Phil's Property Corner - How will the election impact property investors?

April 17, 2019 by Rebecca Crommelin

This month on our blog, Phil Bertram, the owner of Candour Property Group, delivers another instalment of Phil's Property Corner. For this update, Phil looks at the upcoming election and the impacts it may have on property investors.

Perth’s median sale price remained steady in the month of March at $499,000, sales activity decreased and listings for sale increased by 0.7%. REIWA’s March Perth market update video can be found here.

In a bit more good news for Perth, the latest Consumer Confidence figures are in for the March 2019 quarter. Four out of five consumers expect the WA economy to improve or remain unchanged over the next quarter, up from around half of the people surveyed in March 2016. You can find their full results here, it’s a very interesting read.

The Federal Election has been called for May 18^th and there are a few policies that many are keeping an eye on, especially in the property investment area. One of these is the Negative Gearing policy, with the distinctive approaches being seen by Liberal and Labor. The Liberal policy is to leave things as they are, Labor is looking to make significant changes to how people are able to claim deductions through Negative Gearing property.

Very few of the media articles around seem to clearly explain Labor’s Negative Gearing policy, so we thought it would be helpful to briefly explain it.

Firstly, let’s debunk the ‘removal of Negative Gearing’ description used in the media. By definition, Negative Gearing is when a property investment generates less income than the expenses it incurs, resulting in a negative return. This negative return is then claimed as a tax deduction by the owner of the investment property, which generally results in the tax office reducing the owner’s taxable income and refunding some of the tax they would have otherwise paid.

Labor is not seeking to remove negative gearing entirely, they are looking to restrict the use of this tax deduction to brand new properties and to reduce the Capital Gains exemptions that are currently able to be utilized. Should they win the election, they propose to make these changes on 1^st January 2020, with anyone who owns an investment property at that time able to continue to claim deductions under the old rules (known as ‘Grandfathering’).

By looking at the numbers behind property investment it is easy to understand why they would do this. The current Negative Gearing legislation was introduced in the mid 1980’s and was essentially designed to incentivise people to build new property, to take the pressure off the government to provide more housing supply. In effect, it allowed people to claim tax losses from a property investment against their personal income wages and reduce the tax that they pay.

The biggest issue currently is that over 90% of investment property purchasers buy existing property, this means new housing stock is not being created and also results in the government raising very little tax from these transactions.

By way of comparison, should a property investor purchase an existing property the only income to the government is Stamp Duty (State Government) and the Real Estate Agent’s Income Tax (Federal Government).

If a brand new property is purchased then far more income is generated – Stamp Duty is paid on the land before development and again on the sale of the developed block. Local Council fees to approve any development, Income Tax for local government employees, Income Tax for all tradies involved (from laying roads to Builder Trades), Company Income Tax for the Build Company…and the list goes on and on. Both State and Federal Government make a significant amount of money on the development of a new property, which ensures they make a profit when offering tax deductions to the purchaser.

This is not the case with existing property, which is why Labor is looking to restrict this legislation to only be applied should new property be purchased as an investment. A similar approach has already happened in WA with the WA State Government offering $10,000 for First Home Buyers purchasing brand new, versus $0 for existing property, again to stimulate jobs.

If you’d like to have a chat about how these changes in Negative Gearing might affect you the next step is to chat with Phil Bertram. There is no obligation to proceed any further than you’re comfortable with and he doesn’t charge for his time. All strategies are implemented in tandem with your local mortgage brokers at Mortgage Choice.

To arrange for him to call you please email him with your name and contact number on phil@candourproperty.com.au and he’ll be in touch.