Negative gearing tax moves could hurt more than just investors

Will he or won’t he? If the Treasurer targets negative gearing and other property taxes, the consequences could be painful for all.

Anyone who owns, rents or invests in real estate should be feeling nervous about the looming federal budget that Treasurer Jim Chalmers will hand down on May 14.

As Labor’s latest tax cut changes spark debate around workplaces, barbecues and online chat platforms, it was scary to hear Mr Chalmers recently say that the government had not changed its view and would keep the current negative gearing rules.

It was scary because that was the same line the government was using about the stage three tax cuts, often saying it had not changed its position on those previously legislated cuts. Until it did change its position.

Treasurer Jim Chalmers will deliver the budget in May. Picture: Martin Ollman

Whatever you think of the stage three tax cut backflip – which delivers more money to lower income earners but halves the extra $9000 that high income earners were set to receive from July 1 – it signals that more change could be coming.

If this government is willing to dramatically alter previously legislated tax cuts, it certainly may revisit the negative gearing tax changes that it promised before losing the 2019 election. Even if it says it won’t.

It also said it would not bring in new taxes, and look how that turned out for wealthier superannuation fund members with more than $3m in their fund – and a new tax coming their way in 2025.

The problem with toughening the rules around negative gearing is that it hurts middle class investors more than the really rich who have enough cash to own real estate outright.

Think teachers, emergency service workers and tradies who borrow to invest to buy a single property as a nest egg to complement their super. ATO figures show 71 per cent of real estate investors own just one property, and less than 10 per cent of them are on the top marginal tax rate.

Allowing investors a tax deduction for losses they make – negative gearing – is only temporary because every smart investor wants their assets to be positively geared. If you negatively gear you lose money, but if you positively gear you make money – even after paying tax on your profits.

It’s not just investors who would be hit by future changes to negative gearing. Tenants are at risk of even higher rents because more investors would exit the market to chase more lucrative investments, making the current supply shortage even worse.

Property investors may be prompted to look elsewhere if taxes get worse. Picture: iStock

New PropTrack research found rental listings are at record low levels, 30 per cent below decade averages, as population booms and supply can’t keep up.

After the Hawke Labor government changed laws in 1985 to effectively ban negative gearing, it quickly reinstated it in 1987 amid claims of large rent increases in Sydney.

Less demand for real estate overall also might also reduce property wealth nationally with a price fall, although many may argue that would be a good thing to help first home buyers get a foot in the door.

Labor’s changes to tax cuts and superannuation taxes have shown it sees Australia’s population as haves and have-nots, and wants to take more from those with more. It’s not a stretch to see more controversial tax changes in the May budget.