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With the federal election fast approaching, it’s important we take the opportunity to gauge what impact a change in government would mean for property investors. Both sides of politics are positioning themselves to property owners. There is little doubt property will become a central election topic.
The Australian Labor Party, under Bill Shorten, has proposed significant changes to negative gearing and capital gains tax (CGT). These measures are designed to address affordability issues for first time home buyers.
What are the proposed changes to negative gearing and CGT?
There are two major changes:
Negative gearing benefits would be abolished on existing homes.
Losses incurred while running an investment property would no longer be tax deductible against income from other sources. About 1.3 million Australians negatively gear investment properties. Total taxpayer savings amount to nearly $4bn per annum.
Capital gains tax discount would reduce from 50% to 25%.
This means an increased tax liability when selling an investment property held longer than 12 months. No longer would you be able to reduce the capital gain, which is subject to tax, by half. It is also likely capital gains events triggered within 12 months will be subject to greater tax. The aim is to discourage short term profits.
Both sides of politics are positioning themselves to property owners.
Is there any upside to the proposed changes?
New policy is always formulated to incentivise buying property. If it were not, it would have a profound impact on the economy. The property market is valued at $6.6 trillion. An incoming Labor government would set out to stimulate the economy through growth and employment in construction.
The proposed changes are restricted to existing homes. As a property investor you would still receive taxation benefits if you buy a new property, build a home, or buy off-the-plan.
Existing benefits would be ‘grandfathered’. This is standard practice for property-related taxation matters. For example, CGT changes for foreign residents. Investors with existing properties would be exempt from any change in the law. You would retain full tax benefits on any existing investment properties you already own. This tax status would not transfer to existing properties bought after the regulatory change.
A new government may be circumspect in making drastic policy changes. Over 2 million Australians own an investment property. Many electorates include middle-income earners with one or more investment properties. Around 62% of investors using negative gearing earn less than $80,000 in taxable income. Labor will be mindful of negative flow-on effects to the economy if property investors are overburdened.
These risks could prompt Labor to soften its policy. We have seen this before. Last year, the ALP backtracked on policy to withhold franking credit refunds from pensioners. Alternatively, they could be forced to modify policy amidst any outcry that would harm their standing.
Existing legislation currently favours new build properties.
What opportunities are available to property investors?
Existing legislation currently favours new build properties. Various state governments provide concessions. These include grants and stamp duty exemptions if buying off a plan.
The proposed changes would further encourage property investors to buy a new property, build a home, or buy off-the-plan. Such changes would allow investors to retain their tax status.
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However the measures would also lower the number of investors in the market. With fewer investors, there is likely to be three main effects:
Increased value when purchasing new property.
Developers vying for reduced demand will see bargaining power shift to investors. This would represent more competitive pricing.
Greater variety in the range of house and land packages.
Investors would need to consider investing in a property that is appealing to future home buyers. This is because an existing home would appeal less to investors. There would be no tax benefits. Design and construct firms are likely to cater by expanding their range.
Improved rental yields.
Lower purchase prices would provide investors with larger returns on their assets.
What does this all mean?
Property markets are currently in a short term decline. However interest rates are at record lows and analysts expect the next move may be a cut. Repayments towards investment loans are lower. Regulatory changes will also create pressure on property prices. Such savings provide investors the opportunity to build wealth over the medium-to-long term by investing in property.