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The scope of Labor’s plans for negative gearing were a point of confusion for some, and recent clarity from the Tax Institute has prompted predictions of a “much less severe” policy outcome for property investors.
Labor’s proposed changes to negative gearing will apply to all investments, not just property.
Previously, given the public focus on the property outcomes, the extent of Labor’s policy wasn’t clear to investors.
Confusion among accountants and their investor clients prompted Tax Institute senior tax counsel, Professor Robert Deutsch, to seek clarity with the Labor Party.
“This means that individual taxpayers would need to look at the totality of their investments,” he said.
Mr Deutsch also explained the technicalities of what this clarification means:
“If the total of the interest and deductions related to investments exceed the investment income, the excess will not be able to be used for offset against other non-investment income. This excess will need to be carried forward for offset against future investment income or capital gains. Importantly, you will not have to look at each individual investment, or at any particular asset class – that would have been a very onerous and cumbersome exercise,” he explained.
“It would continue to allow people to hold for example, four, five, or six properties with some positively geared and some negatively geared. Provided the overall positives exceed the overall negatives, there will be no problem” he added.
Labor’s changes would bring Australia in line with how other jurisdictions operate, such as the United Kingdom.
Recap: What is Labor’s policy?
If elected, the Labor party will limit negative gearing to new housing from a date that is yet to be determined. It will be after the next federal election, which will fall in the first half of 2019.
Further, the Labor party plans to halve the capital gains discount for all assets purchased after a yet-to-be-determined date after the next election. In effect, this will reduce the capital gains tax discount for assets that are held longer than 12 months from 50 per cent to 25 per cent.
On both measures, all changes will be grandfathered, which means they won’t apply retrospectively.
The ALP says its negative gearing policy has always been applicable to all investments. Its policy documents do suggest this, however, the party's focus publicly has been on the impact the policy will have on housing affordability.
What impact will the changes have on the property market?
The Hawke government scrapped negative gearing in 1985 for about two years, and rental prices in capital city markets went up.
The jury is still out on the direct correlation between abolishing the policy and rental price patterns, but in any case, Labor’s current policy is significantly different to the Hawke government’s policy. As such, the current policy is less likely to have an equally dramatic impact on the market.
“If all asset classes are targeted, then it doesn’t mean property has a problem,” said Mr Deutsch.
However, given the policy hasn’t been legislated, concrete predictions at this stage are “difficult to secure.”
“The devil is always in the detail. Once the legislation comes out, it might look differently. You never quite know until you see the legislation,” Mr Deutsch said.
Negative gearing occurs when the rental income of a property is not enough to cover the total costs of managing the rental and re-paying the interest portion of the loan.