Real Estate Expert
Property is the vehicle that most Australians have utilised to secure financial freedom for themselves and future generations.
Investing in a property beyond the family home has been a safe, easy-to-understand and easy-to-execute wealth plan that has delivered robust, long term security for generations of everyday Australians.
Puffery that suggests property investment is a haven for the wealthy to park funds and reduce tax is far from the reality that I’ve observed for over 35 years in real estate.
image via McGrath
I’ve seen thousands of everyday Australians secure an investment property with a modest deposit and enjoy the long-term benefits of holding it for one or two economic cycles or 10 to 20 years.
In the process of them securing their long-term financial security, this has also provided much needed rental accommodation for millions of Australians.
The local, state and federal taxes and costs associated with buying, holding and selling property, including stamp duty, income tax, local Government taxes and capital gains tax are already enormous.
Most property investors don’t negatively gear their investment as a cute way to reduce their tax, they do it as it’s the only way they can afford to secure an investment property.
Federal Labor’s proposed legislation to remove negative gearing from certain property types could see the killing of the goose that has laid millions of golden eggs for everyday Australians.
With the election fast approaching, let’s re-cap what Labor is proposing.
– If Labor wins the election, they intend to abolish negative gearing for established properties purchased for investment from January 1, 2020. Any purchases after this date can only be negatively geared if they are brand new or off-the-plan properties
– All properties negatively geared prior to January 1 will be grandfathered, which means these investors can continue to use negative gearing on that investment
– Labor intends to cut the capital gains tax discount from 50% to 25% for all investors after January 1. The discount applies to investors who hold their assets for more than one year
– Investors who owned assets prior to January 1 will receive the original 50% discount
Latest statistics released by the Australian Taxation Office in March show there were 2.16 million landlords in Australia in 2016-17. An overwhelming majority (71%) owned just one rental property.
Among these single property owners, 60.5% were negatively geared, 43% earned less than $50,000 per year and 29% were aged under 40. These are ordinary Australians who aren’t rich but are trying to get ahead using property.
Labor’s key message is that getting rid of negative gearing and reducing the CGT discount will make property more affordable for first home buyers. More affordable means cheaper, so they expect property prices to go down. Fewer investors means less rental supply, so rents are likely to go up.
The long-term impact of reduced property investment will mean that far fewer Australians will ever live their dream of financial freedom, impacting both current families and future generations.
In the meantime, tenants will bear the brunt of these changes with a projected 8-15% average increase in rents over 2020-2022, according to modelling by SQM Research*. For someone paying $500 per week, that means an extra $40 to $75 per week to keep a roof over their heads.
Those aged under 35 might be unaware that we actually have a precedent for all this. Next week, I’m going to tell you what happened in 1985-87 when the Hawke Labor Government got rid of negative gearing. The impact was so bad, the policy was reversed just over two years later.
*Estimated average weighted rise in rents across the capital cities if interest rates remain the same and Labor tax policy proceeds.
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