Negative gearing changes favour wealthy investors, says expert

By |

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. 

Top Suburbs : willoughby east , north lambton , kariong , tweed heads south , werribee

SHARE
Comments
  • Mikey says on 16/02/2019 02:36:07 PM

    Lets not make a fuss about this particular scenario where losses can still be claimed against other positive cashflow properties. I would like existing prices to drop to add to my 7th, even 8th Sydney property. Shhhh otherwise the price pressures from NG confusion may not offer buying opportunites for the cashed well, debatably well-off investor

Get help with your investment property



Do you need help finding the right loan for your investment?


When investing in property, it is important to make sure that you not only have the lowest available rate that you can get, but also have the correct loan features for your needs.

Just fill in a few details below and we'll then arrange for a local Aussie Mortgage Broker to contact you and work out what features or types of loans are right for your needs. We'll even help with the paperwork. Plus an appointment is free.

How soon would you like a mortgage?
What is your Annual Household Income i $
Do you currently own any Investment Properties?
Do you own your own residence?
How much equity do you have in all your current properties?
First Name
Last Name
Where do you live?
What number can we reach you on?
E-mail address
We value your privacy and treat all your information seriously - you can check out our privacy policy here