Who will get stung by negative gearing and tax changes?
Slated negative gearing and property tax changes are discussed almost every year, but it is increasingly likely that the upcoming May budget is one of the most likely to include changes to this policy.
Property Observer reported a year ago that former treasurer Wayne Swan was not contemplating any changes at the time, despite much discussion about negative gearing alterations. It appears that current treasurer Joe Hockey, however, may have different ideas.
But who is going to get stung by changes, if there are any? Propell National Valuers shares their thoughts about how residential real estate may see its owners becoming stung with the implications.
They point to the following:
1) WHAT: The exemption of the family home from asset calculations when achieving the pension may come under scrutiny.
WHY: It can encourage retirees to be asset rich and income poor, encouraging them to own and live in a property that's bigger and more expensive than they need. This will become even more pronounced if the extra five years in the workforce, as suggested by Joe Hockey, is brought in.
THE IMPACT: Retirees with properties above the median price may look to then sell these properties, cash out and downsize. This would be a one-off market impact that would soften prices in some sectors over the short-term, but would "likely be absorbed within a year," according to Propell.
2) WHAT: Taxation allowances of negative gearing could be abolished or curtailed.
WHY: The introduction in 1985 has seen tax revenue grow, from reducing personal income tax by $600 million originally to close to $4 billion, according to the Grattan Institute.
THE IMPACT: There would be enormous short-term political backlash. It would potentially result in the transfer of wealth from "one class of people to another and the losers have been first home buyers in particular", providing a benefit to our FHBs.
OTHER OPTIONS: Grandfathering negative gearing out, limiting it to new properties (both of which have been suggested on SBS), phasing it out or toughening the rules. The limitations of negative gearing to new properties has been suggested heavily in the media lately (citing off the record comments from different government departments). If you are an investor using negative gearing to offset your loss, then there is a chance here that you will find yourself facing a greater shortfall.
However, "If the system is not changed this year, then property investors can probably relax in the knowledge that it will become a permanent feature of the investment landscape," Propell suggests, noting that this year is the most likely in which it will happen.
We've previously taken it to the experts and asked, 'Should negative gearing be changed?' Here are their opinions.