For people who are thinking about investing in property, there are potential changes approaching in the horizon. These revolve around planned changes to the rules of negative gearing in Australia, and could dramatically affect the real estate landscape in this country.
For those unfamiliar to property investment, a negatively geared home is one with a rental income that is not enough to meet repayments, rates and other costs associated with owning it. In other words, people have to top up money from their own pocket to pay for these expenses. Profit comes when the home is sold for hefty capital gains.
Citing Australian Bureau of Statistics figures, the Australian Tax Office said there were around 1.9 million property investors in 2010-2011 in Australia, and 1.26 million of these were negatively geared. These are astounding numbers showing that many have made use of negatively geared properties as part of their own investment strategy. Benefits of this approach include being able to access properties at a higher price range as well as enjoying some potentially large tax discounts.
The government has talked about scrapping negative gearing tax benefits on established real estate and slashing capital gains tax concessions. Understandably, there are several concerns behind this.
Property council says no
The Property Council of Australia has made strong disagreements to this planned change in policy. One cited reason behind the government’s proposition involves the many wealthy investors who are using negative gearing as a shelter from tax. The party says this shift would remove it and generate an extra $32 billion in funding over the next 10 years.
However, a February 15 release by the Property Council responds, saying that there are 840,000 people in the country who have negatively geared properties and have incomes under $80,000. Such people are middle-class workers who simply use this feature to generate build long-term wealth.
Such people would suffer the downward pressure of this policy change but aren’t actually the targets of it.
What good could come of it?
That being said, the arguments in support of this change are also convincing, with repairing housing affordability mentioned as a core motivation. The Housing Industry Association’s affordability index showed that the rating dropped by 6.4 per cent in the December quarter last year. If investors are unable to buy beyond their current financial capacity or have to sell their properties due to the wiped tax benefits, we might just see a positive change in this. Only people who can actually afford the homes can buy them, which may stifle the disproportionately high prices seen in cities like Sydney.
Whatever ends up happening, be sure you get the right home loan products for your needs. Don’t hesitate to get in touch with the lending professionals at Border Bank!