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No need to rethink strategy in the face of CGT reform
Following recent news that the government was considering cutting the capital gains tax (CGT) discount for property to 33 per cent as part of the upcoming May budget, property owners have been reconsidering their portfolio position.
According to a leading buyer’s agent, investors’ concerns were premature, as the change to the tax would have a smaller impact on portfolio building than most anticipated.
InvestorKit CEO Arjun Paliwal said the industry was experiencing a knee-jerk reaction to the proposed changes to the CGT discount.
“It’s not making me rethink my strategy, and it actually shouldn’t make many people rethink theirs,” Paliwal said.
He said that, considering that investors typically held on to properties for an average of eight to 10 years, CGT often didn’t even factor into portfolio planning.
“If you are holding onto it for that period, they might refinance, they might use equity in other ways.”
“Right now, investors don’t even consider it until the time to move from one investment to another.”
According to Paliwal, the changes to the CGT would likely result in investors holding on to properties for a longer period of time, the opposite of the government’s intent with the tax reform.
“If the government is thinking that this is just going to release supply and have less pressure, that is just not how it works.”
“Investor demand doesn’t typically cool based on a tax event.”
“If an investor is looking to make X amount and the money they have in their pockets isn’t the amount they want, they will just hold longer.”
He said that the change in CGT could also create a situation in which investors continue with their original investment plan but hold properties in different structures.
“They (investors) will hold them in a different structure like companies that might have a flat tax rate already.”
“It’s a tax margin on all profits that ends up being similar to today’s capital gains discount anyway.”
Additional side effects
Paliwal said that while discouraging investors from properties at the more affordable price point could open the door for buyers to purchase their first home, it would also have a detrimental effect on the rental market.
“At the end of the day, investing plays a part in keeping rental stock balanced,” he said.
“Rental stock balance is important not just for the home buyers of today, but it’s also going to impact home buyers in the future.”
“Even if a home buyer wins today, a home buyer in the future may not, and I think that’s the problem with some of these policies.”
He said that with fewer rental properties available, flexibility would be restricted.
Once investors got over the initial shock that accompanies most significant changes, Paliwal said most would opt for a slow and considerate approach rather than being spurred into action.
“Anytime there is a potential for something to change, there are people who stay on the cautious side, and they think about these things.”
“Once past the initial shock, people will revisit the numbers and realise ‘it doesn’t make sense for me to sell just yet. I’ll just hold it.’”
He said the largest group of home owners who would be impacted by the changes was those who looked to flip homes in a short timeframe.
“There are a lot of people who tend to buy and renovate homes, sit on them for 12 months to get to the CGT benefit and then they sell,” he said.
“It actually impacts property flippers more than investors.”
“Investors who flip on the 12 or 24 month mark, hold the property long enough to get the discount, and then flip might not flip as frequently, actually bringing fewer listings to market.”