Labor's proposed reform to negative gearing

16 February 2016
The Labor government has outlined plans to restrict negative gearing tax deductions if it wins the next election.

There’s no denying that many Australians are in love with the concept of tax-effective negative gearing as a wealth-creation tool. This is evidenced by the highg rate of property investment – and high level of tax deductions claimed – in Australia each year.

Labelling it a “big, bold reform” and “the most significant Budget announcement from an Opposition in at least 10 years”, Labor has announced that if they win the next federal election then from 1 July 2017 negative gearing will only apply to property if the property being prucashed is a new development.

The government will, however, grandfather all existing arrangements so that no existing investors are worse off.

“This is about putting first home buyers and first home owners and young couples trying to get a decent home for their family, on a more level playing field, as well as making our tax system fairer, and providing a big boost to the Budget to fund things like health and education and for a Budget repair plan,” said Chris Bowen, Shadow Treasurer, on Sky News.

“We have a housing affordability crisis in Australia, only one in seven who buy a house a first home buyers, they’re being squeezed out of the market by investors. We need to ensure that negative gearing is fair and it is sustainable. At the moment it’s just not working.”

What is negative gearing?

Negative gearing refers to the situation where investors make an investment (mostly in property) that loses money in the short term (e.g. loan and related costs are greater than rental income), in the expectation of making capital gains in the future.

The investor can deduct any losses associated with the investment from their salary and wage income.

In terms of those tax savings, the top 20% of income earners receive around half of the approximately $4 billion of negative gearing benefits, according to NATSEM.

News welcomed in some quarters

The Australian Council of Trade Unions (ACTU) welcomed the ALP’s new tax policy, labelling it a win for investors, people looking to buy their first home, and jobs.

“The increased supply of new homes will keep the rental market stable meaning landlords have no legitimate reason to try and increase rents as a result of these improvements to negative gearing and in fact those renting may just be able to buy their first home,” said ACTU President, Ged Kearney.

“Any time we see an increase in new home construction we see increases in good jobs associated with their construction. Policy that creates more jobs is good for the economy, good for the budget and good for working people.”

Capital Gain Tax discount also being decreased

In addition to the negative gearing reforms, the opposition has also announced that it intends to reduce the existing capital gains tax discount from 50 percent to 25 percent.

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