The upcoming federal election could herald major changes for property investors. With changes to negative gearing and capital gains tax concessions on the cards, it’s time for property owners to understand the potential impact of these changes and prepare their portfolios accordingly.
We all know the only constant in life is change, followed by death and taxes. So, it’s no real surprise that we face the prospect of more property tax change on the horizon. With the election so close, it’s time to unpack the proposed changes, as well as review those that have already come into effect, to help you prepare for the potential impacts on your portfolio.
Proposed Property Tax Changes
Negative gearing is a widely used investment strategy. It allows investors to offset rental losses against other income, reducing taxable income and improving the tax effectiveness of investments. If elected, the ALP has pledged to limit negative gearing to new constructions only, preventing investors from negatively gearing established properties from 1 January 2020.
It’s important to note that current arrangements will be grandfathered, allowing existing investors to continue to negatively gear. Negative gearing will still be an option for investors who purchase newly constructed homes too as this change would only affect investors purchasing established properties after 1 January 2020.
Capital Gains Tax
Capital gains tax is levied on the profits of an asset when it is sold. Currently, investors who own property for more than 12 months are eligible for a 50 per cent discount on the capital gains tax levied on the profits of their sale. If elected, the ALP have pledged to halve this discount, taking it from 50% to 25%.
While this will have an impact on investment properties purchased after the implementation date, this change will not apply to existing investments. Current investors who have held property for more than 12 months will still be eligible for the full 50% discount. Just like the approach to negative gearing, the changes to capital gains tax concessions will be fully grandfathered.
Recent Property Tax Changes
Plant & Equipment Depreciation
Changes to plant and equipment depreciation affect investors who purchased second-hand residential properties after March 9, 2017. The changes limit the depreciation claimable on existing plant and equipment assets in residential investment properties, preventing items being depreciated multiple times by successive owners.
The changes to plant and equipment depreciation do not affect newly constructed properties. They also don’t apply to new plant and equipment subsequently purchased and installed by the investor. They have no impact on capital works deductions, which can still be claimed for the wear and tear that occurs to the structure of a property, including any structural improvements made during a renovation.
Changes to how travel expenses are treated mean property investors are no longer able to claim tax deductions for travel. This includes travel to maintain or collect rent for rental properties or travel to inspect the property during or at the end of a tenancy. Travel to prepare the property for new tenants or travel to visit a real estate agent to discuss the rental property.
However, certain travel expenses continue to be deductible if you are deemed to be an excluded entity or in the business of letting rental properties. For more information, refer to the advice provided by the Australian Taxation Office or seek more specific advice from a professional.
Support for affordable housing
For those willing to invest in affordable housing, you may qualify for an extra 10 percent capital gains tax discount when you sell. To qualify, the property must provide housing to low-to-moderate income tenants. The rent must also be at a discount to the private market, and the property must be managed through a registered community housing provider.
Under the changes, the CGT discount for qualifying affordable housing increases from 50 per cent to 60 per cent on the profits from the sale of the property. It’s important to note that investments must be held and used for affordable housing for a minimum period of three years to qualify for the discounted rate.
For more advice on preparing your portfolio for property tax change, contact Vision Property & Finance to discover how our financial planning services can help you make the most of your investments. Give us a call on 02 8354 3000 to reach Sydney’s office or 02 4014 1999 to talk to someone in Newcastle’s office. You can also contact us here.
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