This most topical issue has been raised once again in anticipation of the May Budget. I am not sure as to whether there is any substance to the various strategies proposed or whether it is a ‘media beat up’ for the politicians to grab some headlines. One such proposal was to restrict negative gearing to new properties only while introducing a partial removal of the CGT discount. This is an attempt to tinker with a perfectly sound policy for no good reason.
When the negative gearing and CGT policy was introduced in the mid 1980’s, the idea was fairly simple. The Labour Government of the time had several motives in mind. The policy would:
- Allow investors to set up their own small business enterprise (becoming a landlord) whereby the property would generate income, the expenses would be deductible as with any legitimate business and then impose a tax on the ultimate profits of the sale of the asset.
- Stimulate new construction
- Ensure an ongoing supply of rental properties for renters who were not in a financial position to become owner/occupiers
- Support the notion of saving for retirement, thereby easing the burden on the public purse.
Negative gearing is not a tax benefit, it is a tax deferral. The idea is that an investor will benefit from some income tax relief through negative gearing which is effectively returned to the Government coffers via CGT when a sale occurs. That some may choose never to sell is their choice. Ultimately that held asset will become positively geared as rents increase and its debt reduces requiring the owner to pay income tax on the net proceeds. Eliminating negative gearing from established properties while retaining the CGT is simply another form of property tax. To introduce such a policy may convince many to exit the property market which in itself would defeat the original purpose of the 1980’s policy. The implications for the economy at large and the building industry in particular are too far reaching to contemplate.