Housing is set to take centre stage in this year’s federal budget, and investors are bracing for a major shakeup that could reshape the property market.
While the full details of the federal budget will be revealed on Tuesday night next week, several pre-budget teasers have trickled out over the past few weeks, several of which are focused on the property market.
Big tax changes could have major ramifications for property investors, with a potential overhaul of both negative gearing and the capital gains tax discount likely to feature in the budget.
Will negative gearing be abolished?
Negative gearing is when an investor borrows money to buy a rental property and the expenses of owning the property, including interest on the loan, outweigh the rental income, resulting in a loss.
Under current rules, investors can deduct that loss from other income, such as wages.
While Prime Minister Anthony Albanese repeatedly ruled out changes to negative gearing prior to last year’s election, and Labor’s 2019 election campaign to limit negative gearing was decisively rejected by voters, the controversial policy is back on the table this year.
Both Mr Albanese and treasurer Jim Chalmers have remained tight-lipped on whether negative gearing will be abolished as part of the budget, but their refusal to deny ongoing speculation despite multiple opportunities to do so suggests changes are coming.
Dr Chalmers has flagged “intergenerational unfairness in the tax system and in the housing market” and stated that one of the government’s motivations in the budget is to make it easier for people to get into the housing market.
Negative gearing has long been contentious, with some arguing it disproportionately benefits wealthier people and drives up property property prices, while reducing tax revenue which could otherwise be used on services to benefit the broader community.
Proponents of negative gearing argue it supports investment into the housing market by compensating investors for losses incurred by making properties available for rent.
Ideas reportedly on the table for phasing out the policy include limiting negative gearing to just one property, or ending negative gearing for existing homes while allowing investors to claim the loss deduction for new dwellings only.
The aim would be to ease investor demand for existing properties to help first-home buyers get into the market, while incentivising investors to buy new properties, which would encourage more housing construction.
However, property industry leaders have warned that restricting negative gearing and the CGT discount could lead to slower rates of home building and higher rents, arguing the focus should be on reducing regulatory barriers to increasing supply before changing tax settings.
Will the capital gains tax discount be reduced?
Investors have to pay capital gains tax (CGT) when selling assets, such as investment properties or shares.
The capital gain is the difference between the purchase and the sale price of the property, minus purchase costs such as stamp duty and selling costs such as agent fees.
The capital gain is taxed at the owner’s marginal tax rate, and main residences are generally exempt from capital gains tax.
Under current rules, investors who hold a property for more than 12 months are eligible for a 50% discount, meaning tax is only paid on half of the gain.
However, this discount is tipped to be axed in this year’s budget, with capital gains tax potentially reverting to an older system used until 1999, known as the inflation indexation method.
Under this model, the cost of purchasing an asset would be adjusted for inflation when calculating capital gains tax, based on the movement of the consumer price index between when the asset was bought and sold. Property investors would only pay tax on the amount that the property grows in value above the rate of inflation.
For example, if an investor purchased a property for $500,000, including purchase costs, and sold it for $700,000, including selling costs, and inflation was 10% during the period they held the property, the investor’s cost base would be $550,000 ($500,000 x 10% inflation), meaning they would have to pay tax on a $150,000 gain.
Would new rules apply to existing investors?
It’s likely that investors who purchased properties under the existing system would be able to use the old rules, to an extent – an approach known as ‘grandfathering’.
Any negative gearing changes are expected to be grandfathered, meaning investors who purchased properties before the changes come into effect could potentially continue to deduct rental losses from other income.
If the government abolishes negative gearing altogether or limits it to just one property, that would apply to investors who purchase properties after the changes come into effect, which is likely to be either budget night on May 12, or the start of the new financial year on July 1.
There are reports of a possible one year transition period, allowing properties purchased after budget night to be negatively geared until 1 July 2027, but not after that.
For capital gains tax, a hybrid approach could allow investors to claim the 50% discount up until the date the changes come into effect. Capital gains from that date onwards would then be taxed under the inflation indexation method.
The different CGT models are likely to be apportioned based on the length of ownership. For example, if an investor bought a property five years before the changes came into effect, and sold it five years after, they could claim the 50% CGT discount on half their gains, and the indexation method on the other half.
'Boring but important' funding for new housing supply
The government's flagship National Housing Accord aims to deliver 1.2 million new homes over five years from mid-2024, but housing groups estimate a shortfall of more than 380,000 homes due to factors such as infrastructure gaps, environmental approvals and planning delays.
Over the weekend, Dr Chalmers and Housing Minister Clare O'Neil announced a further $2 billion for enabling infrastructure like water, power, sewer pipes and roads to unlock more housing development.
Dr Chalmers said the funding will help support the construction of up to 65,000 additional homes.
"This is all about the power and water and local road infrastructure that we need to get more projects over the line," Dr Chalmers said.
"It is about supporting local governments and state governments working closely together to build more homes in communities that desperately need and deserve them. Projects like this one are making sure that we can build more homes."
Ms O'Neil said the additional $2bn adds to more than $4bn already announced for critical infrastructure since coming into government in 2022.
"As Housing Minister, I have local councils constantly coming through my office, especially from the regions, saying "we would really like to help you with the housing challenges in this country, but we just do not have the money to pay for this kind of boring but important part of the problem", which is funding housing infrastructure," Ms O'Neil said.
"So this brings our total investments now up to $6.3 billion and we're really proud to be rolling this out around the country."
Industry groups such as the The Civil Contractors Federation, Urban Development Institute of Australia (UDIA) and Housing Industry Association (HIA) have welcomed the announcement.
“There is always a need for more enabling infrastructure funding, because it is a fundamental reality that not a single house can be built until enabling infrastructure is in place,” UDIA National President, Oscar Stanley added.
The HIA said a "substantial number of housing projects" are near ready for construction, but stalled due to a lack of funding for enabling infrastructure. However, the group was critical over speculation that newly built homes could potentially be carved out of any negative gearing or capital gains tax discount reforms.
“If policy settings reduce investor participation overall, fewer new homes will be built, rental supply tightens further, and the structural shortage worsens," HIA chief economist Tim Reardon said.
Mr Reardon said the housing debate continues to focus too heavily on changing who owns homes rather than increasing the number of homes being built.
“Investors aren’t making the decision to invest in new, or established homes. They can also redirect investment to shares or other opportunities. This will likely lead to less investment in housing, and therefore less investment in new home building."
The full picture will be revealed on Tuesday night, but if even some of the mooted changes materialise, this budget could mark one of the most significant turning points for Australia’s property market in decades.
Soure: https://www.realestate.com.au
