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Can You Rule Out Any Changes to Negative Gearing?

 

When the Prime Minister was recently asked this question "Can you rule out any changes to negative gearing?" (joint doorstop interview at Boronia, 16 April 2015)  the response was a simple "Yes". Though a simple response, the underlying matters of this question can be complex. For the moment though, negative gearing and capital gains tax discounts for investment properties look to remain in place.

 

On the same day of this interview a report was released by the Australian Council of Social Service (ACOSS), the report 'Fuel on the fire: Negative gearing, Capital Gains Tax and Housing affordability', called for action to restrict tax deductions for negatively geared property investments and the 50% discount on capital gains tax. ACOSS has the view that these tax legislations are costing the Australian Budget and fuelling housing property booms. ACOSS is an advocacy group that was established in 1956 having the vision for a fair, inclusive and sustainable Australia, often commenting on Australian social matters.

 

In Australia, 'negatively geared' properties are investment properties or rentals that are loss making year to year. The loss may include interest on loans, rates, and taxes on the property and depreciation. These expenses outweigh the income that is produced on the property – which is normally rent. The loss of this investment property can then be applied against the employment or other income of the individual, effectively reducing their net taxable income. For example, earning salaries and wages of $100,000, less loss on rental property for the year of $20,000, which results in a net taxable position of $80,000 – tax will only be paid on the $80,000 income. The other side of this coin is that though the investment property may be in a loss position year to year, the capital value of the property would normally be increasing.

 

 

Individual X

20X6 Financial Year

20X7 Financial Year

20X8 Financial Year

Salary

100,000

100,000

100,000

Investment Property (Loss)

(20,000)

(20,000)

(20,000)

Net Capital Gain

-

-

50,000

Net Taxable Income

$80,000

$80,000

$130,000

Note: house purchased in 20X6 for $500,000 and sold in 20X8 for $600,000. This results in a capital gain of $100,000 that is reduced to $50,000 after applying the 50% capital gains tax discount.

 

In the above basic hypothetical example, Individual X receives a reduced taxable income over the three years for the investment property loss and also receives a 50% reduction in the capital gains tax paid on the property due to the property being owned for over 12 months. Though the property operated at a loss over the three years totalling $60,000, the profit on the sale of the property was $100,000 of which only $50,000 was taxable. Effectively tax on $10,000 of income on the property (overall investment) has not been paid at all.

 

The ACOSS report discusses the point that the benefits of such 'negatively geared' situation only go to the top 10% income earners of Australia and puts pressure on affordable housing. In the media, the ACOSS report has renewed debate and discussion about the benefits that can be obtained by the negative gearing and capital gains discounts.

 

 

This is a relevant discussion following on from the Henry Report (Australia's future tax system) that proposed that the 50% discount on individual capital gains be reduced. These proposed changes have still not been implemented.

 

Something that may be in the back of people's minds is the 1980's property boom in Australia; this boom coincided with the Hawke Government's restrictions on negative gearing and is often blamed for the rent increases that occurred at the time. The ACOSS report attempts to dispel this 'myth' in their report, stating that the property boom was also at a time when interest rates were at historic highs and a share market boom was occurring. As with economics and politics, there is often a multitude of reasons also in the background.

 

Should the negative gearing benefits and capital gains tax discounts be reduced? Currently the Prime Minister will not be moving on this subject. In the recent interview (joint doorstop interview at Boronia, 16 April 2015) the Prime Minister also pointed to the fact that all national conversations seem to only steam around the raising of taxes, something that the Government is not focusing on. While not ruling out changes to loopholes in the tax system, the Government focus is on lower, simpler and fairer taxes. With the reform in place to abolish the carbon tax and the mining tax already being removed, Australia doesn't look to be targeting the high income earners any time soon.

 

Affordable housing and negative gearing are two hot topics historically and recently for the Australian economy, tax legislation and Government. Though recommendations have been made to the Government to reduce the tax advantages of negative gearing, such as the Henry Report and now the ACOSS report, the Government looks to be keeping the current legislation in place and unchanged.

Backyard Property Developments

The recent release of Taxpayer Alert 2014/1 serves as a timely reminder for property developers to ensure their own "backyard" is clean.

The alert issued by the ATO sends a warning to property developers against mis-characterising the proceeds from property developments as capital gains instead of ordinary income. Doing this gives access to the capital gains discount where 50% of the profit or gain is tax free.

I thought the release of this alert serves as a timely reminder that property developers even of the "backyard" variety need to seek professional advice before proceeding with a property project.

Generally any property project involves "large numbers". The tax treatment of the project can have a profound effect on the after tax outcome of a property project and even turn a decision on which way to proceed.

The income tax and GST treatment of a property project can come down to the intention of the tax payer and the evidence used to support the decision to treat the ultimate sale of the property either as ordinary income or a capital gain.

Lets look at the most simple example of a "backyard" developer. Read more…
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