Labors Negative gearing and capital gains proposed changes
It is important to consider why we have negative gearing. The concept is a simple one, investors can offset their costs of buying an investment property against their overall income by claiming averall losses by using interest rates and tax depreciation claims. The purpose of the policy was to encourage investors to provide for their own retirement thereby not being a burden on the welfare system.
Labor claims that this tax simply helps rich people. The facts do not support this, in fact 5.75% of Australians own just 1 investment property, 1.42% of Australians own 2 and 0.43 own 3. Small numbers over all. The other figure that has not changed in more than 20 years is that 80% of Australians will retire with not enough money to maintain their current lifestyle. So, you would think that it was in the states interest to encourage people to save money.
So, let’s look at the new policy changes proposed by Labor. The main proposal is to only allow negative gearing on new property making it easier for first home buyers to get into the market. There are several problems with this policy. Firstly, if Labor wants to help first home buyers this policy will drive investors to only buy new properties including house and land packages thereby pushing up demand and therefore prices. It is also important to keep in mind that as soon as you buy the property it becomes established so if you go to sell the property it will not be sold to an investor because the property can no longer be negatively geared. What this means is that as an investor you need to buy a home that will appeal to an owner occupier. If not, what will drive the capital growth.
This policy means that few investor’s will buy established property in inner city areas of any of our major cities. That means less supply, more demand which means we can expect rents to go up dramatically, making it harder for first home buyers to save for their first home.
I do not believe that this policy will drive down all prices however who will buy small apartments in the CBD of our major cities if negative gearing is abolished on established properties. The same may apply to small houses on tiny blocks. In these areas we may see substantial losses.
The second major change is capital gains tax. Under Peter Costello a 50% discount to given on this tax. It effectively meant that you received 50% of whatever gain you made tax free and the other 50% would be applied to your overall income in that year and you would be taxed accordingly. Now Labor policy is to reduce that discount too just 25% and 75% would now be taxed.
In a world where many will retire and still be reliant on the public welfare system it is hard to understand why a party would discourage people to not invest and save. If anything, we should make it easier for people to save for their retirement. When you add the changes to franking credits we can only surmise that these policies are just plain dumb and wonder who came up with them in the first place or perhaps they have been done deliberately to make sure that more people will be reliant on the state which is the great socialist tool of control.