Labor’s negative gearing and capital gains tax policy changes could have significant impacts for property investors, according to a tax expert. Here’s why.
A new incoming Labor government will implement up to “13 major policy changes”, some of which will directly impact property investors, including negative gearing and capital gains tax, IPA’s general manager of technical policy Tony Greco said on the Smart Property Investment Show.
Touching on Labor’s negative gearing policy, Mr Greco said: “It’s a basic taxpayer right to offset a loss from one activity across another.
“In relation to property investors, [it] is a big deal losing that and potentially that is one of the policies that is creating a little bit of uncertainty.”
Investors need to look at more than just their properties to determine if there is an excess amount of deduction that can be offset, according to Mr Greco.
“It will be different amongst different property investors if they have a mix of positive and negative investments. So, if you’ve borrowed money against shares or borrowed money against managed funds, it’s the same deal with property,” Mr Greco said.
“If you have an excess loss across all investments, then that is what you’ll be prohibited from applying against other income. But there's also grandfathering, there was also people who have got negative gearing arrangements and those properties were told will be grandfathered.
“So, I think there’s going to be a little bit of complexity in relation to going forward if we do have a change in policy.”
The other big policy change that could be implemented by the Labor government surrounds capital gains tax.
In the current taxation landscape, Mr Greco explained that Australian citizens who hold investments that are subject to the capital gains tax for more than 12 months can get a 50 per cent reduction on their total taxable gain, before applying for a marginal tax rate against that gain.
“Most people think there’s a capital gains tax specific rights, but that’s not the case,” Mr Greco said.
“You have a discount, yes, and what Labor is proposing is that 50 per cent discount drops to 25 per cent.
“So, we’re talking about a fairly significant reduction in the discount, which translates to more taxable gain, which translates to a higher tax bill. So a lot at stake in relation to property.”
In addition, investors who have already acquired properties and are offsetting their losses could have their investments grandfathered, according to Mr Greco.
But if Labor changes the policy, Mr Greco suggested there will be some “adjustment in market prices across the board”, but negative gearing will still be available for new dwellings.
“You’ve got to understand that there are some caveats on the policy change, so grandfathering and the existing benefits will still be available for new dwellings,” he said.
“So, investors will be attracted more so to newer developments because the negative gearing opportunities are still present.”
This means that any properties that are not new, from an investor perspective, will be red flagged as having a negative against it.
“If they were to borrow against their property and there was an excess deduction, it can’t be used to be offset against, let's say, their salary and wage income. So, a lot at stake,” Mr Greco continued.
Since properties have moved south in value in most capital cities alongside the tightening of credit availability, there is a lot of uncertainty in relation among Australian property investors with the state and federal elections on the horizon.
So, a fair recommendation to property owners would be to contact tax accountants and stay informed about how the future might impact their investments, Mr Greco said.
“Have that conversation, understand what the direct impacts on your portfolio will be and the accountants will be best-versed to explain that, and also when your future ideas in relation to what you might or might not do and in relation to property you hold,” he said.