2019 FEDERAL ELECTION

What is Labor’s policy on Negative Gearing?

Below we set out the facts in plain language about Labor’s policies if they are elected this year:

Labor is set to reform Negative Gearing and the Capital Gains tax discount if they win the next Federal election. Their policy aims to:

Create jobs and stimulate economic growth
Increase home ownership rates for people aged between 25-34.
In this demographic, home ownership rates have decreased from 60% to 48% (ALP 2018) in the last few years alone.

Shadow Treasurer Chris Bowen says 93% of investors are currently buying established properties.

This means:

Investors are directly competing with first homebuyers.
Investors aren’t helping to increase the supply of new property to the market.
The original purpose of Negative Gearing & CGT to encourage new housing development is not being achieved.
The Budget cannot sustain this increase in tax subsidies.

Labor’s reform package is designed to increase the opportunity for first homebuyers to enter the market as well as stimulate economic growth through increased construction activity. Labor expects its plans to reform Negative Gearing and CGT policy will add an additional $32 billion to the budget over the next 10 years.

Labor says that our tax system in Australia is based on increasing the tax rate for individuals as their income levels increase. However, the current policies offer subsidies (usually in the form of tax deductions) to those who hold assets or investments:

Higher Income = More Tax
More Investments/Assets = Less Tax (via tax deductions)

So what exactly is Negative Gearing and Capital Gains Tax?

Negative Gearing

Negative Gearing is when the expenses associated with an investment exceed the income generated by that asset. This results in a loss each year for the taxpayer and the taxpayer can reduce their taxable income by this amount.

Investors may be able to offset this loss either with future capital gains (value of investment increases) OR by claiming annual tax deductions.

Claimable deductions include: Management Fees, Maintenance costs, Borrowing expenses (interest), Depreciation of assets, Capital Works expenditure.
Negative Gearing only works for an investor when the underlying value of the asset increases by more than the accumulated annual income / expense losses.

Capital Gains Tax

Capital Gains Tax is a calculated on the net gain in value of an asset once it is sold. This is not treated as a separate tax but is added to overall taxable income. However, the current tax policy allow a CGT discount of 50% on assets held for more than a year. This means the taxpayer only pays tax on half of the profit from the sale.

[Introduced 20th September 1985 – any assets acquired after this date have been subject to CGT. Discount introduced 20th September 1999]

Labor’s Reform Proposals:

Negative Gearing

From 1st January 2020, Negative Gearing claims will only apply to brand new residential properties. This will not affect any properties purchased prior to this date or commercial property.

CGT Discount

From 1st January 2020, the Capital Gains tax discount will be reduced from 50% to 25% on assets held longer than a year. This will still apply to both newly developed and established property. Properties purchased prior to this date + CGT for small business assets + Investments by superannuation funds, will not be affected by these changes.

What do these changes mean for future property investors?

The aim of the reform is to steer property investors toward new housing developments. It is intended to increase investor demand for new properties and to reduce the demand for established properties. This will likely result in more construction for new homes and lower prices for “second-hand” properties, enabling first home buyers to enter the market.