Mike Reynolds
Mike Reynolds

Director / Adviser


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Election Update Series: No need to worry about Labor’s proposed changes to negative gearing anymore!

18 May 2019 Update: With the Federal Election victory now confirmed for the Liberal–National coalition, we no longer need to plan around changes to franking credits, negative gearing, reductions in CGT discounts, reintroducing a ban on borrowing in super and further restrictions on superannuation contributions that the ALP were proposing. Read our latest Economic Snapshot for more post-election market insights.

What is negative gearing?

Simply put negative gearing is when you borrow money (gearing) to invest in property or shares, and the income you make from that investment, i.e. the rent, is less than your expenses, meaning that you're making a loss (that’s the negative). You can then claim a tax deduction which will partially offset the loss, but a loss is a loss, so this strategy only works when that asset you invested in grows in value, and hopefully much more than those little losses you make each year.

Who can benefit most from negative gearing?

The higher your marginal tax rate, the bigger the benefits from negative gearing strategies, so it isn’t for everyone but for those with time on their side, and high incomes, it can be a great way to reduce tax and build wealth faster. If you are in this position and thinking about buying investment properties or shares in the next couple of years and the ALP comes to power, you may want to bring that decision forward.

What would change under a Labor government?

Many people choose to negatively gear into property as it is an asset they are comfortable with, but if the Australian Labor Party (ALP) wins the upcoming federal election, negative gearing into property will be limited to newly built housing from 1 January 2020. In addition, if you then sell that property a few years later, the ALP also propose to reduce the capital gains tax (CGT) discount across the board to 25% instead of the 50% discount currently in place.

These proposed changes mean investors considering negative gearing need to think long and hard about their overall investment strategy going forward to ensure the best long term returns.

The proposed changes will be fully grandfathered, meaning they only impact new assets purchased after 1 January 2020. They will not apply to people who already have negative gearing arrangements in place, though we anticipate it may be harder for people with existing arrangements to refinance investment loans after 1 January 2020.

So will property be a less attractive investment?

There are two main issues to consider. Firstly, with negative gearing limited to new home construction from 1 January 2020, there are serious questions about whether these properties (heavily skewed towards apartments and new estate housing) will offer a strong enough capital gain to support the strategy. Remember you need the capital gain to offset the losses.

See more in our article about lacklustre performance from the Melbourne apartment market

Secondly, what will be the impact of these tax changes on the overall property market? We are already seeing significant pull-back in property prices in the two larger capital cities. Some of this is attributable to the banks tightening their responsible lending guidelines, but another factor has been APRA stopping the banks lending on an interest only basis for investment properties. While this restriction has been eased, these investors are typically negative gearing, so if they come out of the property market we could see further falls.

Are there other negative gearing options?

So with negative gearing into property looking less attractive let’s explore a couple of the other options:

Borrowing against your home to diversify into other growth assets

Debt recycling is a financial strategy which allows you to convert non-tax-deductible home loan debt into tax-deductible investment debt. With this strategy, you pay down home loan debt (which is not tax-deductible), and re-draw it as an investment loan to acquire property, shares or managed funds, effectively building a portfolio of investments which can grow, compound and tax effectively build your wealth. All additional income generated by your investments (e.g. dividends) is then directed to paying down your home loan.
For this strategy to work best, you need to have a clear picture of your personal balance sheet, assessing your assets and liabilities and future cash flow generation capability. This strategy isn’t for everyone; those with higher incomes who can pay more than the minimum home loan repayments each month could consider this accumulation approach.

Margin loans to invest in shares or other growth assets

A margin loan is where you borrow money to invest and use your investments (shares or managed funds) as security. It can help deliver higher returns by enabling you to invest a more substantial sum, but it can also increase your losses. If the interest on your loan exceeds your returns the investment income is ‘negatively geared’ and you can claim a tax deduction.

A benefit of a margin loan is that you can start small and don’t need to use your home as security, but unlike borrowing against your home, the margin lender uses a Loan to Value (LVR) ratio to maintain an acceptable level of security against their risk, most loans have an LVR limit of 70%. If the value of your investments falls below the LVR it generates a ‘margin call’ and you must bring the loan back within the LVR by selling investments or adding more cash. Margin loans are for investors who actively monitor and manage their investments or entrust a third party like FMD Financial to do so on their behalf.

The bottom line

Regardless of the upcoming election, legislative changes to tax and superannuation are becoming more common and complex, leaving investors in a position where they must constantly recalibrate, making it harder to achieve investment success without professional advice and oversight.

How can an FMD adviser help?

Personal financial advice

An FMD adviser can help you develop an investment plan that will deliver the best long-term returns considering any proposed changes that impact investment and superannuation strategies. Some of the factors we’ll take into consideration include your age, current asset-base, income and debt, your risk appetite and time-horizon to ensure you achieve the best possible investment returns when you need them most. We can model this for you and show you how the numbers stack up over time for a range of investment scenarios.

Active investment management

The principal of active management is at the heart of everything we do and we’ve built a robust approach to monitoring and ongoing portfolio management. Investment fundamentals are always the primary focus for FMD Financial’s investment committee (IC) who select the best direct investments and active fund managers in each asset class. Our Investment Committee (IC) sifts through hundreds of options to find those with a long history of outperformance and the rising stars. We then back them to do their job in our portfolios.

General advice disclaimer: This article has been prepared by FMD Financial and is intended to be a general overview of the subject matter. The information in this article is not intended to be comprehensive and should not be relied upon as such. In preparing this article we have not taken into account the individual objectives or circumstances of any person. Legal, financial and other professional advice should be sought prior to applying the information contained on this article to particular circumstances. FMD Financial, its officers and employees will not be liable for any loss or damage sustained by any person acting in reliance on the information contained on this article. FMD Group Pty Ltd ABN 99 103 115 591 trading as FMD Financial is a Corporate Authorised Representative of FMD Advisory Services Pty Ltd AFSL 232977. The FMD advisers are Authorised Representatives of FMD Advisory Services Pty Ltd AFSL 232977.