Why We Should Say "NO" to Labor's Property Tax Changes

By Paul Bennion, Managing Director, DEPPRO

The announcement that the Federal Labor Party if elected in the forthcoming Federal election will axe negative gearing and reduce capital gains benefits for new property investors from 1 January 2020, has been rightly been condemned by the property industry.

These regressive changes will have a detrimental impact on the property market and those who are employed in it.

From 1 January 2020, an elected Labor Government would implement the following policy changes:

Negative gearing:

  • Only new properties will be able to be negative geared;
  • All investments made before 1 January 2020 will not be affected by the changes to negative gearing and will be fully grandfathered;
  • Losses from investments will continue to be able to be offset against investment gains in the same financial year, regardless of asset class;
  • Within year losses can still be carried forward and offset against future capital gains on the investment.

Capital gains tax discount:

  • CGT will be halved for assets purchased after 1 January 2020, reducing CGT for assets purchased after 1 January 2020 from 50 per cent to 25 per cent;
  • All investments made before 1 January 2020 will not be affected by the changes to CGT and will be fully grandfathered;
  • The existing CGT discount that applies to superannuation funds will not be affected; and
  • The 50 per cent active asset reduction concession that applies to small businesses will not be affected.

These changes will disrupt and distort the property market during a time when it needs stability.

Firstly, it will lead to a rush by investors to purchase properties before 1 January 2020 so they can quality for both the negative gearing and CGT benefits.

This will be followed by a huge lull in property investor activity especially in the established market as negative gearing benefits will no longer apply to established homes.

Recent history has shown that when Governments make changes to property taxes for investors it can create uncertainty and confusion leading to a major slowdown in investor activity.

This last occurred following changes in the 2017 Federal Budget to depreciation benefits for property investors. If a property investor acquired a second-hand residential property after May 10, 2017 and these properties contained "previously used" depreciating assets like ovens, dishwashers blinds etc, they would no longer be able to claim depreciation on those assets.

These changes caused enormous confusion amongst property investors and resulted in a large drop in property investor activity throughout Australia.

These changes to negative gearing and capital gains outlined by the Labor will have a similar effect on property investors and result in even further decline people buying investment properties.

The end result will be rents will rise and property prices will fall. For example, research undertaken by SQM Research recently revealed that Labor's negative gearing policy, rents could rise by up to 15 per cent while property prices could collapse by a further 12 per cent by 2022.

SQM Research also believes market rents could accelerate rise between 7% to 12% over the period 2020 to 2022, assuming there is an interest rate cut. Brisbane and Perth are likely to record the largest rises in rents.

Modelling by the Master Builders Australia has also indicated that the number of new homes would drop by up to 42,000, creating an $11.8 billion hit to the economy.

Labor's propose changes to property taxes should be strongly opposed by everyone employed in the property sector at the forthcoming Federal election as they are an attack on our industry and the livelihood of everyone employed in it.