First Home Guarantee and Negative Gearing

We're all very concerned about how hard it is for people to get into the property market, with property prices being making home ownership out of reach for many.

You may have seen on the news this week the debates about the best way to combat this issue. Whilst the Government want to roll out this Shared Equity program called 'help to buy' (but only for a select few), the Greens are pushing for the removal of 'Negative Gearing', which is where the Net Loss from owning an investment property can be used to reduce an investors other taxable income.

If Johnny owns a $1 million investment property collects rent of $40,000 and the cost of managing the property, repairs, strata and of course interest totals $50,000 - there will be a Net Loss of $10,000.

If Johnny earns a $200,000 salary, his taxable income would be $190,000. That's Negative Gearing, used by 21% of Australians.

We're told that Negative Gearing reduces our national tax revenue by about $2.7 billion per annum, but I think the way that's calculated is flawed (I'll get to that). Either way,?I'm not sure that removing it is a good idea.?

Firstly, it's a bit strange to ask investors to pay tax on money they didn't earn, especially when they have to pay tax on any profit they might earn, when it gets sold.?

Some look to New Zealand, where Negative Gearing is not allowed. But hey they don't have any Capital Gains Tax!! Fair.

Most importantly, most negatively geared properties become positively geared pretty quickly! Even servicing your Investment Loan on an Interest-Only basis is still 'covering' inflation, so the loan balance reduces in real terms. Values and Rents will rise, and before long investors will be paying tax on the profit.

This is why salaried borrowers need to be careful about whose name to buy property in, which forms so much of our advice.?Those with Trust arrangements don't need to worry so much, as they can allocate income to suit.

Even though Johnny embraces Negative Gearing to save $3,000 a year in tax, remember he paid $40,000 in Stamp Duty when he bought it! And if he sells it in 15 years for twice as much as he paid for it, he might be pay Capital Gains Tax of $180,000.?

So if Johnny didn't buy this property, taxpayers miss out on $175,000 [$220,000 less ($3,000 x 15 years)]. The lost revenue from Negative Gearing is comparatively small, right?

(Furthermore, if he was past his Land Tax Threshold, he'd be up for another $8,000 every year, for 15 years - yep, another $120,000).

It happened in 1985, where the Hawke/Keating Government changed Negative Gearing rules, only to restore it 2 years later because of the slowdown in dwelling construction and the concern about prices dwindling (and higher rents). It was also when they halved Capital Gains Tax - a weird time.

A third of people will still rent, and investors are required to own them. Let's not hurt the market.

As a former Economics school teacher, I think the concept of demand and supply is pretty simple and all levels of Governments need to just work on increasing housing supply, in particular the local Councils who seem to cause the red tape & bottlenecks. They just need to get on with it!

Covid taught us we're not always a nation, but a group of states. I'm wondering if 3 levels of Government is too much for us $25 million people?

I try not to be political. I watch Q&A, Media Watch & The Outsiders. Did you like the colours I used there? PS why are the colors the other way around in the United States?

Anyway, our home shortage has led to us now restricting international students, eroding one of the strongest exports we'll still have left one day. We're all used to having 2 TV's, 2 cars; I hope everyone understand where the term 'The Lucky Country' came from. It's not about our beautiful beaches.

And if you think I'm some right-wing dude, you'd be mistaken. I strongly believe in equal opportunity for all Australians?and doing something serious about intergenerational wealth imbalance. How I've embraced that in my work life is by providing great information that isn't always available to everyone.

I don't wear a coloured hat these days, but hey this is where I was 9 years ago:

I didn't have to give up my day job, thanks to the good people of Drummoyne :)

At iChoice we don't only help seasoned investors with refinancing into smarter lending structures. We're proud of making rich people richer, we're good at it, and we enjoy it. BUT we also love getting first home buyers into the market for the first time; it's such a buzz!?

This is why I lobbied for and was thrilled with the roll out of the First Home Guarantee Scheme (FHGS or FHBG).

Until this, having a Guarantor was limited to kids (like me) with a parent who owned a property, which isn't at all fair. The new FHGS requires the borrower to have only a 5% deposit, and the Government goes Guarantor for them for the other 15%. Great.

But I have a few issues with it. And since included in my email readership is my friend The Hon Stephen Jones MP, Assistant Treasurer & Minister for Financial Services, I'm going to mention them!

(1) The maximum income you can be earning to qualify is $125K for an individual and $200K for a couple. Well, I can attest that there are many couples earning this who still struggle to come up with the 20% deposit. I'm not sure why they're penalised.

I have an absurd situation where a couple each earn $110K each, who are holding off getting married as this will immediately make them ineligible.?

(2)?The way they check someone's income is by looking at their most recent Tax Assessment Notice.?Remember my last email how I said salaried workers don't have as much flexibility as their self-employed counterparts?

I just processed a loan for a young bloke who profited $300,000 in his business last Financial Year. He paid himself $100,000 and left $200,000 in his company as Undistributed Profits. His 2024 NOA shows $100,000.?Yep, he qualified for the FHBG.

(3) A condition is that you have not had any interest (ownership) of any property in Australia in the past 10 years. I think this is a shame. Some people have sold their homes because of hardship, divorce, a need to relocate for work and for whole bunch of reasons. I think it should be for anybody who doesn't own a property.

Let's not have rules that affect very personal decisions like this. Maybe we can change it to the 'Only Home Guarantee Scheme'.

In addition to this scheme, First Home Buyers can also often get State-Based concessions or waivers on Stamp Duty. All the states (apart from the NT for some reason, unless I'm mistaken) offer Stamp Duty Concessions of some kind.

Here in NSW, the Stamp Duty is waived for buys under $800,000 and scales down to Nil at $1 million, where full duty is required. The condition to live in the property for a period of 6 months (starting in the first 12 months) has been recently tightened, now stipulating the borrower needs to live in the property for a period of 12 months.

Interestingly, the Stamp Duty is still waived for the First Home Buyer even if they only buy half the property with somebody that doesn't qualify! I don't think many people know that.

So, if my son buys a place for $800,000 in conjunction with me, even though I'd be required to pay Stamp Duty on my half, he doesn't on his!

In Victoria, Stamp Duty is waived at $600,000 and scaled to nil to $750,000. In Qld, Stamp Duty is waived at $500,000, scaling to $550,000. In WA, Stamp Duty is waived to $431,000, scaling to $530,000.?

Still for many of my clients with adult kids, they're able to personally provide a Limited Guarantee for their children.?This is ideal, as there aren't any restrictions at all on income levels or values. It can even be for investment purposes, where demonstrating Capacity is much easier.

Then, the kids can borrow 104% of the property (the full amount and sthe Stamp Duty). Even when they might have $50,000 in savings, by going Guarantor for them so they can borrow 104%, their $50,000 can be reserved for furniture, repairs or even their next purchase!

We refinance around $200 million of loans into cheaper, more clever structures. If I can help you or your adult children, I'd love to hear from you. I'm on 0400 900 300 or you can email me at [email protected]