“A significant tax overhaul would gradually eliminate negative gearing and capital gains incentives to address Australia’s housing issue.” According to the news.
(Negative Gearing: It is a term frequently used to describe a situation in which the cost of an asset, including interest costs, exceeds the income generated by the asset. Negative gearing does not only relate to real estate investments.)
The political saga around negative gearing has been one of the most contentious property problems. The political scuffle at the centre of the previous election had the ironic effect of keeping housing prices stagnant despite extremely low borrowing rates and a sharp increase in population.
You might wonder what these changes signify for you as a property owner. This blog defines negative gearing, describes labour’s suggested modifications and discusses how the changes would impact property owners.
How has it changed from the past to the present?
You must be aware of labour’s most recent declaration addressing negative gearing if you keep up with taxes, property management and asset management. Well, whether you are a homeowner or an aspiring property buyer, this is the one update you keep track of as it will greatly impact your property investment plans.
Labour earlier announced that if they are taken into the government after the next federal election, they will halt negative gearing completely and even bring down the discount for CGT from 50% to 25%. What made these announcements more promising is that all these changes will take effect from 1 January 2020.
Now that we are in 2022, labour has ended nine years of conservative dominance by winning the federal election. That’s not all; they stayed true to their word and made numerous additions to negative gearing. The changes brought in by labour will majorly impact all aspiring property investment planners; therefore, delving deep into the differences of negative gearing becomes imperative.
What is Negative Gearing?
The expense of holding a rental property exceeds the income it produces yearly, known as negative gearing. This results in a taxable loss that may typically be used as a tax deduction against other income, such as your wage or salary.
Negative gearing is a term frequently used to describe a situation in which the cost of an asset, including interest costs, exceeds the income generated by the asset. It does not only apply to real estate investments. Negatively geared individuals may offset their loss against other sources of income, such as salaries and earnings. This is consistent with how Australia’s income tax system generally functions.
The main principle in the Australian tax system is that every Australian pays taxes on their income after deducting the expenses linked with the method of generating that income. Similar to how business profits are taxed, tax is assessed on a company’s net profit rather than its total revenue. The deductions for the costs associated with earning an income demonstrate that each person’s income-generating expenses are unique.
Why Should You Not Link Deductions with Income From an Asset?
Under the Australian tax system, an individual can add other sources of income like rental income to the taxable income. This is similar to how firms add income from other sources to the net business income to determine taxable income properly.
This can bring down the cost imposed on the economy from taxing activities of a firm and that too without making any alterations to the incentive to invest. Unlike other tax systems of different countries, where deductions and income are linked to their sources, the Australian tax system minimises these potential distortions.
Difference Between Negative Gearing and Positive Gearing
(Both negative and positive gearing are important weapons in an investor’s arsenal, and the investor decides which one to use according to the situations and circumstances.)
When a property’s continuing costs are more than its rental revenue, this is known as negative gearing. In other words, the property experiences a loss each year. Not all investment properties have negative gearing. A property is favourably oriented if it makes an annual profit. In other words, the rent outweighs the ongoing costs.
Because the annual loss on your rental property may lower your overall taxable income, negative gearing in investment property may enable you to reduce the tax you pay on other income, such as your regular wage or salary. Negative gearing requires you to be able to make up the difference between the costs of ownership and the revenue you receive from the property. On the other hand, a positively geared property might increase your yearly income. But remember that you will have to pay taxes on this extra money.
The income result is the primary distinction between these two. When dealing with negative gearing, one must add to their investment costs; nevertheless, when dealing with positive gearing, the investment costs are only compensated by the income produced. Therefore, we can define positive gearing as the circumstance in which rental income exceeds expenses.
What are the Proposed Changes?
(You can pre-configure changes to configuration items and the relationships between them using the proposed modifications functionality. Despite being ready for implementation, these pre-configured changes do not become effective until they are applied.)
- Property Investment Before 1 January 2022
If you purchase a property after 1 January 2022, you can profit from the new negative gearing rules, but you won’t get the 50% CGT discount. But if you are planning on purchasing an existing property with the help of a buyer agency in Sydney and negative gear it while locking it at a 50% CGT discount, you should have done it before 1 January 2022.
Existing properties are preferred over newly built properties because-
- They are built in a better-established location where the price of the land is expected to increase in the future.
- There is no need to be wary of the builder going bankrupt and leaving the project unfinished.
- Newly-built properties come with a premium price tag, and there is a limit to which a buyer agent can negotiate on your behalf.
Obtaining bank financing has grown to be an impossible challenge for all Australians in the wake of the royal commission. All individuals who intend to purchase real estate must get started immediately to engage with some of the best buyer agencies in Melbourne, correctly manage their budget and find the ideal property.
- Property Investment After 1 January 2022
You might be thinking about whether it would be beneficial to purchase a property after 1 January 2022, especially if you wish to embrace the changes brought in by labour. The main objective of investing in a property with the help of property advocates in Melbourne should be long-term growth potential. The advantages of the modifications made to negative gearing shouldn’t accelerate your planning for investment properties; these are only additions.
If you plan to buy an existing property after 1 January 2022, you must put location and land value on the top of the priority list. This is necessary because you need the ladder of high growth to subdue cash losses. So, we can say that quality is what you should focus on if you are buying an existing property after 1 January 2022, as this will make your investment more exciting and promising.
- What are the CGT Discount Issues?
(The family home is the most significant exemption from capital gains tax (CGT), a tax levied on capital gains obtained on the sale of any asset in the framework of the Australian taxation system. Some disposals, including transfers to beneficiaries upon death, are subject to rollover rules, preventing the CGT from functioning as a clone of the estate tax.)
The net capital gains become taxable income under CGT when an asset is sold or disposed of. If a purchase is kept for at least a year, the gain is first reduced by 50% for individual taxpayers or by 33.3% for superannuation funds. Losses and profits in the capital may be equal. Net capital losses cannot be utilised to reduce taxable income but may be carried forward indefinitely within a tax year.
Apart from this, doing your maths to analyse which type of returns you can get once the changes take effect is also crucial. And if you are not sure about all this and have never dealt with the numbers and factoring of taxes, then all you need is professional advice.
While we are talking about these changes, it’s crucial to remember that you should consider keeping hold of assets purchased before 1 January 2020 for a longer period than you normally would because if they have the potential to increase significantly over time, this is more growth that will be taxed at a lower rate with the 50% CGT discount. In contrast, the CGT discount will only be 25% for transactions made after 1 January 2020.
Of course, you must consider the potential for growth of the specific assets, such as whether a house or property is situated in a desirable neighbourhood.
What Do These Changes Mean to You?
(Numerous financial and real estate professionals have spoken out against these regulatory changes. Some worry that eliminating the tax breaks may decrease property values and increase rent. Investors can demand a lower price if tax benefits are eliminated since there will be less demand for current assets and less competition. Rents may increase if investors raise them to recuperate the tax advantages they would have otherwise received.)
This policy reform is part of the labour party’s plan to improve housing affordability and promote property development. The present tax breaks for investors contribute to the exclusion of first-time purchasers from the market, and the new rules will help level the playing field. The measures are meant to support property construction to help with Australia’s housing shortage challenges. The negative gearing tax breaks will still apply to new properties, which could encourage investors to build rental properties, giving renters access to additional long-term leases.
Many properties, property advocates in Melbourne and financial experts have an aversion to the new policy changes. Their main concern is the dissipation of tax concessions as it may negatively impact the house and property values and bring along a spike in rents. The main reason behind the fall in the property prices will be the investors who will impose lower prices if the tax breaks are lowered, and even the competition for all the existing properties will reduce.
For a cushion against the tax offset, the investors might also push for higher rents. Apart from this, the new policy changes will not bring any respite for parent investors since they have been using the tool of negative gearing for their retirement plans.
Is It the End of Negative Gearing?
A decision to negatively gear an investment property should not be taken lightly. It is crucial to get professional advice before taking any action.
You must seek professional advice to learn more about the expected changes to negative gearing and what those changes mean. Everything has advantages and disadvantages, depending on your specific financial objectives and demands. Buyers Agency Australia can provide you with further information regarding negative gearing, prospective transition and if you require any tax-related guidance.
The new policy changes have been proposed to make housing more affordable and promote housing construction. Whether or not the newly suggested policy adjustments eliminate negative gearing remains to be seen. However, if the modifications are implemented, we are confident they will significantly impact current property owners and prospective home buyers. Also, remember that all new properties will continue to qualify for negative gearing incentives.
Some people support the changes labour made to negative gearing, while others oppose them. Some would contend that the adjustments will raise rents and reduce competition among current properties, while others might counter-argue that they will level the playing field. Your property investment strategy needs expert guidance from Buyers Agency Australia if the recent changes to negative gearing have upended it. We can guide your property investment planning in the right direction among the changes, uncertainties and updates.
