Negative gearing update

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There have been calls for its abolishment in the past, and now reports suggest the federal government is at least considering changes to negative gearing.

Loved by some and hated by others, negative gearing allows property investors to claim any losses they incur on an investment property against their income, reducing their tax liability. As a result, it is often cited as driving up the price of property by encouraging investors to enter the market.

Back in 2010, the Henry Tax Review recommended a change to negative gearing to allow only 40 percent of any negative gearing loss to be recognised, but the Labor government did not implement any of the recommendations.

How will negative gearing change?

SBS reported this month that the Abbott government is considering leaving negative gearing in place for existing investors, but restricting it so that it only applies to new properties.

The thinking behind this is that it will ease the demand on already built homes (and therefore keep prices down) and increase demand for new homes to be built, creating a supply of new affordable housing.

If the government does go ahead with the proposed plan, the changes will be announced in the May budget next month.

What impact will the changes have?

Louis Christopher, managing director of property research firm SQM Research, wrote in an email to SQM subscribers that if the changes are made it would be “a serious game changer for the property market and all those who participate in it”.

“For a period of time, I think it could be safely said that if negative gearing was repealed or altered, investors would back off buying into the housing market, which is what those who are demanding lower dwelling prices want to see,” Christopher said.

“But if the story is correct – ie keeping negative gearing on new dwellings – then we may well keep the dwelling construction side of the economy going.”

According to Christopher, the timing is good for such changes while the property market is in recovery. “Implementing such a change may also hold off interest rate rises,” he added.

Christopher further suggested there may be a “massive rush” of investors buying property before the cut-off date for changes to negative gearing, which will be followed by a slump.

The Australian Taxation Office lists approximately 8 percent of the Australian population as having an investment property.

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