The Labor party has got some interesting policies for the 2019 Federal Election, for example, the proposal around negative gearing which is a pretty hot topic on the real estate agenda. Here are our thoughts on the different policies.
Interestingly, some of the changes that the Labor party are proposing if they win the federal election, are big changes to the taxation policies around real estate – particularly for investing
CAPITAL GAINS TAX
Capital gains tax is one of them, which is if you buy an investment property, and then you make a profit when you sell it again you will have to pay a fee. So if you buy it for $500K and then 10 years later you sell it for $1M, then you have to pay some tax on that gain with the $500K. At the moment, you get a discount on that tax of 50% and Labor is proposing to reduce that amount by half, down to 25%. You’re sharing the profit of an investment property with the government. This could mean that fewer investors are potentially going into the market and looking at alternatives like the share market. They’re not looking at changing the taxation system on the share market, It’s purely on the property market. Investors will compare and decide where they think they’ll get the best return.
NEGATIVE GEARING
The second part of the taxation policies that are looking to be changed is negative gearing. Negative gearing is when you borrow money to invest into an asset (usually a property) and the income you make from that investment, i.e. the rent, is less than your expenses, meaning that you’re making a loss. Australian law also allows investors to deduct any losses they make on an investment property from their taxable income, which makes it far easier for people to invest in the property market. If you earn $100K a year in income, for example, and you get taxed at say 40% (or whatever the tax rate is), you get taxed $40K. If you have an investment property, and then that investment property is making a little bit of a loss, from your mortgage minus your rent, you’re losing a little bit each year, you can take that off of the tax that you’re paying and you receive it as a rebate back. So, if they remove that policy, you don’t get that kind of rebate back from the tax you paid. This means investing in property is not quite as attractive as it was before. Labor will only keep Negative Gearing with brand new properties. This could probably stimulate the construction industry. Originally negative gearing was brought in to try to make it easier for investment properties to be bought so that there’s a lot of rental properties out there for people who can’t afford to buy. The initiative was there to make it better for renters, giving them more choice. Ironically what might happen is if they take away negative gearing, it will mean fewer investors will buy investment properties, so if there are fewer investment properties in the market and therefore less choice.
“Rent prices will probably go up and both parties, Liberal and Labor, have done independent studies on that, and it’s come out that that will probably be the case.” Alex Ouwens, OC Managing Director.
THE IMPACT ON THE REAL ESTATE MARKET
These policies won’t have a massive impact on the market, other than that if Labor does get in, there might be a six months period with a flurry of investors securing property by the end of the year because they are going to cap it on the 31st of December this year. This is obviously really good for sellers of properties that are likely to be investment-driven.
WHAT IF LIBERAL WON THE ELECTION?
If the Liberal Party won the federal election, it is more likely the marketplace will just continue as it is, and that rebound from a downturn marketplace would probably most likely continue. They haven’t had any policies that are likely to make a massive impact and they are really just running off of a steady-as-she-goes type of campaign
Alex Ouwens and Nathan Casserly have a genuine passion for real estate and love to help people achieve their goals and dreams through property. Find out more about OC here.
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