Tax changes, pension regulations threaten property investors

Several new rules will take effect at the same time.

The taxman now has property investors at the top of its agenda. Picture: Mike Keating

For Australia’s residential property investors, thinking they had escaped a negative gearing clampdown in the May Budget, an awful truth is dawning: the regulators are going to choke off the path to successful property investment anyway.

As the new financial year unfolds, the mounting difficulties of making a successful investment in property have reached a crescendo — and the surprise is not on the revenue side, where prices are slowing and rents are flat.

Rather it’s on the costs side of the ledger, which has steadily worsened, to the point many investors will now face trouble.

It’s not a co-ordinated attack — more like guerilla warfare. This week the Australian Taxation Office joined in the offensive (more on that later). But first, here’s the key changes that are going to blow out costs for investors in the year ahead.

• Prudential regulators demand the banks hold more capital on their books. All major banks have lifted finance costs for investment property. In general as an investor you can now expect to pay 0.5 per cent on top of a first homebuyer rate under the latest mortgage pricing tables in the market.  As for interest-only loans, which are held by up to 40 per cent of recent entrants to the market, it now makes more sense to have an interest and principal loan than an interest-only loan, according to the latest analysis from Macquarie Bank.

• The government has squeezed superannuation reforms in a fashion that directly works against investment property. Thanks to the new concessional (post-tax) limits of $100,000 per annum, the ability to place an investment property in a DIY superannuation fund has now become an elaborate, complex and multi- year process.

As for using superannuation to save for an investment property — salary earners using salary sacrifice in the hope of building a deposit will be waiting a long time — the new maximum for salary sacrifice is $25,000 a year.

• Pension access reforms introduced on January 1 have also weighed heavily against investment property owners. This is due to the simple reason that the family home is excluded from pension benefit calculations but investment property assets are included: In what must surely be a singular policy failure, it will now make more sense for many retirees to sell investment property and put the proceeds into the family home. In doing so they will improve their pension access benefits, especially if their super is in the $400,00 to $1.05 million range, according to the lobby group Save Our Super.

And now for good measure the Australian Taxation Office has made the startling admission that it’s switching its focus from hunting multinationals to hunting mum and dad instead.

ATO commissioner Chris Jordan this week singled out the negatively-gearing property investor as holding one of the ‘‘big pots’’ for the taxman: Jordan made the point that there were $44 billion in rental expenses from investors in Australia.

The commissioner then went on to make the dramatic claim the dollar figure from tax avoidance from Australia’s legion of individual taxpayers and investors could be worth more than the amount racked up by multinationals. Who knows?

Two things are clear. First, as if property investors — outside increasingly small pockets of Sydney and Melbourne — did not have enough to contend with, the taxman has now got them at the top of the agenda.

Second, it’s a lot easier for the ATO to tackle earnest investors who may easily get something wrong on tax matters than a giant multinational with a team of highly paid lawyers on the books.

Moreover, the ATO has launched its negative gearing operation within months of the federal government bringing in two very sharp reductions to the tax arrangements property investors have relied upon.

The ability to depreciate property has now been greatly reduced. New property owners can no longer claim depreciation on existing property assets — they can only claim on actual fixtures and fittings they bought during their ownership of the property.

Separately, the government has completely scrapped the ability to claim travel expenses in relation to property investment. This was a rort in many cases and any sensible government would have scrapped it. Nonetheless it all goes to changing the numbers for property investors.

The outstanding point here is that all these issues weigh against getting the numbers to work on investment property — keeping negative gearing in place hardly matters if the numbers no longer stack up. (Negative gearing is where a property investor’s costs exceed income and the excess of costs over income are claimed against tax.)

Crucially, the changes are all happening at the same time as will become abundantly clear as property investors go to do their annual returns in the coming weeks.

Most are ready to meet the challenge on the revenue side.

The traditional obstacles to successful property investment — irregular tenancies and rock bottom yields — are widely understood.

But investors expected those issues and worked them into their numbers — now the numbers are changing in a whole new way.

No single government agency meant to have it all happen at one time, but it has.