Negative gearing has always been thought of as a handy tax break. However, amongst the younger generation it is becoming synonymous with causing excessive property prices. In an attempt to bid for younger Australians’ political allegiance, the issue of repealing the negative gearing tax concessions is on the political table.
For those who caught Q&A last night, a questioner referred to negative gearing as a “sacred cow” and insinuated this was the case because politicians own on average 2.5 rental properties each. So will the laws change? Will the baby boomers be the last generation to take maximum benefit of negative gearing?
This issue has a precedent. Bob Hawke scrapped the negative gearing concessions in the mid 80’s with the result of undesirable rental price spikes in both Sydney and Perth, and very modest increases across the country. Simple market economics would support that, effectively, an increased cost of owning a rental property across the entire market would lead to increased rent prices for renters, but also, in the long term, a decrease in investment in rental properties (and presumably an increase in investment in another form, perhaps equity investments).
Last night, Federal Treasurer Joe Hockey distanced himself from being the main driver of the discussion around scrapping negative gearing (but did say he and the Liberal Party were committed to healthy discussion around housing affordability). Opposition Treasurer, Chris Bowen, stated that he “was not ruling anything in or out”. Some people would interpret this statement as ‘we’re thinking about it’.
Another factor to consider is that right now, money is pouring into rental properties because yields are so low on alternative investments. One should remember that when interest rates go up, money should flow back out of rental properties and into other investments without the need for a dramatic change to negative gearing concessions.
The final point to consider on negative gearing changes will be that it will only serve to make us even less competitive in the Global market as our tax rates are already so high (in NZ the highest individual tax rate is 33%, the UK Coy tax rate is in the 20%’s). Removing the concessions from negative gearing will only make Australia a less attractive country in which to earn income.
In conclusion, changes to negative gearing concessions are on the table and there are a lot of factors to consider. It would appear that the Liberal Party want nothing to do with them, but are considering housing affordability. The Labour Party “aren’t ruling anything in or out” which is fine with me so long as they are in opposition. This is not the time to panic if this issue affects you, but it is the time to start listening to the ongoing dialogue and it is the time to start assessing any impact that this might have on your financial situation.
Michael Cooper – Director
Optima Audit, March 2015