Should you worry about losing negative gearing?
As the federal election looms, one of the most notable proposals in the property investment landscape is the scrapping of negative gearing as a policy. What would happen to investors if this went ahead?
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The Commonwealth Bank of Australia defines negatively geared properties as assets that have less rental returns than interest repayments and outgoings, which puts an investor in a position of losing income. While losing money may not sound ideal, the Australian tax law states that you can claim the interest portion of your loan repayments and other costs as a deductible expense if your property is available for rent.
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The CBA explained in their website: “The key benefit associated with negative gearing is that the loss associated with the property ownership may be offset against other income earned, such as your salary, reducing your taxable income and … your tax payable.”
“The result is that the cost of owning the property is being funded by your tenant in the form of rent, by the Australian Tax Office in the form of tax savings, and by your other surplus cash flow, such as your savings and other forms of income,” they added.
In some cases, the savings you can get from tax deductions can exceed losses from the property. However, this is not a strategy that will work for everyone.
In fact, according to the CBA, “there’s more to investment properties than reducing tax”.
Smart Property Investment’s Phil Tarrant, who has successfully built a multi-property portfolio through the years, said that he always aims to know his assets “intimately on a pre-tax perspective … [and] levels.”
The scrapping of negative gearing will definitely change things for him as an investor, however, he can still manage his portfolio effectively and find other wealth-creation opportunities in the market.
Mr Tarrant highlights: “When we invest in property, we don't consider how it's going to look for me [in the] after-tax perspective … It's always before tax. Irrespective of whether or not negative gearing stays or goes … our portfolio ... still makes sense to me.”
Pure Property Investment’s Paul Glossop also advises against factoring in exemptions on tax, negative gearing, and capital gains tax as part of your wealth-creation strategy.
“[We don’t say] ‘This property makes sense as long as you can get depreciation, as long as you can [use] negative gear[ing] on your salary’ because, ultimately, it's only going to make sense as long as you're earning what you're earning,” the buyer’s agent explained.
When negative gearing is scrapped
If negative gearing is scrapped totally on all existing properties and incentivized on new properties, Mr Glossop believes that one of the main issues that should be tackled is maintaining the supply of affordable housing.
Millions of people continue to come to Australia and live in its city centres. Once the government decides to do away with negative gearing, they need to find a way to finance the accommodation for the growing population while keeping affordability.
Mr Glossop said: “Whether that's new accommodation or ... reconstructing existing accommodation, someone has to be able to create it. Investors ... have done a very, very good job of that … That is on the backboard of how we accommodate all these additional people that come to this country, and we have to keep doing it.”
Take, for example, Sydney, which has dramatically expanded through the years. Following the rise of expensive infrastructure in the capital city, dwellings have mostly been changed to units in order to accommodate more locals, workers, students, and migrants.
If investors cease to receive incentives for providing these affordable accommodations, keeping up with the demand might be a little too hard, according to the buyer’s agent.
He highlights: “If you're not going to incentivize an investor to keep these properties and provide accommodation, I just truly don't know where the money is going to be found when you got an enormous deficit already sitting there.”
Due diligence
In light of the upcoming election and the looming changes to be made by the government, Mr Tarrant encourages investors to do due diligence before securing an asset. Glossy marketing materials that discuss the benefits of buying a property after taxes are applied should be taken with a grain of salt, he said.
“There are some certain areas of the property investment market which promote property post-tax … My view on this is that, often, people are investing in property that … [they] probably shouldn't be on … [or they] could be putting their money more effectively elsewhere. So, just be very careful,” the avid investor highlights.
While he advocates seeking the help of professionals, Mr Tarrant believes that, ultimately, investors are responsible for their assets and what they choose to do with it.
“Make sure you're informed and educated ... There is no excuse for not been educated this day and age—there is information everywhere. Just ensure that you're relying on all the right information,” he said.
At the end of the day, both Mr Tarrant and Mr Glossop agree that regardless of how the government decides to handle negative gearing as a policy, there will always be wealth-creation opportunities for property investors who keep themselves informed.
Tune in to Paul Glossop’s Q&A episode on The Smart Property Investment Show to find out more about negative gearing and more answers to the most frequently asked investment questions.