Q: What is negative gearing?
When you borrow money to buy an asset, but that asset fails to generate enough income to cover mortgage expenses and other costs, the difference – the “loss” can be written off by individuals against other tax payable on income they have earned in a given financial year. This arrangement for claiming tax deductions is called negative gearing.
All investment purchases – such as property, bonds, shares etc – are currently able to be negatively geared.
Q: What is Capital Gains Tax?
When you sell a property for more than you paid for it, the difference between the amount you paid for it and the amount you sold it for is called a capital gain. Capital Gains Tax (CGT) is applied to this amount for individuals at the marginal rate applicable to their income for that financial year.
Q: What is the CGT discount for investments in residential property?
The notion of a CGT discount isn’t strictly correct, as it gives the impression there is a special treatment of capital gains on property. The reality is that this arrangement was introduced to make administering the tax simpler.
Currently, investors who sell property are able to claim a 50% discount on the CGT that applies to their investments when they sell. The proposal doing the rounds at present is based on abolishing this discount.
The rationale for the 50% discount on capital gains is to ensure that only real capital gains are taxed (as opposed to nominal capital gains). This approach replaced the previous method of indexing capital gains in 1999. If nominal capital gains are taxed without discount, investors may be taxed on a gain they have not made.
In layman’s terms, discounting CGT means the investor will only be taxed on the increase in the value of their investments that has occurred. Ending this practice means CGT would be payable on estimates that may overstate the value of those investments — meaning tax may be paid on something that doesn’t even exist.
Q: Why would negative gearing be abolished for existing properties but not newly built dwellings?
Good question. Some people think this will encourage construction of a lot more housing stock. The reality is that it won’t, as abolishing negative gearing in this way will make it harder to sell newly-built housing to other investors because subsequent buyers will have no incentive to purchase them. We believe new housing construction will fall, not increase, for this reason.
Q. If property prices fall, that’s good because I’ll finally be able to buy a home, right?
It’s a natural assumption, but unfortunately not true. The main barrier to affordability right now, especially for first home buyers, is the upfront costs of a deposit and the state stamp duties. Repayments are actually more affordable now as a percentage of the average wage than they were for baby boomers who paid 17% interest rates. Let’s use a $600K property as an example. Even if house prices fall by 10% (and bearing in mind, the people who are suggesting we abolish negative gearing suggest house prices will only fall by 2%), a 20% deposit will only fall from $120,000 to $108,000 – and that’s outside of any stamp duty you’ll need to pay. There are other, better ways to improve housing affordability.
Q. This website is just propaganda of the real estate industry isn’t it – wealthy agents who want to keep their big incomes?
No, this is not just self-interest. We are certainly worried about the devastating impact this policy will have on our industry, but we’re not the only ones who’ll be affected. This policy will negatively impact everyone in Australia. And by the way, the average income of a real estate agent (according to Payscale.com.au data from March 2016) is just $48,549 – not the six figures most people assume.
Authorised by Jock Kreitals, 16 Thesiger Court, Deakin ACT 2600
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