With the recent election results in Victoria now completed, the nation’s attention is turning to Canberra with one eye on the pending federal election in 2019. It is now a distinct possibility that there will be a change of government, which has us thinking what legislative changes could we expect?
Introduction to Negative Gearing
Negative gearing has historically been a controversial topic in Australian politics, and it is re-emerging in the media as a potential issue for the next election.
In short, investors often borrow money to purchase an income-producing asset. Negative gearing occurs when the gross income being produced is less than the cost of owning or managing this investment.
For example, a property is negatively geared when the rental return is less than your interest repayments and other associated expenses.
What are the current laws surrounding negative gearing?
At present, Australian tax law allows investors to claim a deduction for an expense incurred in the course of generating their taxable income. This reduces their taxable income and therefore their tax payable. This strategy is particularly appealing to high income earners as the benefit received increases in line with the marginal tax rate that is paid.
What changes are Labour proposing?
Labour’s proposed negative gearing policy, should they win at the next election, will end negative gearing on all properties except new builds. Labour has also proposed to halve the capital gains discount from 50% to 25%.
Their intention was to level the playing field for first homebuyers competing with investors, improve housing affordability and strengthen the Commonwealth Budget position through limiting these subsidies.
How could negative gearing changes impact you?
Property is an integral part of the financial culture in Australia. People accumulating their wealth and those later in their careers will often choose to purchase an investment property, either positively or negatively geared, to allow for either increased cash flow or decreased tax payable. Should Labour’s policy come into effect, your options for purchasing a negatively geared property will be reduced to new builds only.
For those approaching retirement, you may wish to sell your home or investment properties to fund your retirement or simply downsize. As investors generally make up one-third of potential buyers, this will reduce the total number of potential buyers for property and as demand falls, so do prices.
The potential benefit of decreased demand is reduced property prices in some segments of the market. This may mean that homes that were previously negatively geared may become positively geared due to a lower purchase price and increased rent; this means that you can purchase a home which will allow for greater cash flow coming into retirement and the possibility of capital gains in the future.
At this point, there is concern that the policy would accelerate the drop in house prices seen in most capital cities. While banks tighten their lending standards, house prices are reducing in a manageable and steady way. There is concern from economists that, should Labour implement their proposed policy change, that the downturn in the property market may turn into a full crash with rippling consequences.
Comprehensive analytics and research
Endorphin Wealth Management invests a great deal of time and effort researching the best investment strategies for our clients. We have developed a number of systems to manage and track the marketplace.
The investment landscape always evolves and it is more important than ever to consider your investments and carefully. We pride ourselves on being experts in researching opportunities, investments and strategies that fit in with your goals. We want our clients to get on with enjoying their life rather than worrying about money.
For an obligation free conversation about your financial future, please contact us on 03 9603 0072 or at firstname.lastname@example.org