Negative gearing limited to new housing
The Labor Party will limit negative gearing to new housing from 1 January 2020. All investments made before this date will not be affected by this change and will be fully grandfathered. Losses from negative gearing (other than new housing) will not be allowed to be claimed against salary and wage income but can be claimed against investment income from positively geared assets and capital gains on their sale. Negative gearing currently enables investors to deduct investment losses from their other taxable income.
According to the Labor Party this change will result in the addition of a new category of tax loss: the investment loss and a significant new layer of complexity when preparing individual tax returns, with taxpayers impacted having to appropriately calculate, apply and carry forward investment losses in addition to dealing with capital losses.
How the investment market will react to this policy remains to be seen?
Capital gains discount halved
If implemented, this proposal will result in halving the capital gains discount for all assets purchased from 1 January 2020. This will reduce the capital gains tax discount for assets that are held longer than 12 months from the current 50% to 25%. All investments made before this date will not be affected by this change and will be fully grandfathered. This policy change will also not affect investments made by superannuation funds, which will continue to be entitled to a 33% CGT discount. The small business 50% CGT discount will not change for eligible small business asset sales.
This policy is not limited to residential housing and will apply to all classes of assets ordinarily subject to capital gains. Currently if an asset is held for at least one year, then any gain is first discounted by 50% for individual taxpayers, or by 33.3% for superannuation funds.
As with the negative gearing proposal, if the opposition wins the May election, how the investment markets react to this measure remains to be seen.
The reduction of the discount also means that the immediate tax rate payable on capital gains will be less for companies than it will be for high income earners. This is likely to affect high wealth individuals’ choices of investment structure.
Foreign investment in residential property
The Labor Party has announced plans to facilitate a uniform vacant property tax across all of Australia’s major cities from 1 July 2019. It will double the maximum financial penalties for breaches of the foreign investment rules banning acquisition of residential investment property by foreign buyers, and double foreign investment application fees for foreign investment in new residential property.
Currently vacancy fees are based on the amount that the entity paid for the foreign investment application fee at the time of submitting their foreign investment application. For example, fees of $5,500 apply for properties valued at $1,000,000 or less (which Labor proposes to double to $11,000).
The measures are part of the Labor Party’s plan to address housing affordability and aim to co-ordinate policies around foreign investment. The plan to standardise charges nationally providing certainty to the housing market - which is desirable - and is consistent with global government responses to curb overheating property prices.