On budget night the treasurer announced what was meant to be the most ambitious reform to the housing market seen in decades. Thankfully, very little has changed and despite what some commentators are claiming, this won’t affect very many people.
The main announcements were:
– An end to Negative Gearing deductions.
– An end to the Capital Gains Tax discount.
– A minimum tax rate on Trust disbursements of 30%.
So what does this mean for us?
Well, if you already own a property, the Negative Gearing change won’t affect you at all. Current investors may continue to claim deductions against their personal income. If you are looking to purchase another investment property, you will only be able to claim Negative Gearing deductions against personal income on new builds.
This means that moving forward how you invest in real estate in the future might have to change. But your current properties aren’t impacted.
Changes to Capital Gains Tax will take effect in July 2027. So until then, you still benefit from the 50% discount on assets held for more than 12 months. If you keep your property beyond that date, we highly recommend getting an appraisal (we know someone who can help) as you will still be able to claim the discount on any price growth up until July 2027, regardless of when you sell. From then on Capital Gains Tax will be calculated off the cost base adjusted for inflation.
Say you purchased a property 2 years ago for $700,000. Add in Stamp duty and your cost base is $735,000. If that property is worth $850,000 by June 2027, then the Capital gain over that period is $115,000. This capital gain is eligible for a 50% discount. So if you sold the property, you would only pay tax on $57,500 (half of your profit). If in 2030 the property was now worth $980,000, the additional $130,000 profit would be balanced against the cost base at the change of legislation ($850,000) plus the Consumer Price Index to allow for inflation. If the CPI for each of those 3 years was 3%, then the new cost base would be $928,817. (cost base + 3%, +3%, +3%) This would leave you to pay tax on $51,182.
As you can see, over time, the CPI based inflation adjustment can still provide fair concessions to the amount of Capital Gains Tax you are required to pay. This new system will only severely impact people who experience large spikes of price growth over very short terms. It is therefore more likely to harm business owners and the stock market, than Property Investors.
Changes to Trust disbursement taxes are insignificant. Very few people had access to beneficiaries on a tax rate below 30% to disburse to anyway, and those who do will shift towards using corporate entities instead of trusts moving forward to access rates as low as 25%.
So what will this do to the market?
Well, there may be a short-term spike of concerned people selling properties and exiting the market. But due to the changes not being retrospective, this will be minimal. Price growth for established properties may temporarily stall while new investors are directed towards new builds. This will of course see a spike in demand for new builds, a jump in construction costs and then ultimately a return of buyers to the more attractive established suburbs. Importantly because these changes apply to all assets, investors will not be better off if they move from property into shares or commodities.
Critically, 2/3 of all homes in Australia belong to homeowners, not investors. These homeowners will continue to drive the market. I have always reasoned that the government will never make any changes that could potentially crash the market for two simple reasons. All politicians’ own property and thanks to programs like the First Home Owners Guarantor Scheme, the government is one of the biggest residential property investors in the country. This means they are all, despite what they might say, heavily biased towards ensuring continued growth.
You may hear that the sky is falling, but none of these changes are as dramatic as they sound. Remember the media and influencers thrive off panic. My general advice would be to stick to your original plan. If you were planning on selling anyway, sell. If you were planning on keeping your property anyway, keep it. None of these changes are significant enough to interrupt most investors who had solid strategies in place.
If you are concerned about your specific situation, please reach out to us for a chat. Or if you are curious to know what we are doing with our own portfolios currently, feel free to ask.
