With the next federal election looming and the Australian Labor Party (ALP) favourites to win, what are the policy changes we need to be aware of as property investors?
Labor will reform negative gearing and the capital tax discount effective from a yet-to-be-determined date after the next election, a policy which will help put the Australian dream of home ownership back within the reach of middle and working class families.
Source: ALP Website
Negative gearing has helped some property investors overcome the early financial hurdles on their way to earning a positive return.
What is Negative Gearing?
Negative gearing is when the income from your investment property, such as the rent you receive, is less than the expenses the property incurs, such as loan interest, property management fees etc.
This means you are making a cash loss, which can be claimed against other taxable income to lower your overall tax rate.
All existing negatively geared investments will be quarantined and continue under the existing rules.
The ALP will then limit future negative gearing to new housing only.
Losses from negative gearing other investments, like shares, will not be allowed to be claimed against salary and wage income but can be claimed against other positively geared assets and carried forward.
Capital Gains Tax
What is capital gains tax?
Capital gains tax is applied to the profit made between the buying and selling price of an investment property, also factoring in any depreciation claimed along the way, and is added to your income and taxed at your marginal rate.
However, if you’ve held the asset for longer than a year, just half the capital gain is added to your taxable income; i.e. you receive a 50 per cent discount.
All existing investments will continue under existing CGT rules.
All new investments will be subject to a 25 per cent discount, rather than the existing 50 per cent.
New investments by superannuation funds and small businesses will be exempt from the changes.
Self Managed Superannuation Funds
The Self Managed Superannuation Fund (SMSF) landscape promises to be very different if Labor comes to power.
Their proposed changes include
Ending the refunding of franking credits on shares held within and outside of super
Cut the after tax limit to superannuation from $100,000 to $75,000
Reverse changes that allow taxpayers to make adhoc contributions to superannuation and claim a tax deduction for doing so
Ban direct borrowing by SMSFs; meaning only those whose SMSFs can pay cash can invest into real estate.
These changes not only mean only those with enough cash in their SMSF can invest in real estate, but it means that even those with enough lose the power of leverage!