Laboring Over Tax Changes

Recent volatility in the Australian housing market and an upcoming election have prompted the Labor party to update their position on negative gearing and capital gains tax concessions. The ALP is touting the changes as “a positive plan to help housing affordability”, claiming the current concessions are unfair, skewed towards high-income earners and do not support investment in new housing.


What is negative gearing?

Negative gearing occurs when an investor borrows money to acquire an income-producing investment and the gross income generated by that investment in a given year is less than the cost of owning and managing it (i.e. they are making a loss). Costs can include depreciation, maintenance (for a property) and interest on the loan but do not include capital repayments.

Australian tax law allows investors to deduct these losses from their taxable income (such as their salary or other income-producing investments).

Why would people want to make a loss on an investment?

While making a loss on an investment might seem counterintuitive, investors utilise this strategy with the expectation that the growth in the capital value of the asset each year will more than offset the loss they are making.

What about capital gains tax?

A ‘capital gain’ is the growth in the value of an asset (i.e. the difference between what it cost to acquire the asset and what you receive when you sell or otherwise dispose of it). This increase in the value of an asset is included in an investor’s assessable income in the year the asset is sold and becomes taxable at their marginal tax rate. Since 1999, however, if you have owned an asset for longer than 12 months, only 50% of the capital gain is taxable.

So what are the proposed changes?

The key components of the ALP’s policy changes are a proposal to limit negative gearing to new housing and to reduce the capital gains tax discount from 50% to 25%.

Implications for negative gearing

INVESTMENT PROPERTIES

The ALP has stated that they will limit negative gearing to new developments. Investors will still be able to deduct net losses from their other income, but only if the losses come from “newly constructed” housing. Losses from existing properties will only be able to be claimed against positively geared assets (assets that make a gain rather than a loss).

With tighter controls on bank lending and an oversupply of property stock in certain areas, one is left wondering how this new policy will achieve its aim of increased investment and housing affordability. It also seems to favour mature investors who have a combination of positively and negatively geared properties, whereas many working Australians with one negatively geared property will miss out.

SHARES / MANAGED FUNDS

The proposed changes to negative gearing will have a significant impact on negatively geared share and managed fund investments. The ALP policy indicates losses from new investments will only be able to be offset against tax liabilities relating to investment income. This means losses from shares / managed funds can be offset against:

  • income directly relating to the investment (e.g. dividends, managed fund distributions)
  • positively geared rental income.

Therefore, losses from shares / managed funds will not be able to offset salary and wage income. Any excess losses will be carried forward and can be offset against either future investment income, future positively geared rental income or be used to reduce the assessable capital gain once the asset is sold.

Once again, this will favour more mature investors who own a mix of negatively and positively geared investments as they are more likely to be able to fully utilise deductions against both salary and wage and investment income.

Typical Mum and Dad investors trying to build wealth by borrowing against the equity in their home to fund an investment portfolio could be the biggest losers as they will no longer be able to help fund the purchase of an investment with the use of tax losses offset against salary and wage income.

What about investments purchased before the changes?

The ALP has stated that investments made before this date will be unaffected by the change and will be covered under grandfather clauses.

Implications for capital gains tax

Under this proposal, capital gains discount for all assets will be halved meaning the capital gains tax discount for assets held longer than 12 months (outside of super) will decrease from 50% to 25%.

The ALP has indicated that the changes will not apply to investments made before the implementation date and will be fully grandfathered. Furthermore, superannuation funds and small businesses will be unaffected as there will be no changes to the existing superannuation and small business capital gains tax concessions.

Always read the fine print

Currently, these proposals are exactly that - proposals. What form the new legislation takes when (or in fact, if) it is passed is anyone's guess. The ALP have said themselves that they will "consult with industry, relevant stakeholders and state governments on further design and implementation details ahead of the start date for both of these proposals"


Date posted: 2019-04-10 | posted by: condell




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