The MBM Tax & Asset Services team regularly reviews ATO rulings to ensure we provide the most up to date and accurate analysis of our clients’ capital expenditure.
Gearing up Against Negativity
Six months ago the thought of negative gearing being abolished and Donald Trump being the GOP front runner in the presidential race in 2016 was laughable. Recent events have shown us that the unthinkable can happen.
The recently released policy of the Labor Party will restrict negative gearing to residential housing, by removing the benefits from investment in existing properties. Taxpayers will still be able to deduct net rental losses against their income from newly constructed housing. This will only apply to property acquired after 1 July 2017 and, of course, only if the Labor Party is in power. They are also proposing to halve the capital gains tax discount to 25% from 50%.
What will it mean for investors in residential property if Labor wins the next election? And how can the property industry position itself to provide a sanctuary?
For taxpayers who already own residential investment property, there will be no changes to the current treatment whilst they hold or dispose of their residential property. What taxpayers should bear in mind is that once the property is sold and the 50% capital gains tax discount applied, whatever you re-invest in will be subject to the new regime.
For those looking at investing in property from 1 July 2017 there will still be options to take advantage of negative gearing; from buying newly constructed residential property to investing in other property class there will plenty of alternative homes for their investment dollars.
Developers should be marketing the negative gearing benefits of newly constructed property. Not only is this currently safe from Labor’s proposals, but under existing rules the depreciation deductions tend to be much higher for new rather than old property, because the Division 43 capital works deductions are based on historical construction costs and run from the original date of construction.
For those working with other property classes the uncertainty around residential property may make alternative sectors more attractive to individual investors. One reason residential property has proved so popular amongst the Australian investment community is that people understand it. Making other property classes more understandable and accessible to investors will be vital to keep and broaden investments in the property sector.
Property syndicates may be a useful tool in providing individuals an opportunity to gain entry to investment in higher value property with less risk. The added bonus of higher yields from some sectors and the benefits of higher depreciation deductions can also play a role in attracting investment.
The obvious big unknown is the Turnbull Government’s plans for property investors. They have acknowledged that they are looking at negative gearing, but have released no details as of yet. Maybe the budget on May 3rd 2016 will address this. It is however unlikely that any wholesale changes will be made with a general election looming.
In an ideal world, both parties would go to the election with a well thought out and costed policy for the future of investment and taxation and allow the general electorate to make an informed decision but maybe that is just one unthinkable thing too far.