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2.2 million reasons to second-guess new housing plan

The possible wide-ranging effects of a proposed housing plan could have significant implications for plenty of Aussies and the government.

The possible wide-ranging effects of a proposed housing plan could have significant implications for plenty of Aussies and the government. Picture: NCA NewsWire/ Gaye Gerard
The possible wide-ranging effects of a proposed housing plan could have significant implications for plenty of Aussies and the government. Picture: NCA NewsWire/ Gaye Gerard

It seems inevitable that there will be changes to negative gearing sooner or later.

The prospect of an entrenched housing crisis will be the plausible prompt. More likely after the next election than before, amid the vicissitudes of a likely minority government.

It would certainly be wise to signal in the meantime that there will be grandfathering, ie. having new rules for new investors alongside the longstanding ongoing negative gearing rules.

The notion of limiting it to new builds certainly comes with the simplistic populist appeal of helping housing supply, although there would be a slow take-up.

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Treasurer Jim Chalmers could still make a move on negative gearing. Picture: NewsWire / Glenn Campbell
Treasurer Jim Chalmers could still make a move on negative gearing. Picture: NewsWire / Glenn Campbell

Strangely you won’t find the phrase “negative gearing” in tax legislation.

It is, though, the commonly used term used to describe a situation where expenses including interest are greater than the income earned from rental properties, so individuals then deduct their loss against their PAYE salary.

While making a loss on an investment property might seem counterintuitive, some are willing to do this in the expectation that the huge likely capital gain when they sell will more than offset that loss.

The number of people who own investment properties sat in the most recent Australian Taxation Office data at 2.2 million, with about 959,000 reporting a net rental loss. That is about 15 per cent of all taxpayers.

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Any changes to negative gearing could impact the aged care system.
Any changes to negative gearing could impact the aged care system.

The figure fluctuates as, in 2013, about 1.3 million investors reported a net rental loss from 1.9 million who earned rental income. These negative gearers are effectively subsidising tenants.

Treasury estimates 80 per cent of rental deductions go to people with above median income, with analysis showing surgeons on a $480,000 average income being the most avid investor cohort with about 42 per cent having an investment, and about 22 per cent being negatively geared.

It is often overlooked that these 2.2 million property investors are likely to be self-funded retirees and when doing so will reduce the burgeoning federal government budget for the aged care system.

There are key reasons why avoiding any retrospectivity in the changes would be smart as part of any initial tinkering.

The wise heads in the government know that any big changes to the current system runs the huge risk of triggering investors to exit the market, making the rental shortage even more dire.

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Is now the time to invest in the market?

Any grandfathering will effectively lock in existing landlords which is a good thing since the rental churn rate is way too high among landlords and contributes to tenancy insecurity.

Of course if there is an increase in the capital gains tax being secured on property sales, no doubt some investors would seek to hold onto their investments in the expectation of a lower tax take being potentially offered by any Coalition government in the future.

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Originally published as 2.2 million reasons to second-guess new housing plan

Original URL: https://www.news.com.au/finance/real-estate/22-million-reasons-to-secondguess-new-housing-plan/news-story/beeb064b3c13be3999ac610c3cbb9b37