What you need to know about proposed changes to negative gearing

Negative gearing has been in the news a lot in the first few months of 2016. In mid-February Opposition Leader Bill Shorten unveiled proposed changes to negative gearing on existing homes.

Under the Labor election policy, negative gearing would be restricted to new investments from 1 July 2017; this has been forecast to save $32 billion over the next decade. Needless to say, the proposed changes have caused a lot of debate. Here’s what you need to know about the situation as it stands now.

What is negative gearing?

Gearing is when you borrow money to buy an asset that will make you money. Negative gearing occurs when the repayments for the loan are more than the income being generated by the property – essentially, you are making a loss. As well as earning capital growth, the loss is subsidised by the current tax system. This means that investors of a negatively geared property can offset their losses against their own taxable income.

What are Labor’s proposed changes?

Mr Shorten’s plan includes the following overhauls to the system:

  • From 1 July 2017, negative gearing will only be available on newly constructed homes.
  • Negatively geared properties purchased before 1 July 2017 will be left untouched (also known as grandfathered).
  • Labor will halve the capital gains discount for all assets acquired after 1 July 2017.
  • This will reduce the capital gains tax discount for assets held for more than 12 months from the current rate of 50 per cent to 25 per cent.
  • Investments made before this date will be fully grandfathered.
  • Investments made by superannuation funds will not be affected.

Why are changes being considered by Labor?

Labor’s goal for the proposed changes to negative gearing and capital gains tax is to level the playing field and make it easier for first-home buyers, in particular, to enter the market. Mr Shorten estimates that the changes will create 25,000 new jobs and will save the budget over $10 billion a year – more than the current government spends on education and child care.

What is the impact of these proposed changes?

Experts have speculated that wealthy investors are firmly in the sights of this proposed policy change. Grandfathering the changes essentially protects the overwhelming majority of “mum and dad” investors earning less than $80,000 a year who have invested in and negatively geared existing property.

Shadow Cities Minister Anthony Albanese recently summed up the main goals of the changes. “When it was introduced, negative gearing was about boosting new construction,” he said. “By doing that, you increase supply. If you increase supply, you put downward pressure on houses, and in terms of our policy, it’s been well thought through, it’s fully costed, it’s out there.”

Malcolm Turnbull’s response

As of March the 4th, the Coalition has not announced any tax policies. There was speculation earlier in the year that Mr Turnbull would be putting a cap on negative gearing deductions at $20,000 or limiting the number of investment properties that could be negatively geared. However according to the Fairfax press, any plans the federal government had to target negative gearing have been scrapped, with senior sources telling The Australian Financial Review that “we’re not going to touch it”.

We’ll bring you more information about possible tax reforms closer to the May budget.