Negative gearing, CGT changes draw mixed responses from experts

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Proposed changes by the Federal Government and their Opposition counterparts to taxation arrangements such as negative gearing and capital gains tax have garnered mixed reviews from those within the property investment industry.

Last weekend saw the Opposition propose that from 1 July 2017, negative gearing would be available only to investors who purchase new housing, while the current capital gains tax discount of 50% would be reduced to 25%.

The Federal government is believed to be considering either capping the amount that is deductible via negative gearing or a cap on the number of properties that can be negatively geared.

While property and construction lobby groups came out swinging against the proposed changes, there has been a more pragmatic response from people within the industry.

For Phillipe Brach, chief executive officer of Multifocus Properties & Finance, Labor’s proposal of halving the CGT discount is something he disagrees with as an investor, but he has no philosophical objection to it.
 
“When you look at when negative gearing was first introduced it was supposed to be a tax deferral method, not a way to avoid paying tax. The idea was that you defer the tax you pay and then you sell the property you pay the whack of taxes,” Brach said.
 
“But then the 50% discount was introduced and it meant that people really were avoiding paying their taxes. So while as an investor I don’t like to see the discount cut, I don’t have any philosophical issues with it,” he said.
 
While Brach recognises the rationale behind the Labor’s CGT proposal, he isn’t so enamoured with their plan for negative gearing.
 
“I think if you restrict negative gearing to new housing stock, then you’re going to spook the market. A lot of people are going to look at that and see that when it comes time to sell the potential pool of buyers has been reduced," he said.
 
“I think this is just a bit of a witch-hunt really. Somebody has decided that we can’t have an increase to the GST and now they’re scrambling to find another area of the taxation system to change and unfortunately negative gearing is one of those areas where they can get some political kudos.”
 
Rich Harvey, managing director of Property Buyer had a similar opinion of Labor’s negative gearing proposal.
 
“With their plan, Labor is trying to create more jobs by stimulating the construction industry, but I’m not sure it’s going to lead to economic prosperity,” Harvey said.
 
“I think you’ll end up with a real dichotomy between new housing and existing housing. A lot of the time new housing isn’t really attractive to investors, you’ve got things like developer’s margins that impact prices and it’s often in areas that investors aren’t looking at,” he said.
 
Harvey also agreed that politicians were looking to negative gearing as it’s an easy way for them to secure political points.
 
“As an economist, I’d much rather see an increase to the GST as it’s a consumption based tax. Taxes on investments are generally negative for the economy.
 
“Negative gearing is one of those things that’s always bandied about and it’s always an emotional debate. It’s something that politicians seem able to use to score some cheap points.”
 
Both Harvey and Brach said it was difficult to comment on the Government’s proposal without more specific detail; however Brach was sceptical that capping negative gearing in any way would deliver a revenue windfall to the government.
 
“There’s something like 1.9 million or 2 million investors in Australia and 75% of them only have one investment property. So there are probably very few people who a cap would probably impact," he said.
 
“I think it’s one of those things that it politically palatable, but won’t have much of an impact.”
 
But while Brach and Harvey are in favour of retaining the negative gearing status quo, Antony Bucello, Victorian state manager for National Property Buyers doesn’t believe changing the system would be the end of the world.
 
“It may affect some people, but the majority of our clients view negative gearing as a bonus. It’s a tax concession that helps out a little, but they’re in it for the capital growth," Bucello said.
 
“Labor have said they want to level the playing field a bit to help first time buyers and I think we need to do that at the moment. Right now they’re just losing out to cashed-up investors,” he said.
 

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