Changes to negative gearing ruled out

Negative-gearing-has-caused-some-fuss-But-what-is-the-debate-about_157_6009928_0_14101013_300As a property investor, you are likely all too familiar with the planning required to maintain your rental. On top of a budget, you should formulate a clear strategy and plan of action that can successfully guide your investment. Many Australians are choosing negative gearing as their preferred strategy. In fact, the Australian Taxation Office (ATO) revealed that 1.3 million landlords across the country claim tax losses from their rental income in 2012. So what is all the fuss about?

What is negative gearing?

For a lot of property investors in Australia, negative gearing represents an attractive way to grow their wealth over time. In essence, a property is negatively geared if the net rental income collected from the property is less than the interest you pay on your home loan. This enables investors to claim a net rental loss on their tax return to offset against the tax on other sources of income, such as your salary.

What has caused the controversy?

However, there has been talk about taking away some of these tax breaks. This has caused a fair amount of discussion in the housing industry. A recent proposal put to the federal government by the Australian Council of Social Services (ACOSS) suggested that Australians no longer be able to use the tax break from negative gearing to offset the tax owed on other sources of income. In the whitepaper, named Fuel on the fire: Negative gearing, Capital Gains Tax and housing affordability, ACOSS said that negative gearing is costing the government around $7 billion a year and adding further fuel to rising house prices.

“Negative gearing and the tax break for capital gains don’t improve housing affordability; they make it worse by fuelling home price booms like the one in Sydney right now,” said ACOSS CEO Dr Cassandra Goldie.

It has proved a divisive subject. The Grattan Institute has echoed ACOSS’s suggestion. In an article published in the Sydney Morning Herald, the institute said that negative gearing pushes house values higher because it increases the returns collected by investors after tax.

On the other hand, many commentators are firmly in support of the strategy. The Housing Industry Association (HIA) has urged the government to keep the taxation policies in place, noting that preventing investors access to negative gearing would cause widespread damage to the property market. Graham Wolfe, HIA’s Executive Director of Industry Policy and Media, said that adjustments to policy around building, buying and selling a home, such as stamp duty and other restrictive measures, would improve affordability.

“Independent research has found that changing residential negative gearing would reduce housing affordability, and under the current housing policy settings, would lower Australian living standards,” said Graham Wolfe, HIA’s Executive Director of Industry Policy and Media in an April 16 statement.

Is there are resolution?

While debate on the pros and cons of negative gearing is likely to go on for some time, Prime Minister Tony Abbott has put discussion to rest in the mean time. He ruled out changes to negative gearing as it stands, noting that the government would be focussing on making the tax system fairer without increasing taxes on investments.

The Property Council of Australia has welcomed the comments with open arms. In an April 17 release, Executive Direct of Residential Nick Proud said retaining negative gearing would give more people the confidence to invest in the housing market and provide certainty for everyday investors.

“It also helps encourage young Australians and first homeowners to take their first step into the property market by providing what can be a more economical option – purchasing initially as an investment rather than as an owner occupier,” he said.

While this chapter on negative gearing has shut, it is a sound reminder to check up on your own strategy. A property manager can provide guidance and expertise to help you get the best from your investment.

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