There seems to be a great deal of misunderstanding of Labor’s proposed changes to negative gearing. To help everyone with some aspects of the issue, I have prepared a short Q&A on what the changes would mean.
Q: How many people currently with negatively geared properties will be impacted by Labor’s proposed change?
A: Zero. None. Zilch. No one, whether they have one or 10 negatively geared properties, they will still claim the same deductions as they do now.
Q: Will investors looking to build a nest egg for their retirement still be able to buy negatively geared property after the changes take effect?
A: Yes, but the property must be newly constructed. So you can still buy property, 5 or 10 if you wish, speculate till the cows come home, but it must be a new property. (Hhhmmm… I can see the builders and developers preparing their advertising now – ”Can’t buy an established dwelling for negative gearing? Come to us – we have thousands of properties that qualify under the new rules. Come in before it’s too late!”)
Q: Can investors still buy an established dwelling for investment purposes after the rule changes take effect?
A: Yes, but they cannot claim interest costs as a tax deduction. So buy all the established dwellings you want, you simply cannot rely on other tax payers to subsidise your borrowing costs.
Q: Will the news rule have an impact on dwelling prices?
A: It is difficult to say, but there is no doubt that new construction will get a significant boost as investors switch their focus to new dwellings. Depending on the size of this boost and critically, what happens to underlying demand from demographic changes (immigration mainly), prices will likely soften as newly constructed properties are completed. Again, a moderation in house price growth is one of the intended consequences of the change.
Q: What will be the impact of the new rules on rents?
A: Again it is difficult to be sure as some renters will be able to become owners due to improved affordability and the extra supply of dwellings that will be built. As things stand, rental yields are already low. The policy change may well see rents for new dwellings remain soft, but some established dwelling rents rise.
Q: The impact on the budget is a puny $600 million for the first four years of the change. Is this really worth the effort?
A: Well, yes. The grand-mothering of the change means that the main revenue boost is back-loaded – ie, the bulk of the gains are in the out years. Which is exactly where the money is needed. Recall the Government’s Intergenerational Report from last year? It noted, “the policies currently legislated would not see the budget in surplus at any point over the next 40 years”. It added, “over the next 40 years, Australian governments will face increasing fiscal pressures as the population grows and ages”.
Sounds like there is a bigger budget repair needed beyond 2020 and the proposed change to negative gearing addresses that.
All up, no one need fear the changes, other than people who after 1 July 2017 might have wanted to buy an established dwelling for negative gearing purposes. And for them, they can still gear up but with a new dwelling.
It’s good for the budget bottom line, especially where the revenue will likely be needed beyond 2020 and it is simply good policy.