Implications for negative gearing and capital gains tax concessions
The falling housing market in Australia has prompted the Labor party (ALP) to update their policy on negative gearing and capital gains tax concessions. Touted as a “positive plan to help housing affordability”, the ALP claims current concessions are highly inequitable, skewed towards high-income earners and not supportive of investment in new housing.
The key components of the ALP’s policy are a proposal to limit negative gearing to new housing and reduce the capital gains tax discount from a current rate of 50% down to 25%.
For now, there is no impact on investments acquired before the proposed change in legislation.
The ALP will limit negative gearing to new housing. Under the proposed policy taxpayers will still be able to deduct net rental losses from salary and wage income – provided the losses come from ‘newly constructed' housing.
Losses from negative gearing property (other than new housing) will not be allowed to be claimed against salary and wage income but can be claimed against positively geared assets.
With limited vacant land for new housing developments and tighter controls on bank lending, one is left pondering how the ALP policy will achieve their claims of increased investment and housing affordability. The policy also seems to favour mature investors who may have a combination of positively geared and negatively geared properties, whereas most working Australians with a single negative geared property will miss out.
The proposed changes to negative gearing will have a significant impact on negatively geared share investments. The ALP policy indicates losses from new investments in shares will remain eligible for offset against investment income tax liabilities, however, the policy is short on detail of exactly how the ALP intend the proposed legislation to apply.
Under the proposed legislation, losses from new investments in shares will ONLY be able to be offset against tax liabilities relating to investment income. This means losses from new investments in shares will be able to be offset against:
- income directly relating to the investment (e.g. dividends, managed trust distributions); and
- positively geared rental income.
Losses from new investments in shares will NOT be able to be offset against salary and wage income and any excess losses will be carried forward to be offset against either future investment income, future positively geared rental income or be used to reduce any capital gain on sale.
Essentially, the ALP policy will result in the addition of a new category of tax loss – the investment loss. This will result in a whole new layer of complexity when preparing individual tax returns with taxpayers impacted having to appropriately calculate, apply and carry forward investment losses in addition to dealing with capital losses.
High wealth taxpayers with a mix of negatively and positively geared investments and investments acquired prior to the proposed changes are the winners, as they are more likely to be able to fully utilise deductions against both salary and wage and investment income.
Low to middle-income earners will lose out. The typical mum and dad investor trying to build wealth by borrowing against the equity in their home to fund a single investment asset will be the biggest losers as they will no longer be able to help fund the purchase of the asset with the use of tax losses offset against salary and wage income.
The policy is proposed to take effect from a yet-to-be-determined date after the next election (assuming the ALP is elected to government). The ALP has stated that investments made before this date will be unaffected by the change and will be covered under grandfather clauses.
Capital gains tax
Under this proposal, capital gains discount for all assets will be halved; the capital gains tax discount for assets held longer than 12 months will decrease from 50% to 25%.
It is not all bad news for investors though. The ALP has indicated that their policy change will not apply to investments made before the implementation date and will be fully grandfathered, in line with the approach to the negative gearing changes.
Good news also for superannuation funds and small business, with the ALP indicating investments made by superannuation funds will be excluded and there will be no changes to the existing small business capital gains tax concessions.
Always read the fine print
Having reviewed the proposal, it is with caution that the full impact of the proposed policy should be considered by those impacted by its contents.
While the ALP has made public their intended policy changes, taxpayers should anticipate that this proposal is subject to change.
How do we know this? Because they told us. The ALP has openly stated that they “will consult with industry, relevant stakeholders and state governments on further design and implementation details ahead of the start date for both these proposals”. While industry input and stakeholder feedback are valuable exercises, if the legislation is ever introduced to Parliament, it may be presented in a very different form than first proposed.
To conclude, the proposal does not make clear exactly how Labor’s policy will improve housing affordability. The fact is that new investors will be limited to new housing (predominantly in outer city housing markets given the current state of the market) and the capital gains discount will be limited to 25%, if eligible, on ultimate sale. This hardly presents as an attractive incentive to those who have the borrowing capacity to invest.
CONCERNED ABOUT YOUR INVESTMENT DECISIONS AND TAX SITUATION?
If you are concerned on how the Labor party’s proposed policy changes may impact your investment decisions and tax situation, we urge you to contact your local RSM office.