Negative gearing relates to the situation where an investor incurs a loss from an investment but eventually expects to make an annual net profit plus capital gains on disposal of the investment in the future. The investor can deduct such losses against their salary, wage, investment or business income. Negative gearing is commonly used with investment properties. Negative gearing usually arises when significant interest on a loan procured to purchase the investment causes total deductible expenses to exceed rental income. A list of deductible expenses can be found here.
Labor’s Proposed Changes
If Labor is elected in the federal election on 18 May 2019, Labor proposes to abolish negative gearing for existing properties purchased after 1 January 2020. Negative gearing will remain available on all newly built properties.
The stated cause for this policy is to reduce the number of investors competing with owner occupier purchasers of properties. While this intention may be achieved, the “jury is out” on whether the policy will result in a loss in value of properties (due to fewer buyers) and a shortage of rental properties (due to fewer landlords) leading to rents increasing; the latter occurred in the mid-1980s when then Treasurer Paul Keating enacted laws to deny negatively geared losses but, within two years, the laws were withdrawn due to rising rents.
Capital Gains Tax Discount
Individuals and trusts, but not companies, that make capital gains from the sale of assets subject to the capital gains tax law are entitled to a 50% discount if the asset has been held for more than 12 months from the time of acquisition. This was a Howard Government measure introduced in 1999 and substituted the former mechanism whereby the cost of CGT assets was increased by movements in the consumer price index to reduce the capital gain.
Labor proposes to reduce the capital gain discount to 25% for CGT assets purchased from 1 January 2020. All investments made before this date will remain eligible for the 50% discount.
The proposed changes will also not apply to investments made by superannuation funds and for small business assets.
The reasoning for Labor’s proposal is that the 50% capital gains discount predominately favours high income earners and property investors.