Negative Gearing in Property Investment

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By : Paul McKenzie.

Nearing gearing has become topical, with federal Bill Opposition Leader, in the tax form debate, suggesting negative gearing should be restricted to new properties, not existing. Negative Gearing simply means having an investment property that generates rental income that is less than the cost of loan (with interest repayments excluding principal/capital repayment components) and property related expenses (management fees, repairs/maintenance, council/water rates, strata levies, land tax, accounting fees, depreciation allowances etc), to gear tax benefits for the property investor. Mum and Dads property investors can benefit from negative geared investments properties, as this would have the potential benefit of pointing them into lower tax income levels and tax rates.

For property investment in Australia, which is a major investment class in Australia, which is different from United Stated and Europe, which is property is only minor, as they have share markets are double the size and major investment classes. A big factor reason why property investment in Australia is such a big “talked about” major investment class, is the tax benefits – Negative Gearing and Tax Depreciations.

Migrants and investors who come to Australia, when looking to invest, they quick to hear about property investment in Australia. When they soon become an Australian resident, then soon hear about the benefits of negative geared property investment. Negative gearing in property investment was introduced in the 1930s to help Australia out of the great depression, offing tax benefits to help national rebuilding of savings and investment. The next fifty years, grew to make property investment a major asset class and investment focus for Australians. In the mid-1980s, the Hawke/Keating Labor Government started to make changes into negative gearing, restricting the benefits and depreciation allowances. Some of the changes were then reversed, resulting from a political backlash and property market impacts (investors leaving and rental prices spiralling) and opinion polls during this time, forcing Paul Keating to reverse some of the unpopular reforms.  This is now having same political backlash for Bill Shorten, with a upcoming federal election.

Since Paul Keating’s attempt to reform and restrict negative gearing, no government to date, include the current Turnbull Liberal-National Government, would consider restricting negative gearing for Australians with negative geared investment properties, a major investment in Australia, due to the political consequences. When John Howard as Prime Minister in office, he quickly dismiss media speculation on negative gearing, referring to many Australian have negative geared investment properties, for their retirement planning. Current media reports, at the time of writing article, there is discussion of tax reform, which capital gain tax to be reviewed and possible reform, in lieu of reforming negative gearing. The number of individual tax payers with negative geared properties has risen by almost 60,000 from the previous years. Most individual tax payers with negative geared properties making tax deductions, of between $37,000.00 to $80,000.00 a year, which shows the negative gearing property investment system benefits “Middle Class Australia”.

Opposition Leader Bill Shorten’s announcement to scrap negative gearing for established properties from July next year. The changes would not affect the tax arrangements for investment properties purchased before July 2017. Federal Treasurer, Scott Morrison MP, says “It could also have some very nasty consequences for everyday mum and dad investors just trying to get ahead, who can only afford a second hand investment”. This also have an impact on the government’s very own Defence Housing properties (with Defencing Housing Australia – DHA), in which has approx. 30,000 mum and dad DHA property investors of existing DHA properties, who have approx. 30,000 defence personnel occupants.

The Business Council of Australia (BCA), while supports negative gearing reform, they also warn about limited negative gearing to new dwellings that would distort the housing market between new and second hand residential properties. They also have concerns that negative gearing changes to be phased in carefully, to avoid “fire sale impacts” on the property market. BCA president Catherine Livingstone says “If we follow the framework for good policy, and we are agreed that a tax system which reinforces and complements our national capabilities is essential to delivering on our national vision … the next step is identifying the problems with the current tax system. The BCA discussion paper identified eight directions of tax reform, including changes to negative gearing and capital gains tax, and land taxes and stamp duties.

The BCA said changes to negative gearing should align with treatment of other savings vehicles.

“Changes to negative gearing without more neutral tax treatment of savings across different asset classes are likely to shift investors into other assets. This would reduce any potential revenue gain,”

The BCA identified numerous options for changing negative gearing, including:

– Limit the number of negatively geared properties

– Cap the total amount of deductions for negatively geared property

– Quarantining interest deductions against rental income

– Not to limit negative gearing to new dwellings only.

The federal government is bringing the 2016 budget forward on 3rd May 2016, with an expected early election to follow. It is expected, the federal budget and election to follow, will be on tax reform. It is likely negative gearing to have little changes, in view political sensitivities and capital gains tax to reformed more, as a political off-set.

The Indian Telegraph Sydney Australia

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