I’m not overly fussed whether Labor wins the upcoming election and makes changes to negative gearing and capital gains tax, and let me tell you why. Before I give you my reasons, let me summarise the proposed changes.
A Labor government will scrap negative gearing concessions for new investors from 1 January 2020, earlier than many analysts and commentators predicted.
Labor is also proposing to halve the capital gains discount for all assets, such as property, shares and managed funds. The proposed capital gains tax changes will apply to both new and existing properties.
What does this all mean?
Only new properties will be able to be negatively geared;
All investments made before 1 January 2020 will not be affected by the changes to negative gearing and will be fully grandfathered;
Losses from investments will continue to be able to be offset against investment gains in the same financial year, regardless of asset class;
Within year losses can still be carried forward and offset against future gains on the investment.
Capital gains tax discount
CGT will be halved for assets purchased after 1 January 2020, reducing CGT for assets purchased after 1 January 2020 from 50 per cent to 25 per cent;
All investments made before 1 January 2020 will not be affected by the changes to CGT and will be fully grandfathered;
The existing CGT discount that applies to superannuation funds will not be affected; and
The 50 per cent active asset reduction concession that applies to small businesses will not be affected.
Why I’m not overly concerned
1) Why invest in a loss-making property?
Investors buy property to make money, not lose it, and the idea behind buying a loss-making investment is that any short-term losses will be outweighed by long-term capital gains.
Many investors would also expect rental income to increase over time as the property rises in value and demand for rental properties in the area increases. This means that a negatively geared property can become positively geared once the income exceeds the interest and expenses.
An investment property purchased in an area with a low rental yield, such as an inner-city suburb, is more likely to be negatively geared, while a property purchased in an area with a high rental yield, such as a regional town, is more likely to be positively geared.
However, inner-city properties tend to rise in value more than regional areas in the long term, so investors usually expect negatively geared properties to increase in value enough to cover the loss, and then some.
Investing for the sole purpose of getting tax back is a bad strategy, in fact, I wouldn’t call it a strategy to begin with. When presenting my clients with properties I always talk in pre-tax dollars. Any potential tax refund is treated as “cream on top” and not factored into the investment decision.
2) Will we see a mini buying boom?
There will be a mini surge in the property market if Labor wins the election, as investors attempt to secure established properties before 1 January 2020, so they can negatively gear and claim the capital gains discount under the old regime. This buying frenzy will push up prices.
3) The opportunity of uncertainty
We can all agree that the amount of negative press and uncertainty in the property markets freaks everyone out a little. Right? To a certain degree, sure, the everyday investor is probably spooked and a little frightened.
On the flipside, the sophisticated and well informed investor will see this as an opportunity. I personally have not seen buying conditions (in certain markets across Australia) this good in years. It reminds me of the post GFC days. As a buyers agent, the opportunities I am seeing for my clients are second to none.
To wrap up, it’s not all doom and gloom in the property markets. There are opportunities in every market cycle, and we see the current hysteria around Labors proposed changes as no different.
“A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.”
Winston S. Churchill
Ben Plohl – Founder & Director
**All information published has been collated and prepared in good faith. No representation is given or implied as to its accuracy or interpretation. Please ensure you rely on your own research before making any investment decisions**