There are many opinions on the future of negative gearing, but what do they mean?
The Federal Election may be decided, but it's done little to dampen people's passion about the future of negative gearing. With so many opinions on negative gearing, it can be hard to work out a true picture of the tax concession’s impact. What would it actually mean to limit negative gearing? What would it mean to scrap the concession altogether? What are the vested interests involved in each position? We’ve broken down all the proposed scenarios around negative gearing to get an idea of what the future could hold, and what an alternate negative gearing reality would look like.
Negative gearing remains untouched?
The Coalition’s election win means the negative gearing status quo is likely to be maintained. The latest Federal Budget leaves negative gearing untouched, and housing groups have cheered that decision. So what exactly does the status quo mean?
What is negative gearing anyway?
Negative gearing is a tax concession that allows property investors to deduct a loss on their investment property from their personal income. In other words, if the cost of maintaining a property, the deprecation of the property and the interest payments for the property’s mortgage produce a net loss compared to the rental income, the owner can deduct this loss from their personal income at tax time. The concession puts Australia in a bit of a unique category. New Zealand is one of the only other countries in the world that allows the unrestricted transfer of losses from one kind of income to offset another kind of income.
Negative gearing proponents would say, however, that the entire property market benefits. These benefits come in the form of an increased supply of rental properties, which, in theory, keeps a lid on rental prices. The primary beneficiaries, of course, are property investors. But who are property investors? Negative gearing proponents would argue that investors are largely everyday Australians, and there is some research to support this.
The problem with these figures is that they only show the taxable income of negative gearers. This means the income represented is after taxpayers have already deducted rental losses from their income. The average income of Australians who own an investment property shows a slightly different picture.
And with fewer than 10% of Australians negatively geared, the impact of the tax concession might not be as sweeping as advertised.
What’s the downside?
The downside to negative gearing, according to its opponents, is that it pushes up property prices. It encourages speculative investment, and can price out first home buyers who are outbid at auction by property investors. The tax concession is costly for government revenue as well. The Grattan Institute claims negative gearing costs the Commonwealth Government $4 billion a year.
What’s the upshot?
There’s little doubt that negative gearing is a strategy more commonly used by wealthy investors than by average Australians. This in and of itself does not make the tax concession a bad one, but it’s the flow-on effect that could produce negative outcomes for average homebuyers and renters. Opponents would say the flow-on effect is higher house prices and loss of revenue. The problem with these claims is that they’re speculative. It’s difficult to know for certain the impact removing negative gearing would have on affordability, as it’s only one of many factors influencing house prices. Likewise, the claim that negative gearing strips $4 billion out of the Budget assumes that investors wouldn’t find another tax minimisation strategy in its absence. Still, there’s a strong argument that negative gearing distorts the market to encourage investment rather than owner-occupation.
Negative gearing is limited?
The Labor Party may have lost the Federal Election, but don't expect their position on negative gearing to change. A win in the future could put the tax concession back on the chopping block.
Labor’s plan for negative gearing is to limit the concession to new housing, with already negatively gearing property investors grandfathered in. The party also plans to reduce the capital gains tax (CGT) concession from 50% to 25%.
What is the plan anyway?
The Labor Party’s plan wouldn’t do away with negative gearing, but would only let investors deduct rental losses from their personal income for investments on newly constructed housing, with grandfathering arrangements in place for already negatively geared investors.
Labor has also proposed to reduce the capital gains tax concession for property investors. The current CGT arrangements allow investors to take a 50% discount on CGT for properties held longer than 12 months. Under the party’s proposal, this discount would fall to 25%. Again, grandfathering arrangements would be put in place for existing investors. The changes also won’t impact investments made by superannuation funds.
The major benefit would be for anyone buying already-established properties. The proposal would be likely to take some of the heat out of the competition for established homes as investors turned their eye toward off-the-plan properties.
Younger Australians could potentially reap the biggest benefits. First home buyers would no longer have to compete with investors for established housing, and research shows Australians aged 45 and above are the most likely to be negatively geared.
Property developers and home builders could reap some rewards from the plan as well. With investors by and large taken out of the market for established housing, new housing stock would likely be in higher demand. This could see greater investment in greenfield property development.
What are the drawbacks?
Opponents of the plan say it could strip investors out of the market. Without the incentive of negative gearing, Australians could choose to put their money in other asset classes. This, in turn, could put renters in a tough position. If the stock of rental properties fall, rental prices are likely to get much dearer.
On the other side of the spectrum are opponents who claim the plan doesn’t actually go far enough. The Grattan Institute has criticised the plan to grandfather existing investors as unfair to new and younger investors.
What’s the upshot?
Labor’s proposal could see prices on new developments and off-the-plan properties spike as investors increase competition for newly-built housing. The move to grandfather in investors who are already negatively geared could also cause a rush to buy established properties before the cut-off date, further pushing up prices.
What the plan is unlikely to do, however, is push up rents, as critics have claimed. This comes down to simple supply and demand. For every investor taken out of the market for established housing, the path is made clear for an owner-occupier. For every owner-occupier who purchases, the demand for rental falls because someone has moved from being a renter to being an owner-occupier. Moreover, if investors are limited to new housing stock, this introduces new rental stock to the market rather than trading existing rental stock between investors.
Negative gearing is axed?
A number of policy pundits want the tax concession axed entirely. They point out that Australia is unique among the world’s economies in offering negative gearing concessions, and say the policy is distorting house prices.
What is the plan anyway?
The Greens Party has proposed the end negative gearing entirely, doing away with the tax concession for all properties purchased on or after 1 July 2015. Properties purchased before this time would have grandfathering arrangements put in place. The party claims this would increase revenue by $42.5 billion over the period to 2024-25, and proposes to invest this revenue in building social housing. In addition to this, the Greens propose to phase out the CGT discount. Under their plan, the discount would be reduced by 10% each year from 1 July 2016 until it was entirely phased out by 1 July 2020.
Policy think tank the Grattan Institute goes even further on negative gearing, by recommending the concession be scrapped with no grandfathering arrangements in place. The group doesn’t recommend axing the CGT concession, however, but calls for it to be cut from 50% to 25%.
Under the Greens plan, the main beneficiaries would be the homeless and those living in social housing. The party proposes to build 7,000 new homes for the homeless by 2020, and 7,500 new social housing dwellings over the same period. Existing investors also benefit by having their negative gearing arrangements remain untouched, but this benefit is offset by taking away CGT concessions.
The Grattan Institute would suggest that their plan benefits renters and first home buyers by reducing speculative property investment. They say property prices would edge down only slightly, by an estimated 2%, but that first home buyers wouldn’t face fierce competition from investors when looking to purchase a home.
Both groups also claim government revenue would benefit. The Grattan Institute says its CGT discount reduction would save $3.7 billion a year, while eliminating negative gearing would raise $2 billion a year in additional tax revenue.
What are the drawbacks?
Both plans have major drawbacks for property investors. Investors would find the tax incentives of putting their money into property almost entirely erased. The Real Estate Institute of Queensland recently conducted a survey that it claimed showed 80% of respondents would pull out of property investment if negative gearing concessions were removed.
It’s possible the plan could have a flow-on effect for renters, as investors would have to ensure they generated positive rental income. This could potentially lead to higher rents.
What’s the upshot?
Removing negative gearing and the capital gains tax concession entirely would definitely see property become a less attractive asset class for investors, and it could take some out of the market. The idea that eight out of 10 investors would pull out of the market is unlikely if grandfathering arrangements were put in place, though. Moreover, as mentioned above, rents are not likely to see steep rises because more owner occupiers entering the market means fewer renters. And, countries where negative gearing concessions don’t exist still have active investment and rental markets.
Once again, the problem with the plans’ particulars is that they’re speculative. While removing negative gearing and limiting or removing capital gains tax discounts could take considerable heat out of the housing market, they aren’t the only factors pushing up house prices. First home buyers are likely to benefit from less competition, but it’s uncertain house prices would fall significantly without negative gearing in place.
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