POTENTIAL CHANGES TO NEGATIVE GEARING ARE NOT GOOD NEWS FOR WA PROPERTY
Following the release of former Treasurer Joe Hockey’s tax discussion paper in March 2015, the spectre of tax reform has loomed large in Australia over the last 12 months.
However, in recent months the Turnbull government has significantly backed away from any major reform moves prior the upcoming election, first cancelling any plans to increase or broaden the GST base and now stepping away from making rumoured changes to negative gearing and capital gains tax discounts.
Potential changes to negative gearing arrangements and capital gains tax (CGT) discounts have been in and out of the spotlight in the last year as different sides of politics and the economic spectrum argue as to whether these arrangements are fair or simply providing another tax break to wealthy investors.
While the government may have backed down from any potential changes to these two arrangements, the opposition released their policy on negative gearing and CGT in February 2016. The policy states that as of 1 July 2017, Labor will decrease the CGT discount from 50% to 25% for investors and only allow negative gearing arrangements for new homes.
This policy position means that changes to taxation for property owners is still very much on the table dependant on the outcome of further debate and of course the upcoming federal election. So what could these potential changes mean for the WA property market? Will limits on negative gearing have a real impact on prices?
It is common knowledge that we are currently experiencing a downturn in the property market in WA as we continue to feel the impact of the end of the mining boom and reduced population growth.
More specifically, the median house price in Perth has decreased by approximately 3% in the last year according to CoreLogic RP Data and the number of properties on the market continues to escalate. Median rental rates have also decreased in the same period as less people move to the state seeking jobs in the mining industry.
It is no surprise then that changes to current tax arrangements for property are being met with trepidation as we look to stimulate investor interest in the market rather than stymie.
Many commentators argue that limiting access to negative gearing will further dampen demand for property and possibly push up rents.
A recent report by consultants BIS Shrapnel found that scrapping negative gearing would increase rents by up to 10% due to investors passing on their lost concession to renters. They also state that changes could depress new home construction by 4% and put 70,000 more households into rental stress.
While these figures may be on the extreme side, it is certainly feasible that changes to negative gearing and CGT will weaken investor demand. Particularly smaller scale investors may be put off by the lack of a tax break for any losses incurred and this has the flow on effect of further decreasing median house prices due to even less demand for property.
Given the current market conditions in WA and the need to encourage investment in the residential property market, it would seem unwise to introduce measures that may cause further uncertainty.
It is important to think of negative gearing and the CGT discount as avenues to encourage much needed investment in housing and assisting in helping buyers who may not be otherwise able to afford it to enter into the property investment market. We are not just talking about the wealthy who benefit from these types of arrangements but everyday people looking for a feasible and affordable way to make an investment in their future.