Is The End In Sight For Negative Gearing?

Long controversial, but loved by many a property investor, the tax incentive known as negative gearing could be reaching the end of its lifespan (in its current form).

Over recent weeks, the whispers that the Federal government is considering significant changes to negative gearing have been gathering volume.

This week, SQM Research managing director Louis Christopher said that he could confirm Treasury was “looking at” the tax benefit.

One of the changes, apparently, being considered was a “grandfathering of arrangements” for existing investors with future negative gearing only available for new properties.

Christopher said making real change would require character and strong support from the cabinet, but that, given the market was in recovery, it was near-on the perfect time to do it.

However, the Federal government wouldn’t want to impact negatively on a construction recovery, or kill the economy while trying to put the budget back into the black, he said.

“If negative gearing was repealed or altered, investors would back off buying into the housing market, which is what those who are demanding lower dwelling prices want to see.

“But if the story above is correct – ie: keeping negative gearing on new dwellings – then we may well keep the dwelling construction side of the economy going.”

He added that if there was some type of grandfathering provision, he would expect to see a massive rush of investors jumping in before the date, and then a slump afterwards.

The devil would be in the detail, which was likely to come out closer to the Budget in May, Christopher said. The push to end negative gearing has been driven by the community sector, notably the Equality Rights Alliance, which argued that it drives up housing costs and benefits higher income earners.

This argument was supported by a recent Grattan Institute report, Renovating Housing Policy, which found that capital gains tax and negative gearing did not produce new housing.

Instead they led investors to bid up the prices of existing housing to get the tax benefits on offer. This prevented more first home buyers entering the market and impacted negatively on housing affordability.

Meanwhile, negative gearing advocates argued that the tax incentive not only encourages investment, but increases rental stock and has positive effects on the construction industry.

The Housing Industry Association has said any reduction in negative gearing benefits would impact negatively on housing demand and rental affordability.



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