Tax changes would impact Melbourne property investors
Capital gains tax (CGT) is something any property investor will no doubt have come across. It’s the term that describes the amount of tax you pay on the amount of money gained as a result of a sale – namely the difference between what you paid for a property and how much you sold it for.
The amount you need to pay will depend on various factors, including your eligibility for a discount and the size of the gain you made. Nevertheless, it affects most investors and will be something your property agent can offer some advice about.
However, a new report from the Grattan Institute has suggested the current system should be overhauled, bringing potential annual savings to the Commonwealth government of $5.3 billion. The study, titled Hot property: negative gearing and capital gains tax reform, explained that the 50 per cent CGT discount doesn’t work well alongside negative gearing, which is why some amendments need to be made.
How would the changes look?
The Grattan Institute proposes reducing the CGT discount to 25 per cent, while increasing some of the other taxes that Australians face. Meanwhile, it believes that investors should no longer be able to negatively gear their properties to deduct any losses they make from their investments using their labour income.
The Property Council emphasised that people are already facing high taxes on property.
On paper, this proposal makes sense from the government’s perspective. It’s estimated that a reduced CGT discount would generate around $3.7 billion a year, while changes to negative gearing could raise around $2 billion in the short term.
“Contrary to urban myth, rents won’t change much, nor will housing markets collapse. The effects on property prices would be small compared to factors such as interest rates and the supply of land,” noted CEO of the Grattan Institute and co-author of the report John Daley.
He added that property prices could fall by as much as 2 per cent, improving affordability for those using a buyers’ agent in Melbourne.
So what’s the problem?
Understandably, several policymakers and real estate groups have had plenty to say about these proposals. Among them is the Property Council of Australia, which believes the recommendations are ill-timed and misguided.
This is partly because the Australian Bureau of Statistics (ABS) recently released figures showing that taxes generated by property are on the rise. Total taxation revenue across the country increased 2.3 per cent between 2013-14 and 2014-15, with much of this rise being the result of property-related taxes. Property taxation was up 10.5 per cent year-on-year, generating a total of $4,308 million for the Commonwealth government, the ABS revealed.
The Property Council emphasised that people are already facing high taxes on property and other aspects of their daily lives, making it all the more important for further rises to be kept to a minimum. The Grattan Institute has made recommendations that don’t support this view and that could potentially cause problems for those who have already invested in property, or who are thinking about it.
“This proposal would be a retrospective hit on property investors – who have bought in good faith knowing what the rules are,” said Property Council chief executive Ken Morrison.
He continued: “The Grattan recipe will result in less investment in housing, higher rents and less jobs in the property industry. Tens of billions in new taxes, is the wrong recipe for an economy in transition.”
Why should negative gearing be allowed?
Negative gearing is an issue that been debated by, and divided, the property industry for many years. Simply put, it’s when property investors pay out more in their loan repayments than they receive back in rental income, essentially meaning they’re making a loss.
Any losses can be offset against the person’s tax, all while the price of the property has the potential to increase. This ultimately means the investor is making money, albeit at a cost to other taxpayers.
What the Grattan Institute is proposing is that this shouldn’t be able to happen. However, some groups including the Property Council believe negative gearing plays an important role in the health of the real estate market and economy as a whole.
The Grattan Institute suggested that negative gearing generally benefits people who are on higher incomes – which the Property Council argues simply isn’t the case. It revealed that 58 per cent of net rental loss deductions are received by people with a taxable income of less than $80,000. For those with an income higher than $200,000, this falls to just 13 per cent.
The government decided in recent days that it wasn’t going to make any changes to the way in which taxation works for the nation’s investors. This brings good news to the two million people across the country who have potentially approached investment property managers to put their money into real estate.
This suggests that there is still a place for negative gearing in the property landscape, and as Mr Morrison points out, there’s opportunity to give people the financial security and independence they need.
Estimates from the Property Council suggest Australians pay around $72 billion a year in property taxes, so increasing this pressure even further might not be the best option. People should have the freedom they need to secure private house sales without worrying about the associated taxes they’ll need to pay, which will bring advantages to the Australian economy as a whole.
What does the future hold for property investors?
The Grattan Institute report may have offered some suggestions, but they’re unlikely to be welcomed into policy anytime soon. It’s important to bear in mind that for the time being at least, the investment landscape is still working in most people’s favour, making now a great time to approach a buyer agent in Melbourne.
Here at Cohen Handler, we’re here to help you achieve your property goals, no matter which method you use. Our team of experienced buyers’ agents is on hand to help with any questions you might have and ensure your investment has the strongest possible chance of success.