If you own a property, this is a must-read. 

On 24th October 2018, the cover of The Australian had a huge spread on the Labor’s new proposed legislation to remove the benefits of negative gearing for existing properties. Now this media is a couple of months old now but the essence of it and the LEGISLATION ITSELF is more relevant than ever with the upcoming Federal Election.

There are so many issues with this legislation, and it’s important as a property owner to be brought up to speed and given a lens on what this means.

This Eda Property article will delve into three areas:

  1. What exactly legislation is referring to
  2. The tax double dipping issue
  3. The trickle-down effect issue and the impact on the very people that Labor is supposed to protect

Now before we delve into each area, we want to first state that this legislation helps businesses like Eda Property. However, we’ve always been about helping people retire above the poverty line and establishing wealth through property. We firmly believe that the right thing to do is to help people, who will be impacted by this legislation, understand what it all means.

 

Breaking down the proposed legislation

What exactly is the proposed legislation trying to achieve? The talk is to get rid of negative gearing for existing properties only – so not new properties.

 

What is Negative Gearing?

Negative Gearing is where you claim a loss on your losses for investments. For example, you might invest in something, such as the shares in the stock market, and you make a loss, but you use your taxable income to invest. Not only can you claim the loss against the income from the shares, but you can also claim the loss against your other income, such as your salary. This applies to many types of investments – including property.

How does Negative Gearing apply to property?

Where you have purchased an investment property, you can claim the loss against your taxable income. For example, if you own a property in Melbourne and get $24,000 to hold it, you would say you have made a loss of $24,000. However, you would claim an offset of $20,000 you are getting as an income from the property. But you also have another additional loss of $44,000 left over that cannot be claimed against your income from the property. What you should say is if your salary is $70,000 a year, you would claim the $4,000 against your $70,000 and say you didn’t really earn the whole salary that year. You only earned $66,000 and had in fact been taxed based on the $70,000 not the $66,000 which truly represents your income for that year.

This is what the legislation wants to abolish for existing properties – nNo more claiming against your income tax.

 

Tax Double Dipping

So, you have already been taxed on the money that you use to invest in property. In most cases, you’re going to use that money to invest in something else that you will also be taxed on. The whole idea of negative gearing is to stop the double dipping effect people have already been taxed on and the money that has been invested in something that is going to be taxed on again.

The issue with abolishing negative gearing for anything at all is the fact that the government will be double taxing us.

You have been taxed on your hard-earned money. You are now investing your hard- earned money into something that will improve the economy of Australia (probably create jobs and opportunities) and you’re going to get taxed on that again.

 If the government is going to apply this legislation to properties the question is why have they not applied this to everything? Why is okay to double dip on taxes relating to the property, but not the shares, nor new vehicle purchases or any other investment but not just existing property.

 

Trickle-down effect and devaluation of existing homes

The whole concept of abolishing negative gearing is to try and save some money for the government and potentially assist with the affordability of housing. And secondly, to make sure that the middle class do not get a fair go.

However, with the legislation applicable to only existing houses, it will impact the vast majority of Australians who are owner-occupiers of their properties. These people rely on this major asset in life for retirement.

This means that the only people who will be willing to buy an existing property are those wanting to leave in it. Investors will be cut out of the market because they are no longer able to claim a tax deduction against properties that already exist. Instead, they will buy something new which will devalue the existing properties owned by the vast number of Australians.

The legislation will devalue the one major asset the middle-class Australians rely on in retirement.

So, it’s the middle-class Australian that will be impacted by this legislation. This is what we call the trickle-down effect.

These are our observations and thoughts. If you have any concerns about what this means for you or want to discuss the above in more detail, email property@edaproperty.com.au.