Proposed tax changes to have big impact on investment behaviour

Proposed tax changes to have big impact on investment behaviour

Property is a critically important asset class as Australian households hold more than half of their wealth in residential property.

Policies that have the potential to affect housing values have a direct bearing on household confidence and then the appetite for consumption versus savings.

When the ALP negative gearing policy was first unveiled several years ago, Sydney’s residential property market was in a boom. The landscape is very different now, yet the policy stays the same.

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It was pitched as a policy to make home ownership more affordable, which the recent price falls have certainly achieved.

Labor wants to halve the capital gains tax discount and restrict negative gearing to newly built homes, while “grandfathering” existing arrangements.

It calculates the policy would save (and or raise) $32 billion over 10 years.

The proposed changes have contributed a little to the nervousness surrounding the property market, and therefore contributed to the decline in prices.

Of course, the anxiety assumes a change of Federal government and then the passage of the policy through the parliament.

There’s plenty of feared impacts should the policy to become law.

While the proposed changes to negative gearing and also to capital gains tax will only apply to investments purchased after any policy change, there are going to be huge impacts on investment behaviour.

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There are some impacts quietly at work now, while other impacts are coming down the track.

Some investors will now be buying established housing as the purchase will be able to be negatively geared and also avoid the higher capital gains tax on any resale. After the policy comes in, there would be a period of inactivity as investors appraise the new landscape and initially avoid new housing purchases. Historically investors have a marked preference for established housing as it is cheaper.

Investors would also refrain from selling investments at the higher capital gains tax in the hope that there would be a return to a Coalition government who’d possibly scrap the policy.

Not withstanding the CGT impact, the biggest concern is the policy would likely reduce the overall supply of property in the rental market, and trigger a rise in rents.

No one really knows the full behavioural outcomes of investors, but Australians are unconvinced by the flagship Labor reform, with 44 per cent against the policy change, according to an Ipsos poll.

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Voters are also against the mooted change on capital gains tax on investments, with 48 per cent against, according to Ipsos.

The Opposition leader Bill Shorten has noted that the tax reforms were not “universally loved.” That would because some 2.1 million Australians have a rental property.

“All of the experts know that with scarce taxpayer dollars it’s better to put money into health and aged care than give a tax subsidy to someone buying their sixth or seventh investment property,” Mr Shorten said.

The last time I looked there were only 20,023 Australians with an interest in six or more investment properties.

According to ATO statistics some 71 per cent of Australians with rental properties had just the one investment.

There’s going to a lot of upheaval to get stuck into the 20,023.

Maybe the solution should be, without retrospectivity, simply limit claims to just one negatively geared policy.

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