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A lot of people are talking about this, so we thought we should give you more information on this policy to make it less confusing.
To begin with, what is “negative gearing?” To put it simply the Oxford dictionary says: “the practice of investing borrowed money in such a way as to result in a loss that can be claimed as a tax deduction.”
So, if your investment income is $25,000 and your expenses are $30,000 you can claim $5,000 off your personal tax assessment in that financial year. For someone with a marginal tax rate of 37% that would be a return of $1,850.
The Labour federal government is proposing to introduce a new policy regarding negative gearing if they come into power in the next Federal election. The election is scheduled to be in May 2019 and if Labour win, this policy will be put in place on 1st January 2020. (See https://www.alp.org.au/negativegearing for the specific policy.)
Firstly, the proposed policy will not be retroactive. This means that any investments made before the policy is introduced on 1st January 2020 will continue with the same negative gearing aspects as currently exists, no matter what type of investment it is.
Secondly, the proposed policy is limiting negative gearing to new houses built for the specific purpose of being an investment property. That means that if you buy a house and land package and build your investment property, you can still claim any negative gearing on your personal tax for that year. Additionally, any property purchased with superannuation funds will also be able to claim any negative gearing.
Thirdly, existing properties that are purchased for investments can offset losses by carrying them forward into new tax years when the property starts making money. This means that if in 2021 you made a loss of $5,000 and in 2022 you made a gain of $2,000, you don’t need to pay any tax on the $2,000 for 2022 and can carry forward another $3,000 into 2023.
An additional benefit will be that investment properties that are sold will mainly be to house owners as property investors will wish to be able to offset their losses immediately instead of waiting for the property to start making income. This will push the rental prices up as there will become a scarcity of rental properties in the area and thus the winner will be property investors already in the market.
There you have it – a simple explanation of what Labour’s policy is all about. Be sure to remember that these changes will ONLY occur if Labour wins the next Federal election!
