Established houses will no longer be able to be negatively geared.
Tax changes for property investors have been announced in Labor’s federal budget, with negative gearing and capital gains tax (CGT) both affected.
The government is attempting to make home ownership more affordable and accessible for young Australians by reducing the incentives for property investors to compete for the same homes. So, how will it all work and who will be affected?
What are the proposed changes for negative gearing in Australia?
First, let’s look at negative gearing. This occurs when the costs of holding and paying off an investment property are greater than the rental income it earns. Until now, investors have been able to deduct their annual losses from their taxable income.
From budget night onwards, negative gearing will only be available for newly built properties. The government believes this will stimulate more construction activity of new homes, something Australia desperately needs.
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Construction activity is desperately needed in Australia.
Investors who purchase established homes from budget night on will no longer be able to offset their losses against their taxable income.
What is grandfathering in tax?
The good news for those who already negatively gear established homes is that the policy will be ‘grandfathered’, which means those already negatively gearing established properties can continue to do so, without any changes. They will only be subjected to the new rules on any additional properties they purchase.
Investors who purchase established properties after the 2026 budget night will be able to employ negative gearing until 1 July 2027, but not afterwards.
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Why are newly-built homes exempt from tax changes?
Labor wants to stimulate the supply of new homes, so the budget allows negative gearing to continue for newly built properties. The theory is that the investors who might otherwise be keeping buyers out of established suburbs could sink their money into helping create more supply.
What are the proposed changes to Capital Gains Tax (CGT) in Australia?
Since 1999, property investors have enjoyed a 50 per cent CGT discount on the proceeds of properties they sold, as long as they had held them for more than 12 months.
Say they purchased a property for $500,000 and sold it 10 years later for $1 million, their capital gain would be $500,000, but they would only pay tax on $250,000.
This will all change, with Australia now reverting to its pre-1999 system of indexing capital gains against inflation.
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Treasurer Jim Chalmers announced major tax changes for investors. Picture: Martin Ollman.
Using the same example above, that investor would be taxed on a $500,000 capital gain, minus the inflation over that 10 year period. Say inflation was 20 per cent over that time, they would therefore be taxed on a $400,000 capital gain.
What’s the 30 per cent minimum tax on real capital gains?
The Government is introducing a 30 per cent minimum tax on real capital gains, to reduce the incentives for people to sell their assets at a time in life when they are earning low income, such as retirement. The Government believes this measure will see a reduction in the delay of selling assets, which could mean more consistent supply of homes for buyers.
How will the changes impact existing investors?
Changes to CGT will only be partially grandfathered, meaning investors who sell properties in the future will be subject to the 50 per cent discount for any gains made up to 1 July 2027, and then the inflation based method for gains achieved after that date.
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Say an investor purchased in 2017 and sold in 2037, they could claim the 50 per cent CGT discount for the first decade of value gain, but the next decade would be counted against inflation, with no discount.
Rental prices are likely to increase as supply is reduced.
Will negative gearing and CGT changes impact rental prices?
Australia already has a severe shortage of rentals, with national vacancy rates sitting around the 1 per cent mark for a number of years now.
Disincentivising negative gearing may help more owner occupiers enter the market instead of investors, but this would also mean a further reduction in rental supply and the potential for increases in asking rents. In the budget papers, Labor estimates a potential short term increase in median rents of “less than $2 per week”, though it is not clear how it arrived at that figure.
It then claims that “the combination of the Government’s policies in this budget will add to housing supply, which will exert downwards pressure on rents over time.”
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