There are only really three certainties in life – death, taxes and change
There is a great deal of conversation and debate surrounding the issue of negative gearing on investment property in Australia. It has become a political issue and is receiving a great deal of media attention and hype, so let’s look at the facts.
What exactly is negative gearing?
Negative gearing involves leverage (borrowing money from the bank) to invest in property whereby the cost of owning and maintaining that investment property is higher than the gross income (rental income) that you receive. The losses are typically tax-deductible against other taxable income creating quite an incentive for property investors looking to Australia.
There are costs and benefits to using negative gearing as an investment strategy to build your assets. For some, it can be a highly cost effective strategy however it depends on your own personal financial goals.
What is the Australian government considering?
The Labor government has stated that they would remove negative gearing from 2017 but it would not be applied retrospectively. Therefore, your existing properties would continue to be treated in the same manner as they are currently, a process called ‘grandfathering’. Turnbull is yet to clarify specifically his stance on negative gearing, but it is likely that there will be some change.
What happened when they removed negative gearing previously?
Some of you may remember that negative gearing was abolished (albeit briefly) in 1985, which led to a surge in rents as investors sought to replace their lost revenue. This had a number of flow-on effects impacting the construction sector and related services.
Studies have indicated that abolishing negative gearing in its entirety would in fact led to a reduction in national GDP, rather than boosting revenues as some media sources would lead you to believe.
What does this mean for you as an investor?
As an Adviser, I never recommend that my clients make an investment decision based solely on the tax benefits. It’s important to factor in changes into your strategy and discover how they would impact you. Property will remain an appealing option for many looking to build and grow their retirement nest egg, regardless of changes to negative gearing, it’s simply an important step to be aware of how these changes may impact you. The one thing we can always count on with taxes is change.
Speak with your Adviser today and go through some cash flow analyses based on a range of scenarios. As always, remain focused and on track to achieve your financial goals.
To Your Financial Success!
Jarrad Brown is the trusted fee-based financial adviser for Australian expatriates living in Singapore and throughout Asia-Pacific.
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