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As negative gearing becomes political football once again, brokers have warned how removing the tax incentive would have dire consequences.
Concerns have been raised about the future of negative gearing this week, after it was confirmed that Treasury is modelling potential changes to scale back negative gearing and capital gains tax.
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Currently, investors can deduct the day-to-day costs of financing and running their investment property from their rental income. It is estimated that around two-thirds of property investors make losses that they can offset against other income, thereby generating a tax refund at the end of the year.
Similarly, investors can access a capital gains discount of 50 per cent if they hold their assets for more than 12 months.
After the Greens demanded that negative gearing would need to be scrapped in return for them helping push through the Albanese government’s Help to Buy Scheme through Senate, it was confirmed this week that Treasury is modelling potential changes to negative gearing and capital gains tax.
Treasurer Jim Chalmers confirmed on Wednesday (25 September) that “Treasury looks at all kinds of Treasury options all of the time” and that it was “not unusual for the public service … to examine issues that are being speculated about in the public or in the Parliament”.
However, both he and Prime Minister Anthony Albanese emphasised to several media outlets yesterday (26 September) that negative gearing reform is not on the Labor agenda for the next election.
Speaking to The Adviser, brokers have warned that changing negative gearing would be “playing with fire” and could result in rents being pushed upwards.
Damian Collins, the founder and managing director of Western Australian-based brokerage and investor specialist Momentum Wealth, said: “Negative gearing is really a rent subsidy; without it rents would go up.
“Investors in residential property will lose money and get some of that as a subsidy back on their tax return, so they’re willing to accept lower rent. If negative gearing is prohibited, then investors would be out of pocket and would need to hike rents by $200 to cover the $10,000 shortfall.
“Ultimately, what would happen, rent would go up even more than they have, simply because investors won’t accept such a big cash flow out of their pocket with no tax benefits.
“Investors would also then stay out of the market until rents adjust and people would probably be in a worse, if not the same, economic position.
“Every time you interfere in the market, you put more investors off entering the market.
“The best way to get rents down is encourage more supply, more investment, more construction. Tax changes and rent caps are just tinkering around the edges.”
However, the Momentum Wealth MD said that in the “unlikely” situation where negative gearing was scrapped for investors, he said he hoped that the move would be grandfathered to avoid “mass disruption in the investment market”.
Similarly, the manager of the broker division of property finance brokerage Finni, Eva Loisance, told The Adviser that the Australian economy was heavily reliant on the property market and changing the foundations of what attracts investors to it would be “playing with fire”.
“Negative gearing can make a big difference to a borrower’s servicing capacity and whether they have the option to invest at all. It makes a big difference. An investor might get between $5,000–$10,000 per year back in tax. That’s quite substantial. They might completely reconsider their approach to property purchasing, it might not be feasible,” Loisance said.
“Negative gearing is the reason why a lot of people get into investing; to save on tax. If, for whatever reason, negative gearing was going to be cancelled, you would have a lot of mortgage prisoners – because they would not be able to refinance or move their loan. They wouldn’t service. They would have to sell. So, you would see a lot of investors pulling out of the market and probably a market correction. There would be fewer investor interested in buying the property asset class, too.”
However, the Finni broker said that the company had already been receiving calls from concerned Australians who are looking to enter the property market sooner, rather than later, in case the tax laws change.
Loisance said: “We’ve had a few calls from people who were waiting to refinance until rates drop, but they’re now worried about negative gearing disappearing and not being able to refinance when rates eventually do fall. So, they’re trying to get into market now.
“The whole country is quite reliant on this property market, and I think it’s playing with fire if you were to get rid of one of the main attributes that makes it so strong.”
[Related: In Focus: What’s driving the surge in investor lending?]
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