Why negative gearing is falling out of favour
The hot topic that did so much to bolster the election prospects of Prime Minister Scott Morrison has now lost much of its sheen.
The hot topic that did so much to bolster the election prospects of Prime Minister Scott Morrison has now lost much of its sheen.
A commitment not to abolish negative gearing was attributed as one of the key reasons the coalition won the unwinnable Federal election.
While the Labor party was unable to eradicate the tax saving, COVID-19 has at least managed to tarnish its lustre.
A property is negatively geared when rental return is less than the interest repayments and other property-related expenses, with the difference claimed as a tax deduction.
About 10 per cent of Australians negatively gear a property. But the idea of paying the bank more interest for the debt than is covered by rent is no longer such a great strategy when house prices are falling across most capital cities.
Tax expert Steve Douglas, chairman of the SMATS Group of Companies, said the deliberate use of negative gearing as an investment strategy was no longer paying dividends.
“Property prices have not suffered the pandemic-induced falls of 20 per cent or so that many had speculated would happen but the declines of one or two per cent are still enough to erase the benefits of negative gearing,” Mr Douglas said.
“It’s also less achievable in an environment of low interest rates, so what we’re seeing now is a return to purchasing investment properties in great locations with high rent yield potential that can deliver the profits that are no longer assured by capital gains.”
It’s an approach that is easier said than done, with rental vacancies on the rise in Sydney and downwards pressure being placed on rents in Melbourne.
“With no travel and a subsequently subdued rental market in the biggest cities, no depreciation any more on fixtures and fittings in second-hand buildings, it’s really time to look for property investments that can stand on their own as a profit generator,” Mr Douglas said.
“Now is the time for investors to be looking at ways of making tweaks to their strategy, whether it’s renegotiating interest rates or switching to fixed from higher variable rates, renovating to bolster rent returns and looking for other cost savings on property management and the like,” he said.
Negative gearing is a good idea if…
- Saving money on tax is the priority.
- An increase in property or rental value is expected.
- An investor’s disposable income is enough to cover losses from the property.
Negative gearing is a bad idea if…
- There are no signs of an increase in property and rental values.
- The plan is to expand your portfolio.
- The goal is to invest for passive income and build wealth.
The absence of international students has reduced rent demand and the six-month moratorium on residential evictions that started in late March has produced rental reductions and deferrals.
Victoria has extended its moratorium on evictions and rental increases until the end of the year.
Negatively geared properties are still lowering tax bills as the gap between interest repayments and rent returns widens, but without capital gains it’s little more than a discounted loss-making exercise.
In Australia, around 1.32 million properties are negatively geared, costing the Federal Government around $13.1 billion in lost tax revenue. Only around 884,000 properties are positively geared, generating a profit of $9.5 billion.
Negative gearing costs are widely expected to blow out this year as landlords absorb rent discounts or non-payments on their properties due to the coronavirus pandemic.
“Negative gearing isn’t dead by a long shot but as an investment strategy it’s now on life support,” Mr Douglas said.