Realities of ALP Neg Gearing Policies

A lot has been said about the ALP Neg Gearing policy. Here is what we know v's what isnt factual

1. Applies from 1 January 2020
2. To a new acquisition acquired under contract from that date.
3. A taxpayer must consider ALL investment income from shares, interest, property, foreign investment income and indirect trust income and then determine after all deductions applicable to those investments if a net loss occurs.

• If some are pos geared and others neg geared the net loss WILL be allowed if all was acquired prior to 1/1/2020. Otherwise may need to be considered on a specific investment by investment position.
• If a taxpayer is POSITIVE geared on their investment income at 1 January 2020 then a new neg geared investment after 1/1/2020 may be limited to the amount of that already positive geared situation. No more.
• If a taxpayer is negative geared on their investment income at 1 Jan 2020 this wont change unless their property ownership changes. It remains to be seen if the ALP introduce tests to change use of existing investments eg a former PPOR becomes a IP or if a test for new borrowings is applied from 1 January 2020. I wouldnt be shocked if they did.
• Some (new) property will be excluded after 1 January 2020. These types of property are likely to have very high neg gearing benefits from interest and QS deductions and may become a new strategy if market risks for OTP and new build supply risks are addressed by the buyer.

Those most affected

• Those who dont own property at 1 / 1/ 2020 who are considering buying an IP that will be neg geared.
• First home buyers who initially rent a property intended to become a future home. Lender servicing calcs may affect them after 1/1/20
• Taxpayers without sophisticated property tax advice are more likely to make errors and not understand the options to avoid the impact or to fix it if there is an impact
• Taxpayers with poor quality brokers who dont understand the key tax issues. They may seek a high loan when other strategies abased on tax are better. (In my experience, PC brokers tend to understand the main tax issues)

Those least affected

• People with a portfolio at 1/1/2020. They have a range of strategies available. Including
  • Sell down POS GEARED property in portfolio to restore their neg gearing
  • Partial spouse sale to effect that same issue
  • Persons aged 65+ who could use downsizer contribution strategies as part of that sell down
  • Those with access to equity refinance and with net POSITIVE geared income. They may be able to carefully boorow for new investmnets to pull that POS income down to $0.
  • Strategies for LOCs, spouse loans etc to pay property expenses to assist retaining loan capital and maximise interest that is deductible
  • Those with shares and property income. Shares are easiest to dispose with few transaction costs v's property. They may find rejig of their share portion to assist retention of neg gearing for the property portion.

 

Prepaid interest clients may also need to address if the new policy even allows prepaid interest. As it was announced it should, but that seems illogical in some respects.

eg The net investment loss is enhanced (to offset a CGT amount?).

 

Thanks Paul.

If I own a property today on a large piece of land, retain original home. Subdivide and build a new home in 2021. Sell original home and keep the new home at the same time. Will the first home still have the 50% CGT exemption? Will you pay more CGT on the new property built in 2021 if you decide to sell in the future? If you own development blocks is there anything should consider doing now? Eg. subdivide now, even if not building until the future? Thanks!!

 

Great factual post.

 

No. Its probably not a capital gain on the new build but the original...hmmmm. Consider GST registration too as sale of new residential premises may be a concern if its sold within a period of time. The sale of the former home will have a tax issue of some sort. Maybe a main residence exemption, maybe partial.

You appear to have a isolated profit making intent and an enterprise.

Seek property tax advice

 

Hi Paul,
Without having to sell down, those with existing portfolios and chocked offsets could simply shuffle the offsets around for a new purchase.

Example:
-Purchase new IP (not OTP just a new purchase of existing property to add to portfolio). Not eligible for NG under proposed rules.
-Move offset (chocked) funds from existing IP loan offset to new IP loan offset.
-New IP is no longer NG and the existing IP now becomes NG using grandfathered rules.
-Investor continues on merrily investing unaffected by the new rules.

Have I missed anything?

 

I think you need to provide some clarity around the impacts of the proposed changes to Capital Gains Tax as well. I understand the CGT discount reduces from 50% to 25% for assets acquired after 1 January 2020 (and as currently applies the assets need to be held for > 12 months to qualify for the discount ).

 

You don't even need to go that far. If your offests are chokkers then you should have investment income. Then you can just buy another IP, negatively gear it and use the loss to offset your investment income. Simple.

Disclaimer: this assumes the policy is implemented as advertised.

 

Good point - this does require the investment income to be greater than the negatively geared property though (likely if fully or majority offset).

If it is not - then do the offset substitution I suggested above to avoid any impact whatsoever.

 

This is the problem I see with the policy. There are lots of options for people with a portfolio and also options for people with a decent income. The policy is really to stop mum and dad investors or lower income investors from entering the market.

My parents retirement would be very miserable if they had not literally been mum and dad investors. In the early days they would have struggled to hold their sole investment property without negative gearing. Years later it was nicely cashflow positive and they paid tax for many more years than they negatively geared it. I can't really see how this is unfair.

 

Rentvesting will become less popular. Owning and living in a PPOR will be back in vogue.

Most won't be able to scratch up a deposit. They'll be forced to rent in an increasingly tight rental market.

 

As the policy was announced yes. However blind freddy can see that its a gaping policy gap particularly for existing owners rather than first time entrants to property investment. I can sniff a test applying. That and borrowing more new $$$$ to pay outgoings etc to make a neutrally geared IP deductible again etc etc