Negative Gearing 101 and Why It’s an Election Hot Button
There’s been a lot of talk about Negative Gearing in the media.
So what is gearing?
Gearing is when you borrow money to invest and is most often talked about with regard to investment properties. The income earned from your investment is usually positively or negatively geared.
Positively Geared (PG) – when the rental return is higher than your interest repayments and outgoings.
Negatively Geared (NG) – when the rental return is less than your interest repayments and outgoings.
NG was and still is, a very lucrative option for investors who are looking at minimising their tax bill. The overall tax result of an NG property is a ‘net rental loss’ and in this case, investors are able to claim a deduction for the full amount of rental expenses against their rental and other income, such as salary, wages or business income. Where the other income is not sufficient to absorb the loss, it’s carried forward to the next financial year. (Source: ATO)
There has been a lot of speculation around negative gearing and capital gains tax arrangements with the upcoming Federal election looming.
A few key proposals being discussed have included:
- Limiting negative gearing to new housing from 1 January 2020. All investments made prior to this date will not be affected by the changes and will be fully grandfathered.
- Halving the capital gains tax discount for all assets purchased after 1 January 2020. This will reduce the capital gains tax discount from assets held longer than 12 months from 50% to 25%. All investments made prior to the 1 January 2020 will be fully grandfathered.
- Putting negative gearing to work by limiting it to new investment properties to help boost housing supply and jobs.
According to some experts, the Australian property landscape could change dramatically and is certainly dividing the nation’s voters. The resulting impact could directly affect home values, new housing construction, rent prices, home-owners vs investors marketplace, housing affordability and buyer sentiment overall.
The timing of the implementation is key. As it will take place during a quieter time in the property cycle, there will be an opportunity for scrutiny and consultation by Treasury and stakeholders - as asserted by Labor Treasury spokesman Chris Bowen in the Australian.