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Investors urged to assess portfolios as possible negative gearing changes loom
Investors could soon face restrictions on the number of properties they can negatively gear, following reports that housing tax changes were on the table ahead of the federal budget.
Negative gearing has been available for decades and allows investors to offset their rental property losses against their total income, reducing the taxes they pay.
While there is currently no limit on the number of properties that can be negatively geared, Labor has reportedly been considering a maximum of two rentals, which could have dire consequences for more experienced investors.
The reforms being considered in the lead-up to the budget also include cuts to the CGT (capital gains tax) discount, with the current 50 per cent tax concession to possibly be halved.
Property Investment Professionals of Australia (PIPA) chair Cate Bakos said that, if legislated, the negative gearing reforms would affect thousands of investors, as 10 per cent own more than two properties.
“Given we have around 2.2 million investors, this overall figure is somewhere around 220,000 individuals,” she told SPI.
Bakos said the change may encourage Australians to look to other asset classes, such as shares, while pre-existing investors may feel compelled to sell their properties.
“Depending on whether a future legislated date is set or not (and whether a proposal for ‘grandfathering’ is tabled), we can anticipate seeing a number of investor-driven sales in the short-term for those who do hold multiple properties.”
“Perception will be a potential problem for prospective investors, particularly those who wish to have a portfolio of properties as a vehicle to a comfortable retirement.”
She said that if many investors sold their properties in favour of other asset classes, the rental pool would likely be negatively impacted.
“With increasing rental demand, tightened vacancy rates and a reduced number of rental properties, we can only assume that the supply/demand imbalance will cause rents to rise.”
Last week, The Australian reported Treasury was conducting modelling around a potential two-property limit negative gearing policy.
Addressing the reports at a press conference on Friday, Jim Chalmers did not confirm the matter but said the government was considering “other options” to ease housing pressures ahead of the budget.
“We are alive, obviously, to the intergenerational issues in the housing market and in the tax system, and we’ve got other policies to help address that sense of unfairness,” he said.
“It’s not unusual this far out from the budget that the Treasury would be considering other options … any further steps along those lines would be a matter for cabinet in the usual way.”
Bakos said knowledge and preparation were key for investors looking to get ahead of the possible reforms.
“Investors should assess and evaluate the properties that they wish to hold long-term vs those they wish to sell.”
“Provisioning for a changed CGT landscape is prudent. Planning conversations with qualified taxation specialists prior to making any divestment decisions is highly recommended,” Bakos concluded.