I have 2 negative geared investment properties and not doing a very good job in understanding the policy changes the Labour Party is suggesting to negative gearing. Is someone able explain in basic terms what their policy is and how it would impact my investments? thank you
Lets use an example where you have 1 property and earn $10,000 pa in rent
lets assume your outgoings like insurance, rates, agent fees etc are $3,000
And lets further assume you pay interest of $11,000 per year
so income = $10,000
expenses = $14,000
rental loss = $4,000
Now under the CURRENT rules, you get to apply this investment loss as a tax deduction against your other forms of assessable income: lets assume you earn $60,000 in wages and to keep things simple you have NO other tax deductions
so, your taxable income is as follows
gross earnings = $60,000
allowable deduction = $4,000
taxable income = $56,000
in this case you will get a tax refund of $4,000 times your marginal tax rate.
so $4,000 x 32.5% = $1,300.
this is the EXTRA refund you are currently entitled to because the current rules allow you to claim the rental loss against your other income
Big Hearted Bill is proposing that this tax benefit is removed. I am not sure whether this loss can be applied to the property to help you manage Capital Gains Tax or whether it is lost altogether (and for the purposes of this explanation I wont go into this further complication)
So the million dollar question for you is this:
"WILL LOSING THE TAX BENEFIT I CURRENTLY ENJOY CAUSE ME SO MUCH FINANCIAL HARDSHIP THAT I HAVE TO SELL MY INVESTMENT PROPERTY???"
My advice to you is to get yourself in front of a good tax advisor and figure it out. My example is very simplistic and your numbers may well be a lot larger than the figures I have used. And the last thing you need is to find out you have a $10,000 hole in your budget by getting a nasty letter from the bank. Plan this out and see if you have the funds to continue to hold both your properties. And if you cant, then you need to see how much of a hiding you are going to take when you sell.
Get last years tax return and use that as your starting point to budget for the future.
Basically what Labour Party is proposing will have the following effects:
- Rental losses will not be claimable against your salary & wages to reduce your taxable income.
- Losses from rental investments will be accumulated and deductible against capital gains when property is sold.
- Capital Gains Tax discount of 50% will be reduced to 25% i.e. tax will be payable on 75% of Net Capital Gains
Hope this helps!
Note that this is all just a proposal, not sure if we will see this happening (at least not is full).
Understanding the changes is one thing as described by Brendan and Anurag. How will affect you? Not at all.
Other than the potential to change the value of your property due to less investors being interested in established properties
Hi again Ellie,
Scotts comment about the proposed changes potentially affecting property values is valid, and there will clearly be some sort of change in demand for an established investment property
I think that the proposed changes has potential to have a significant effect on your cashflow if your properties are heavily geared and you now receive a significant tax benefit (which will evaporate under the proposed changes).
As an example I was talking to a client who has been gearing up over the last 4 years and has acquired a number of investment properties, each one leveraged against existing properties.......this guys is in a position where he has to lodge a PAYG W variation which reduces the PAYG W on his wages each week instead of waiting until the end of the year to get a giant tax refund. This extra cash paid to him each week is used to pay the shortfall in cashflow created by having a mountain of debt.
Just so everyone understands I didnt advise this guy to employ such an aggressive investment strategy: he had the help of a property guru who set him up on a program to own a fleet of rental properties by the time he was 50........
In this example, the client is now trying to figure out how to sell a property without creating a disaster. His loans have been based on valuations from banks before they all got ultra-conservative on lending, and also before the property market eased.
His concern now is that should he sell one property, this will result in potentially needing to revalue ALL his properties. If this is the case, it is likely that he wont have enough equity across the board to manage the whole show.
But he also knows that without the extra cash created by the negative gearing tax benefit, he cant maintain the loan payments for the long term.
This bloke has made decisions based on a set of rules that are mostly likely going to change, and in his case, the consequences of the changes are not great at best, and potentially catastrophic at worst.
Hopefully you have employed a much more conservative approach to your investment strategy, and the effect on you is nowhere near as dramatic.......but you really should do some budgeting and see if you have a hole in your cashflow that is currently being filled by a negative gearing tax refund
It sounds like Labour is going to Grandfather the old rules for those who already HAVE investment properties, so I think that anyone who is already set up wont need to worry about selling up due to the changes........
It also appears that the negative gearing embargo will only apply " in aggregate"
sooooo, if you have a fleet of properties, and there are some that generate positive income and some that generate negative income, the losers will be offset agains the winners, however if the TOTAL result is a loss, then that loss gets quarantined.....
call me cynical, but this would make life more difficult for a middle-low income earner with a single negatively geared investment property than a cardio-thoracic surgeon who owns 15 properties......so long as the new negatively geared property can be offset against some other property or other investment income.
I dunno......it just seems like a poorly thought out grab for votes......