Scrutiny for property investors is on the rise: What impact is it having?

There has been increased scrutiny from the government in the form of tax changes. Since 2016, the Australian Taxation Office (ATO) has introduced plenty of measures that affect investors, such as:

• No more travel expense deductions.
• No more depreciation deductions.
• Foreign resident capital gains withholding tax.
• Vacancy tax.
• Capital gains tax.
• Non-deductibility of land costs.
• ATO granted new powers to access investors’ bank accounts.

There is good reason for the ATO to crack down so hard on property investors. According to Dr Diaswati Mardiasmo, chief economist at PRD Real Estate, around 90 per cent of the 1.7 million Aussie landlords are misreporting net incomes from rentals, leading to $1.3 billion in revenue losses for the governmemt.

Meanwhile, some investors are reportedly using investment loans for personal expenses like holidays or school fees, which is against tax guidelines.

The crackdown is in a bid to repair the budget deficit and curb tax revenue losses, said Mardiasmo. She said that taxpayers who incorrectly claim deductions or under-report income face penalties of up to 75 per cent of the missing tax payments.

There is certainly an argument to be made on either side of the fence. On the one hand, a reduction in investment could cool the market by reducing the supply challenges that are pushing up prices.

On the other hand, increased scrutiny could push out investors, reducing the supply of rental properties and leaving the third of Australians who rent stuck paying inflated prices.

Will the government continue to increase scrutiny?

With affordability and supply remaining key challenges in the Australian property market, Mardiasmo believes this scrutiny will continue.

The government is working to close the tax loopholes that are being exploited. The negative public sentiment will likely add further pressure, especially considering the upcoming federal election.

“Housing affordability is likely to be a key issue during the election, with property investors being a central part of the debate. Political parties may propose policy changes targeting investors, like adjusting negative gearing or capital gains tax,” said Mardiasmo.

“However, the government must also consider the economic importance of property investment, as it is tied to a significant portion of wealth in the country. Balancing policies will likely be the focus – addressing investor influence while aiming to improve housing supply and affordability.”

Clearly, it’s a fine line to tread and the government will need to weigh up each side before acting. Regardless, the scrutiny is likely to continue at a federal level while the property market challenges persist.

How is it affecting lending?

The government isn’t the only one with its eyes on property investors. Lenders are also cracking down, said Eva Loisance, Finni Mortgages’ head of broker.

“The property market has been fuelled by investors in the last few years. In order to keep the market stable and manage the risks of the high level of debt, market bubble, and consumer protection, more checks were definitely needed. "

"We saw tighter lending standards emerging, more Documents required, lower LVR on investment, Strick DTI and banks are practising more robust risk management practice as well as stress test,” Loisance said.

This has resulted in a shifting of investor activity. Strategies are being adjusted and investors are exploring alternative routes due to the added pressure. SMSF and trust lending have become much more popular as a result, said Loisance.

People who are investing or considering it should be wary of the challenges that are likely to continue to impact them.

“Investors will need to be more diligent in assessing the risks associated with their investments and ensuring they have appropriate risk mitigation strategies in place however tighter lending standards can lead to a cooling effect on property prices, as fewer investors are able to secure financing."

"This can help stabilise markets but also have the opposite effect with more investors going to private credit markets with less regulations,” said Loisance.

As the build-up to the May election heats up, we could see more attention given to property investors. Both parties are looking to attract young voters and housing affordability is a top concern for this demographic.

Unfortunately for investors, the scrutiny doesn’t appear to be going away. This could continue to deter investment activity, as has been witnessed recently.

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