THE FEDERAL ELECTION; NEGATIVE GEARING AND CAPITAL GAINS TAX. ARE WE BEING MISINFORMED?

We recently sat down with industry expert Veronica Morgan to get her insight on Australian Labor Party policy, negative gearing and capital gains tax. Here’s what she had to say.

Firstly, let’s look at what’s proposed with negative gearing policy. The ALP proposes to limit negative gearing to new housing from January 1st, 2020.

But what is negative gearing? It’s a tax concession that allows an investor to get a tax deduction for losses. Say you’re a property investor who is out of pocket $1,000 a month because your rent doesn’t cover interest on your mortgage after accounting for depreciation and costs, you can claim $12,000 a year against your tax which means you’ll receive a maximum $5,640 tax refund.

The upshot here is that negative gearing on its own is a terrible reason to buy property. It merely makes buying a quality asset more affordable. By quality asset, I mean one that will grow in value over time and help provide you with the financial freedom, which is the end goal of investing in property in the first place.

Nevertheless, it’s all a bit of a Trojan horse because the real sting in this policy is the change to the capital gains tax concession. Nobody is calling it the “capital gains tax policy”, they’re calling it the “negative gearing policy”. This means no one is really talking about CGT implications that will actually affect every investor that buys after the policy is active. Personally I actually agree the concession we get at the moment is too high and should be addressed, but I don’t feel negative gearing should be tampered with. The politicising and the rhetoric around it all are misleading to the extreme.

Capital Gains Tax concessions are the part of the policy that has much greater implications for investors than the removal of negative gearing. Currently, when you sell an investment property, you only pay tax on half of the capital gain. Before 1985 there was no CGT on investment property. It was introduced by the Hawke government and, in 1999, the Howard government removed indexation and applied a flat discount of 50%. According to the Grattan Institute, which supports the removal of these tax benefits, the number of negatively geared individuals doubled in the 10 years after the CGT discount was introduced.

So you could argue that simply removing this concession might do the trick without needing to tinker with negative gearing. However that is apparently really unpopular with voters. You can see why, because it would impact a lot more people than changes to negative gearing. Roughly 40% of property investors don’t negatively gear. Here’s what will happen when they sell. Say you make a $500K profit and you’re already in the top tax bracket, under current rules, you’ll need to pay $117,500 in tax. Labor’s policy is to reduce the concession to 25%, which means if this example property was purchased after the rule changes, you’ll be paying an additional $58,750. That’s a 50% increase in tax when the property sells. The wealthy don’t necessarily rely on negative gearing to buy property, but the CGT change will have a huge impact on individuals. This will restrict supply in the long term as people will hold off from selling to avoid incurring tax. The ALP is pushing this as a ‘positive plan to help housing affordability’, what are the other arguments in favour of this policy?

The general public doesn’t understand CGT mainly because only a small percentage actually use negative gearing so everyone else thinks it’s giving away tax dollars to ‘fat cat investors’. I started doing research after hearing Bill Shorten ask why a first homebuyer should miss out at auction because an investor is buying their 6th or 7th investment property. On the surface, I totally agree with that premise but, when you look at the data, the reality is that only 1% of investors own six or more properties, less than 1% own five so you could say less than 2% own more than five investment properties. The truth is 73% of investors own only one property. So while I’m not going to disagree that, in Sydney and Melbourne, first homebuyers have been pushed out of the market by investor activity, there is no doubt it has been over inflated. I fear the problem with the ALP using this as part of their key election platform is that it’s a very emotive issue and is laying all the blame for first homebuyers being priced out of the market on investors. It’s important to remember it’s only Sydney and Melbourne where it’s a real problem anyway and so is a national fix for a local problem.

Having spoken to experts I think the policy is poorly crafted and the political spin is misleading. It creates a two tiered market, funnelling investors into buying new property, which is proven to have a high chance of underperforming. There are three main reasons I don’t think the policy will deliver what it claims.

Firstly, it hurts the people who need it most and won’t make Sydney and Melbourne more affordable because it’s based on a faulty understanding of property buyer behaviour. 

Secondly, savvy investors won’t flock to newly built property because it’s a loss maker and is based on the assumption that investors can’t do maths. 

And finally, spruikers will have a field day with unsophisticated investors based on the assumption of ‘build it and they will come’ and developers won’t build the stock we need. 

Veronica Morgan is co-host of Foxtel’s Location Location Location Australia & Relocation Relocation Australia, principal of Good Deeds Property Buyers, co-founder of Home Buyer Academy and co-host of The Elephant in the Room property podcast. She is a Licensed Real Estate Agent, Buyers Agent and Qualified Investment Property Advisor.

Posted in Community, General, Inner West, Property on 18th April, 2019