Frequently Asked Questions

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

Copyright © Real Estate Institute of Australia 2016. All Rights Reserved.

10 thoughts

  1. CGT 50% discount only applies after 1 year.

    No mention of Stamp Duty? I suspect State Governments won’t like a potential 30% drop in property transactions, given stamp duty on each purchase generates a tax windfall of tens of thousands of dollars!

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  2. “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.”

    – The average income from being a real estate agent, or the average of their total income (before negative gearing)?

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    1. Hi Anna, thanks for your post you have a great sense of humour. Alas, while most real estate agents would love to also be property investors, they do not appear on the list of the top professions who use negative gearing.

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        1. HI Anna, there’s a couple of different ways to cut the data, but here’s a Domain list, also from ATO data;

          Surgeons, anaesthetists, lawyers, mining engineers and financial managers have the highest propensity among the professions for investing in rental properties, and the highest average tax benefits.

          Twenty-eight per cent of surgeons claim deductions for losses on rental income, and earn an average tax benefit (reduction in their tax liability) of $4,161.

          Surgeons, anaesthetists, lawyers, mining engineers and financial managers have the highest propensity among the professions for investing in rental properties, and the highest average tax benefits.

          Anaesthetists are even more likely to take a plunge on a loss-making rental property, with 29 per cent claiming rental losses and earning average tax benefits of $3,352.

          Lawyers are the third biggest in this busy pond, with 22 per cent of lawyers earning an average tax benefit of $1,788, just ahead of mining engineers (22 per cent, $1,336) and finance managers (23.4 per cent, $1,247).21 per cent of emergency services workers claim rental losses, earning average tax benefits of $768.

          These figures were compiled by the Grattan Institute’s Hugh Parsonage from Australian Tax Office data for the 2012-13 tax year.

          That’s by % in the profession.

          Then you’ve got raw numbers of people. PCA says out of the roughly 1.2 million people who negative gear, there are 840,000 people who earn a taxable income of less than $80,000 per year – with the biggest groups being 53800 teachers, 52,000 retail workers, 35900 nurses and midwives, 22600 hospitality workers and 10,400 emergency services works.

          Not sure what that article was talking about as the link is not working, but sounds like not comparing apples with apples – real estate agents are not on either “biggest user” list when comparing like with like.

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  3. The relationship between an agent and an owner is a business one.

    Within my monthly statement there was included a political flyer on negative gearing produced by yourselves.

    To me it was unprofessional to include political flyers of any persuasion in with the monthly statements. It sullies the business relationship and frankly is an insult to the owner’s intelligence.

    I have instructed my agent never to do this again or I will take my business elsewhere.

    You lose more supporters than gain them with nonsense like this.

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    1. Hi David, thanks for your post. while we understand it might not be popular with some, we feel it’s our obligation to ensure our clients understand the serious risks associated with this policy. We would never usually speak out on a political issue, but as this issue will directly affect our clients, we can’t stay silent. Not sure where your property is located, but we can almost certainly say that your property will be worth less under this policy – happy to comment further if you tell us what town it’s located in. There is no reason for us to speak out unless our fears were based in fact and we can also assure you this is a fight against poorly thought through policy, not against a political party.

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      1. ngaffectsyou – You raise some valid points and have me wondering if I am doing the right thing. I am looking at investing in property for the first time (this is all new to me). I am looking at a one bedroom, one bathroom (45sqm) in Bundoora ($373K) and a deposit on a two bedroom two bathroom unit that will be ready in 2 years in Cairnlea ($409K) both in Victoria. Is this likely to affect these areas? Many thanks, Alison

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