Albo has been making headlines this week amid rumours of potential changes to the nation’s negative gearing laws. But what does that mean for the property market?
Speculations are swirling over the government’s plans for investors’ favourite tax rort after reports the Treasury was approached for advice on making potential changes earlier this week.
If federal officials are walking back their stubborn stance on the system to reassess property tax concessions, this would mark a massive shift in the country’s housing policies, which have become a hot topic in the current heated property market.
But while the news will be music to the ears of Greens ministers who have long been asking for the system scrapped, what would these changes mean for the average Aussie looking to purchase an investment property?
What is negative gearing?
First, let’s understand what negative gearing actually does. This current system basically boils down to investors scrapping a portion of their income tax by spending more on their investment properties than they earn in rent.
For example, for property owners that spend $40k on costs for their rental property – interest, strata fees, maintenance and upkeep – but only receive $30k in rent, they can put that financial year down as a loss and take the $10k difference off of their income tax bill.
It’s a great rort that more than 1.1 million Aussie investors took advantage of in the 2021-22 financial year, but it does come with its fair share of pros and cons for the everyday homeowner.
The good
Initially introduced in the 1930s, negative gearing has been fingered as a major draw card for both foreign and home-grown investors to boost the current supply of homes to bolster their own coffers over the years.
By dishing out benefits for loss-leading properties, the market is theoretically injected with a steady supply of homes at more affordable prices, supposedly resulting in a win-win scenario for both owners and renters.
The bad
But that idyllic system hasn’t exactly panned out, with parties instead blaming negative gearing for the current property market shit show that has priced thousands of Aussies out of homes.
Many Aussies see the tax break as a way to make rich property owners richer as wealthy investors compete for established properties and tighten the supply of homes for everyday buyers.
And they aren’t exactly wrong, with research from AHURI showing families earning about $140,000 or more made up 24 per cent of the renting population in 2021, up from 8 per cent in 1996.
Treasury figures also show negative gearing cost $2.7 billion in lost tax in 2020-21, a figure likely to be higher this year due to rising interest rates.
What does the federal government think?
Both the Albo and the Opposition have made it clear in the past that neither plan to change Australia’s current policy around negative gearing.
However, if current reports around the government’s request for Treasury advice are to be believed, Labor could be changing its stance.
It would be a shift welcomed with open arms by Greens leader Adam Brandt, who has long campaigned to abolish the system he blames for fattening the wallets of investors at the cost of housing affordability.
“Last week the Greens told Labor we wanted to wind back negative gearing and capital gains tax discounts as part of passing the government’s weak housing bill,” said Brandt in a statement.
“These unfair tax handouts are driving the rental and housing crisis. They help wealthy property investors buying their seventh property and hurt renters trying to buy their first home.
“Labor said it was impossible. Now they admit it’s possible. They must commit to doing it.”
But it isn’t as clear-cut as Brandt would have us believe. Many worry that if negative gearing was abolished, a large number of investors would either hike up their rents to cover the loss or sell their properties, reducing the rental stock available in an already tight market.
And with property prices seemingly only going up, it’s hard to see how properties could earn enough rent to cover the mortgage without negative gearing to attract investor dollars.
It’s a dilemma that the Government found themselves unable to solve once before when they wound back negative gearing in 1985, reinstating the tax break again in 1987 after rental prices skyrocketed in Sydney.
But looking at overseas markets, there are ways the system can be tweaked to help out homebuyers. Australia could adopt a similar system to the US or the UK, where rental losses can only be offset against rental income earned from another property.
It remains to be seen which way the government will swing with Albo still firmly planted on the fence, but voters can undoubtedly expect more negative gearing going into the heated election months ahead.
