The Labor Party’s proposed negative changes will widen the gap between wealthy investors and middle-income investors, according to an industry professional.
Under the party’s planned modifications, negative gearing will be limited to newly built properties. This means that if an investor purchases a second-hand property that generates an overall loss in a year, they will not be able to claim that loss against their taxable income.
The objective is to pull investors away from second-hand properties and encourage them to invest instead in brand-new properties or other assets. Ideally, this will reduce the demand for second-hand property and put downward pressure on property prices. As a result, those properties will be more affordable for first home buyers. It will also save the budget billions of dollars in tax refunds, which are currently paid out to investors for their negatively geared investments.
However, Leah Wilkins, Capital Claims Tax Depreciation director, believes the proposed policy changes will accomplish little except hurting smaller investors. “If we drill down into the details, we discover that whilst this policy will likely deter everyday mum-and-dad investors away from second-hand property (and possibly property as an investment in general), it is likely to have little impact on the purchasing behaviour of the wealthy investors, who are also receiving the majority of the tax benefits,” she said.
Writing in a blog, Wilkins cited a Grattan Institute analysis of tax office data, which revealed that high-income earners reap more benefits from negative gearing than some middle-income earners. Nearly half of the tax benefits go to the top 10% of income earners. In addition, the top 20% of who are negatively gearing receive 53% of the negative gearing benefit.
“What has been buried in the detail of (Labor’s) policy is that these high-income earners will still have the ability to negatively gear assets (brand new or established) to offset the positive income derived by other assets in their portfolio,” she wrote. “Investment portfolios will be viewed in aggregate, not individually for each asset. This means that assets that are positively geared can be offset by an asset that is negatively geared. So long as the portfolio remains positive or neutral, these investors will not really be impacted”
This allows wealthy investors who buy negatively geared property to offset the investment income earned after realising that they earned too much money. Following the train of thought of Labor’s new policy, prices for second-hand properties are likely to decline, and these wealthy investors are best placed to buy them and continue to grow their portfolios, Wilkins said.
Wilkins said that this will tempt investors to most likely hold investment properties in a trust or company structure, given that this will not be affected by the proposed changes.
Statistics show that about 1.3 million people get the tax benefit of negative gearing, with more than half of those individuals earning less than $80,000 per year, and holding only one investment property. These individuals are the ones who will be directly affected by the proposed changes, regardless of whether home values go down, according to Wilkins. The net accumulated wealth of the people under this category will diminish, she said.
“If these investors are too highly leveraged (their asset value is not much greater than their debt), this could have devastating consequences for cash flow and long term security should the bank no longer consider their assets sufficient to secure their debt,” Wilkins said.
Increased downward pressure on prices could cause these people to land on homes that cost them much more than they are worth by the end of their loan period. Selling and reducing losses, meanwhile, would drive more properties to the market and adversely impact prices further.
“Many of these investors who can often only afford to invest in property if it is negatively geared for the first few years will be pushed out of the market, or diverted to higher risk new developments. Long development periods combined with a policy intended to reduce house prices can make these investments higher risk options,” Wilkins said.