Everyone’s Talking About Negative Gearing Again, Here’s What You Need To Know
Last week Prime Minister Malcolm Turnbull announced a double-dissolution election to be held on July 2 this year. So over the next 75 days be prepared for a lot of talk about negative gearing, which is looming as one of the election’s biggest issues.
Yesterday, Prime Minister Turnbull announced he won’t be touching negative gearing in the upcoming May federal budget, differing vastly from Labor, who are seeking a reform.
Stop! Explain what negative gearing is again
Negative gearing is basically a tax incentive for investment property owners, where any losses you’re making on a property can be deducted from your taxable income (i.e. you pay less tax).
And it’s only in real estate that you’re able to claim the losses against your personal income, which means some people could qualify for a lower tax bracket. Meanwhile, your property quietly increases in value, the end result being that while you might lose a bit of money in the short term (subsidised by the government), when you sell off the investment you cash in because your property is now worth more.
If that still doesn’t make sense, The Cusp has published an explainer on negative gearing and capital gains tax.
So what does this mean for you?
Obviously, negative gearing has been a topic of raging contention over the past few months, and it’s not hard to see why – firstly, it’s harder than ever for the average Australian to own property, and so naturally, reports have found more than half of the benefit of the capital gains tax discount and negative gearing goes to the top 10% of income earners.
Treasurer Scott Morrison has denied this, however, telling ABC Radio National today that it’s “a complete and utter myth” that negative gearing is only available to the wealthy elite. Citing Australian Tax Office data, he said the people that benefit from negative gearing are also “mum and dad investors,” such as teachers, nurses, midwives and police officers.
We can spend all day debating who’s exploiting the loophole, but the fact remains that negative gearing is essentially a tax break for Aussies who can afford investment properties – whether they’re mums, dads, teachers or plumbers is not the point. And it’s a break that allows them to buy more properties and avoid paying as much tax.
For those who can’t afford to own investment property, these tax breaks have driven up property prices in Australia, adding to the fact it’s ridiculously difficult for a lot of young Australians to purchase their own home.
So what does Labor want?
As announced earlier this year, Labor are proposing to cut negative gearing and capital gains tax concessions. If Labor were to win the upcoming election, its leader Bill Shorten has said he’d restrict negative gearing to new houses and reduce the capital gains tax concessions from 50% to 25%.
As he puts it, the policies will “help level the playing field for first-home buyers [who are] competing with investors [and] put the great Australian dream back within the reach of working and middle class Australians, who have been priced out of the market for too long.”
Turnbull plans to leave the policies as they are
Speaking to the press in Sydney on Sunday, Turnbull told reporters that Labor’s “reckless” stance on negative gearing would effectively devalue every property in Australia, raising rent prices in the process. “It is an extraordinary trifecta of outcomes the Labor Party is proposing in their recklessness,” the PM said, “They are going to drive down home values, drive up rents and discourage investment.”
So is there any truth to the claim that our housing market will effectively implode should we reform negative gearing?
The answer may lie in this report
According to a new report by independent Think Tank Grattan Institute, changes to negative gearing and the capital gains tax would actually save the government about $5.3 billion a year.
The report says that having a 50% capital gains tax discount (as well as the added benefits of negative gearing tax breaks) is making the housing market “more volatile and reduces home ownership” especially when it comes to first-home buyers. Together, these two measures are allowing investors to reduce and even defer their personal income tax, which is currently costing the economy about $11.7 billion.
The report recommends dropping the capital gains tax from 50% to 25%, which would see a saving of about $3.7 billion a year. Add to that a limit on negative gearing, and the government would be saving big bucks annually.
Contrary to Turnbull’s comments that changes would raise rent prices and collapse the entire housing market, the report found these reforms would actually provide relief to the Federal Budget and improve housing affordability (apparently they’ll be 2% lower, which may sound small, but it’s actually a mighty change).
Turnbull is staying on course, going so far as to write a rebuff to the report on his blog, saying “I have a great deal of respect for John Daley and the Grattan Institute, but on this occasion they have it wrong… removing negative gearing will reduce investor demand and result in lower residential property prices.” He outlines his reasoning to support the current tax incentives, which you can read here.
The debate rages on. Watch this space.