Impacts of Labor’s proposed negative gearing changes

Impacts of Labor’s proposed negative gearing changes

If elected the Australian Labor Party has promised to make substantial changes to the taxation laws pertaining to negative gearing and capital gains.

These changes would take effect on existing property purchases as from January 1 2019. 

There has been much discussion about what affect these changes will have on the Australian property market.  The government argues that the changes will have a negative impact on the economy, while the ALP believes that the changes will have a positive impact on the First Home Buyer’s market.

Gearing is the term given to borrowing for investment.  Negative gearing is when the borrowing interest costs exceed the income that the property generates.  Many property investors have used this practice to decrease their overall tax liability while building the long term value of their property portfolio.  The short term losses associated with the borrowing are usually anticipated to be offset by the long term capital growth.

The proposed changes by the ALP would make the negative gearing strategy obsolete in most cases. The proposed policy would restrict the negative gearing strategy to new properties only.  This would effectively mean that once the policy was implemented the incentive to borrow for investment purposes would be reduced as the immediate ability to claim borrowing losses on these properties would be removed, even if those losses could be offset against future capital gains.

What the effect of this proposed policy change would be is hard to gauge.  The government argues that the incentive for investors to invest in property would be greatly reduced.  This reduction in demand, they say, would result in a collapse in housing prices.  The ALP denies this and claims that their initiative would make it easier for first home buyers to enter the market as the competition for housing would be reduced.

On the face of it, the new policy would appear to reduce the incentive for investors to invest in real estate while perhaps making it easier for first home buyers to enter the market. 

Important Points

  • If elected, the ALP will remove the negative gearing facility on all loans except where the purchase of new properties is concerned
  • The ALP has promised to grandfather the new legislation, meaning that existing property investors utilising negative gearing will not be affected.
  • If considering borrowing to purchase an investment property, it may  ebworth considering financial advice.