Emerald Chamber of Commerce Inc

Five Reasons Why the Government Shouldn't Change Negative Gearing        

Author: David Naylor - Source: Chan & Naylor

 

Federal Opposition Leader Bill Shorten has announced plans to change negative gearing and the capital gains tax discount if Labor wins the next federal election.
Under costings released from the Parliamentary Budget Office, Labor’s proposed changes could save the budget $32.1 billion over 10 years once they come into force.
Key measures include:

• Negative gearing to be restricted to "newly constructed homes"
• Capital gains tax discount reduced from 50% to 25%
• Both measures would come into force from July 2017
• All existing investments under the scheme would be fully "grandfathered" and protected against the changes

With pressure on the current government to reduce the growing Budget deficit, and Treasurer Scott Morrison's refusal to rule out any changes in policy across the board, negative gearing would seem to be the one area squarely in the sights of both the government and the opposition, especially when you look at the statistics…

• There are currently 1.2 million people who have negatively geared property, and most of these people are middle class Australians.
• Australian Tax Office statistics show negatively geared property investors claim over $13 billion in losses each year, and the average loss per negatively geared investor is over $11,000
• The average loss per negatively geared property doubles for people earning more than $180,000, to over $24,000.

Should our governments look beyond the numbers? Is it a false economy just to think that by tinkering with negative gearing it will solve the budgetary problem?

5 Reasons Why the Government Shouldn't Change Negative Gearing

1. Growing Population

With Australia's population set to grow significantly over the coming decades, our governments should be asking "How will we house these people?"

The government does not have the capacity, nor the finance, to provide public housing for the growing population so this is left to the private sector.

Negative gearing allows more Australians to invest in property, as the tax benefits assist with the cash flow to invest and hold onto that property. If negative gearing is changed and CGT concessions are reduced, it will mean less investors, less demand and less houses, and it will place further pressure on the government to fund and provide housing.

2. Financial Pressures of the Ageing Population

There are currently 1.2 million middle class Australians investing in property to generate a capital gain and increase their asset base for retirement, to subsequently ensure that they can maintain a standard of living in their retirement without having to solely rely on the aged pension.

If the government creates a blockage into entry for property investment by chipping away at the tax benefits or reduce capital gain concessions, property investment becomes less attractive. In the long term, this will see more Australians relying on government pensions, meaning less self-funded retirees and therefore further pressure will be placed on future budgets.

The government needs to take a long term view and look beyond today. A change to negative gearing and capital gain concessions will only make matters worse in the future.

3. A Drop in Property Prices

Will a change in negative gearing and capital gain concessions disincentivise investors and, if so, what impact will this have on property prices?

In the short term, we may see a dip in property prices due to lower demand and increased supply – which will impact on the economy across the board. State governments will miss out on a large chunk of revenue (via loss of stamp duties), which could mean less funding to spend on things such as education, hospitals and infrastructure at a state level. The federal government will then have to fork out more to state governments to compensate.

4. Knock On Effect to the Economy

Will the changes deter people from investing in property?

Due to the loss of the tax benefits, people will not be able to fund the cash flow of an investment property, meaning they simply won’t buy investment properties. This will cause a knock on effect similar to what we have seen in the mining industry after the boom.

It could also mean a rise in unemployment in the building sector and associated industries such as white goods, electrical and service related industries like real estate and everything that goes with it. As previously mentioned, state governments will be impacted with less revenue from stamp duties to spend on state infrastructures – which would also mean less jobs.

5. Short Term Thinking

For all of the reasons above, I can understand why the government might look at the numbers in front of them and think changing the rules around negative gearing and capital gain concessions is a win for budgetary reasons, but it is simply a case of short term thinking. The government really needs to take a deep breath, sit back and carefully consider what impact this will have on the economy long term.

Any changes made may increase revenue today, but they – or should I say we – could end up paying for this 10, 20 or 30 years down the track. To put it bluntly, a short term gain for long term pain is not good business.

With 1.2 million middle class Australian property investors impacted, changing the rules are negative gearing and capital gains concessions would be highly unpopular – and it could be a game changer for either political party.