The clock is ticking on negative gearing

The government may not want to touch the negative gearing of investment properties, but plunging tax revenues may force it to act.

Those planning to negatively gear an investment dwelling should consider taking action sooner rather than later. There is no certainty that the taxation treatment will be altered, but the supporters of change to the dwelling investment rules are being led by the Reserve Bank.

With Joe Hockey now admitting that May’s federal budget was based on global scenarios that were too optimistic, (Budget facing offshore hit: Hockey, October 7) it is certain that negative gearing of housing will be high on the government’s potential attack list.

Although there is always a risk, it is highly unlikely that any changes will be backdated.

Australian first home buyers have been priced out of the market partly because they do not get a tax deduction on their interest payments.  By contrast, investors are able to claim housing tax deductions that exceed rental income against their salaried and other income and therefore can afford to bid up prices.

It’s true there is no capital gains tax on residential homes, but that’s not much help to first home buyers.

The government will be nervous about changing the rules because currently investor buying is leading the dwelling building boom that is holding the domestic economy together (Canberra must tread carefully with negative gearing, October 2).

Nevertheless, longer-term taxation of income would be boosted if we followed the US pattern that allowed tax deductions on investor dwelling interest and other costs to be claimed only against the rental income itself. Any losses could be carried forward but could not be offset against salary or non-investment income.

The US allows the deduction of interest for homeowners but that is not likely to be considered here, given the budgetary constraints.

What might be looked at is Daryl Dixon’s suggestion in the Weekend Australian  (Oct 4-5) that a portion of the funds held in superannuation accounts -- say a limit of $200,000 for an individual or $300,000 for a family -- be designated for a residential home deposit. The sum could still not be accessed until the age of 60 or 65.

Presumably the controversial gearing of superannuation funds to buy investor houses would be abandoned at the same time, thereby further swinging demand away from investment.

No doubt there will be other ideas as the government tries to boost taxation income but maintain building activity by shifting demand away from negatively-geared investors to first homeowners.

My guess is that any major curbs to negative gearing -- even if they were replaced by incentives for first home buyers -- would dampen house prices, particularly if they were accompanied by banking lending ratio clamps. On the other hand, the strong Chinese and Asian buying would not be affected.

So those looking to take advantage of the existing rules need to take a possible weakening in dwelling prices into account before plunging into the negative gearing arena.  Similarly, those planning to build apartments to sell to the negatively-geared investor market need to make sure that they have firm sales contracts before they start building.