may likely have to compete harder with investors to secure a property or face higher rental costs.
The demand dynamics outlined combined with market fundamentals that are sound, increasingly encouraging economic indicators, rates at low levels, and, developers keen to see some transactions make this the perfect time to secure your next property.
In the words of Warren Buffett, “be greedy when others are fearful”.
Please contact Michael Martin to discuss the range of properties we are currently marketing in both Sydney and the Gold Coast.