No property pain in the Budget, but beware of the next one
REAL estate owners escaped pain in this month’s Federal Budget, but financial pain may be looming when the 2019 version comes around — due after the next federal election.
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REAL estate owners and investors have nothing to worry about in the Federal Budget unveiled earlier this month, but the next one may be a real tear-jerker.
The Budget was the last one to be delivered before the next federal election — due before mid-May 2019 — and Labor has roughly a 50-50 chance of winning that.
If Bill Shorten gets voted in, expect to be giving the government much more money if you buy an investment property or holiday home.
Labor hasn’t shifted from its 2016 election policies and after its recent push to increase taxes on investors, it’s unlikely to drop them.
Painful policy number one is a planned change in the capital gains tax discount from 50 per cent to 25 per cent on future investments. While your family home is generally exempt from CGT, other real estate purchases will be affected.
The current 50 per cent discount applies to assets held more than a year. For example, if you buy then sell a holiday home for a $400,000 profit 10 years later, half of that gain gets added to your taxable income in one financial year.
That means $200,000 extra income taxed at up to 47 per cent — a potential tax bill of $94,000.
Labor’s proposal means $300,000, rather than $200,000, would be added to taxable income so the tax bill potentially grows by another $47,000 to $141,000. Yikes.
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The other big Labor policy is to ban negative gearing tax deductions on all but new residential properties.
Australian Taxation Office data shows that we have more than 2.1 million real estate investors nationally and more than half of them claim negative gearing rental losses — which is when the rent they receive is less than their costs such as interest, council rates and agent fees.
This loss is tax deductible, but Labor’s policy is to only allow these losses to be claimed for new properties. The rules will be grandfathered so existing rental property owners don’t get burnt, but future purchases will have to be new to qualify.
That’s not a bad thing from a national housing perspective as it may prompt more people to build new investment properties and boost housing supply. But it could distort investment decisions and eventually hand back billions of dollars to (Labor) government coffers.
While nothing is set in concrete, and Labor is yet to win the election even though it’s been winning polls for a long time, it’s a good idea for property owners to think about how they will react.
First, don’t cry. There’s no time for tears, even if it costs you tens of thousands of dollars in tax.
Instead think about strategies to minimise the pain. That may including investing in new properties only, seeking investments that are almost positively geared (which should be the aim of every property investor anyway) and splitting ownership of properties to spread future capital gains tax bills.
Property tax rules will always change, just like superannuation laws do. It’s a matter of timing as to when and how.
Originally published as No property pain in the Budget, but beware of the next one