The recent heated debate over abolishing negative gearing on investment properties highlights the need for all property investors to have a clear plan for their investment future. “Regardless of whether you negatively gear or not, you need to have a clear understanding and strategy for why you are doing it.” according to Rick Collova, Director with PEB Group.
“Negative gearing should not be the sole or major reason for you to invest in property. The only reason anybody invests in anything is to create wealth. So it is essential that you build your investment plan around wealth creation, and not whether or not you will get a tax deduction.” This is where getting professional property investment advice becomes critical.
The majority of rental property in Australia is supplied and funded by the private sector, according to ABS Census data (Source ABS 4130.0). Typically these are ordinary mum and dad investors who only have one investment property. And most of them partially fund their property investment through negative gearing.
A recent report independently commissioned by the Real Estate Institute of Australia and conducted by ACIL Allen found that two-thirds of property investors earned a taxable income of less than $80,000 per year and that 73 per cent of those who negatively geared owned just one property.
‘So it’s hardly this evil tax rort for the rich as so many of its critics try to make out,” said Mr Collova. Mainly it’s ordinary Australians who plan to use their one investment property to fund their retirement. And it is precisely these everyday people that need good advice when starting to invest.
Will the Government Abolish Negative Gearing?
Despite the recent calls by the Reserve Bank of Australia and others for the abolishment of negative gearing on investment properties in the hope to improve housing affordability, it is unlikely the government will take any action on it. The Treasurer Joe Hockey has already ruled it out, saying that the ability to deduct expenses from income is a fundamental principle of taxation law. The Labor Party has said it will look at it, but not abolish it altogether.
Mr Collova said. “If the Government is serious about the issue, it needs to consider all factors and across the whole country, not just those in the overheated real estate market of Sydney and Melbourne. There are many issues which affect housing prices, and to just focus on negative gearing is dangerous and simplistic. Current debates are not taking into account factors that play a huge role within the economy such as population growth, wage increases, job growth, economic conditions plus supply and demand."
A perfect example of this was when negative gearing was scrapped for two years from 1985-87. Rental prices in both Perth and Sydney rose but this was more than likely due to the economic conditions that both NSW and WA were experiencing. Vacancy rates were very low in these states; demand was outstripping supply and so rental prices increased. Conversely in Brisbane vacancy rates were 4+% thus prices were not increasing.
“In our opinion, if you negative gear your property now and then somewhere in the future the government does abolish the practice, it should not be a major problem. It’s almost certain that a sunset or grandfather clause would be included to prevent the change from being applied retrospectively. We also believe that abolishment will only apply to established homes, which will highlight the new home sector as a more attractive offer to investors, growing employment and rental opportunities in that area.” Mr Collova said.
Negative gearing means the investment property is making a loss and it is only by offsetting that loss against other income that the investment may be viable. Without it, the property is just a loss making liability. Remember even though you do not have to carry that loss for the entire year before you can claim it back as a tax deduction, it will only reduce the amount of your taxable income you pay; ie. you don’t get the full amount back. According to the ATO the typical loss claimed on a negatively geared property is $9,500 a year, or about $183 a week. “That amount is far too high and demonstrates to us that the majority of investors are either not getting any advice or worse still, not getting the right advice on how to reduce those losses.” Mr Collova said.
As stated at the beginning, before you start thinking about negative gearing, you need to have a sound property investment strategy in place and get professional property investment advice. Negative gearing may or may not be right for you, everyone has different circumstances and objectives, and this is where expert advice becomes crucial. "There are strategies to be used that can reduce your losses and increase your cash flow which most people are unaware of" said Mr Collova.
*This article is for general information purposes only. It is not intended as financial or investment advice and should not be construed or relied on as such. Before making any commitment of a financial nature you should seek advice from a qualified and registered financial or investment adviser.