Labor’s proposed changes to negative gearing and capital gains tax arrangements are set to be one of the key issues in the upcoming federal election.
SBS Filipino speaks to a finance broker, Maria Papa to discuss what the proposed changes are, what negative gearing is, how does it work, and how it would affect investors and first-home buyers.
What are the proposed changes?
1. Scrap negative gearing
From 1 January 2020, Labor Government will limit negative gearing to new investment properties. If the investment property was purchased prior to this date, it will not be affected by the changes and will be fully grandfathered.
2. Reduce capital gains tax discount
Labor proposes to halve the Capital Gains Tax (CGT) discount from all assets held longer than 12 months from 50 per cent to 25 per cent. All investments made prior to the 1 January 2020 will be fully grandfathered.
What is negative gearing?
Gearing is when an investor borrows money to purchase an investment property.
What happens when it’s negative gearing? It’s when the interest that the investor is paying for is higher than the rent that he receives from that investment property.
For instance, if the investor has a property and he’s getting $500 per week for the rent. It translates to $25,000 a year. If the investor is paying $30,000 per year – a higher interest for the loan that he took out to purchase that investment property - then the investor is making a loss of $5,000.
Ms Papa shares that under the current tax laws, this can be deducted against the investor’s income.
How does Capital Gains Tax discount works?
“If the investor purchases a property and he intends to sell it after 10 years and it grows in value, he is entitled to receive 50 per cent Capital Gains Tax discount. Labor’s proposed change reduces the discount to 25 per cent,” Ms Papa says. This means investors will be liable to pay tax on 75 per cent of their capital gain.
Who will be affected?
Labor claims the reforms are good for the budget and will help put first home buyers back on the playing field with investors.
Ms Papa explains that the Labor’s plan for affordable housing and more construction jobs will give working families a fair go.
“They are saying that there is this inter-generational unfairness in our tax system. Our children are unable to afford to buy a new home because of soaring property prices,” she adds.
