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‘Calculative and deliberate’: Investing enters more disciplined era after tax shake-up
Following the recent property tax changes, investors will require a calculated approach, with long-term planning and a focus on debt management more necessary now than ever.
The federal government’s property tax reforms have upended investors’ trusted wealth-building formulas, forcing many to rethink how they buy, hold and exit property.
On the inaugural episode of the KTG Property Podcast, host Kev Tran sat down with property accountant and investor Jeremy Iannuzzelli to explore the ramifications of the federal budget and the strategies investors need to adopt next.
Iannuzzelli said the reforms will present multiple challenges, with new restrictions on negative gearing preventing investors in established properties from using rental losses to reduce their taxable income.
Additionally, he said the capital gains tax changes will lead to higher tax bills on an asset’s profits, particularly affecting some double-income households and younger aspiring investors.
Despite a likely drop in sentiment, he said investors can make the most of the current market by seeking out long-term growth opportunities and carefully considering their next purchases, while trying to minimise their debt as much as possible.
“I’ve always been of the belief that tax is a cost of success. We’ve got to try to find ways to enable that cost of success to stay more in our back pocket as opposed to someone else,” he said.
Regarding negative gearing, Iannuzzelli said that previously, an investor on a 30 per cent marginal tax rate, with a net loss of $20,000, would receive $6,000 back.
“Now you’ll no longer get that moving forward. It’s only new properties, so anyone buying existing properties, you’ve got to foot the bill of $20,000,” he said.
However, he said it was important to note that the tax losses and offsets would carry forward into future years, enabling investors to reduce their future tax liability when their investments became profitable.
“It will carry forward until you sell the property or until properties start to make positive income inside your personal return from other assets you may have purchased,” he said.
He said that the tax benefit would then be received through passive income, or at a period of time when the property was sold.
“So it’s not a loss – don’t let it deter you and say, well, ‘I’ll never get it’. It’s more so just realised when the property is sold or when a passive income is generated from future properties or that current property.”
In light of the tax changes, Iannuzzelli said he had reassessed his own strategy, noting that investors had to be “calculative and deliberate” in order to continue generating wealth.
He said that he was focused on paying off the debt on properties where he couldn’t claim losses under negative gearing benefits against his own income.
“Or potentially work towards paying them down first and maintain any existing properties that we may have owned in our own name, helping offset the tax that I pay.”
When it came to the minimum 30 per cent tax rate on capital gains, Iannuzzelli said the new measure could affect double-income households where one partner was not working, or earning less, and wouldn’t have usually been taxed as much.
He also said that younger people wanting to invest in lower incomes would be affected by the changes and would be deterred from entering the market.
“There are lots of negatives out of it, no doubt about it. We call it as it is,” he said.
Additionally, Iannuzzelli said a challenge of the negative gearing reforms may be that investors looking to buy into new build estates will lack essential data about possible demand in their area, should they decide to sell in the future.
He said this was particularly an issue when an influx of new homes was built at the same time, with the property’s value not necessarily being the same for the next purchaser.
“A lot of people will buy the shiny brand new object because it was shiny and brand new to them, and then the value becomes in the eye of the beholder of the next person,” Iannuzzelli said.
According to Iannuzzelli, the prospective buyer pool can be reduced drastically depending on a property’s perceived value, making it essential for investors to carefully consider their exit strategy and who they would be selling to.
“Be deliberate with your approach and the way that you buy and understand who that next market is,” he said.
Iannuzzelli said while rapid market growth during COVID-19 had prompted quicker decisions from investors in the following years, the current market called for a more precise and considered approach.
“We can’t just be throwing thousands of darts at a dartboard now because you’re not going to be popping the balloons.”
Listen to the full episode here
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