Episode Details

The property industry, and investors in general, welcomed the Labor party's announcement that they won't change the rules of negative gearing if they got into power.

So, is this the end of the debate?

Not necessarily according to Stuart Wemyss who still has some concerns that we're going to talk about today.

We'll also discuss the concept that sophisticated investors shouldn't have to jump through the same hoops that beginning investors do.

Then, in my mindset message, we're going to talk about the fears that may be holding you back.

Is this the beginning of the end of negative gearing despite Labor's promises?

One of the aspects of finance I discuss with Stuart is negative gearing.

What is negative gearing?

Negative gearing allows investors to offset property investment losses against other taxable income (such as employment income) to reduce their tax liabilities.

Why do people negatively gear?

The only reason that you would negatively gear is that you anticipate that the property's capital growth will eventually dwarf its income losses.

Is negative gearing at risk?

There are three main reasons why tax benefits resulting from borrowing to invest in property will not be as substantial as they have been in the past. As such, investors should not rely on negative gearing tax benefits when making investment decisions.

Reason 1: Government will probably (eventually) limit negative gearing

The expansion of federal government debt to over $1 trillion dollars means the government must generate more revenue to service and eventually repay this debt. One way to do that is to grow the economy (GDP) which will generate more tax revenue, even if tax rates don't change. Another way is to raise taxes or limit deductions.

Reason 2: Persistently low interest rates reduce tax savings

Gross property residential rental yields typically range between 2% and 3.5%. After allowing for expenses (such as management fees, maintenance, insurances, and so on), net rental yields typically range between 1% and 2.5%. With interest-only investment rates starting at 2.5% p.a. (fixed rates), a property's pre-tax income loss can range from nil to 1.5% of a property's value (being net yield less interest rate). This means if your property is worth $1 million, your pre-tax loss probably won't exceed $15,000 p.a. Consequently, your tax benefit (savings) won't be more than $,7,050 (being 47% of the loss).

Reason 3: Stage 3 tax cuts will reduce tax savings

It was reported last week that the ALP will likely support the government's stage 3 tax cuts which are set to become effective in the 2024/25 financial year. This means that there will only be two tiers for taxpayers that earn in excess of $41,000:

$41,001 to $200,000 = 34.5% tax rate including Medicare; and

Over $200,001 = 47% tax rate including Medicare.

Sophisticated Borrowers Shouldn't Have to Jump Through the Same Hoops

Anyone who recently made an application to get more finance would have realized how much harder it is, how many more questions you have to answer, and how much longer it takes today.

Stuart recently wrote a great article where he suggested that sophisticated, more experienced borrowers shouldn't be required to jump through the same hoops to get finance that less experienced borrowers need to.

What do you mean by that?

We discuss the retail versus wholesale investor rules

The Corporations Act makes a distinction between wholesale and retail clients (or "sophisticated investors" if being offered bonds or direct shares). A wholesale client is someone that meets either of the below two tests:

Asset test – having a net worth of over $2.5 million; or

Income test – having a pre-tax income of at least $250,000 in each of the past two years.

The Act also includes other exemptions in addition to th