Budget takes sideswipe at negative gearing: Pete Wargent
GUEST OBSERVER
As expected, a range of housing policy measures were introduced in the Budget, including but not limited to:
-National Affordable Housing Agreement providing $1.3 billion of funding per annum to the States to help meet supply targets;
-A $1 billion National Housing Infrastructure Facility;
-A new suburb for Melbourne, with 6,000 homes to be unlocked 10km from the CBD at Maribyrnong (which is not an easy thing to say late at night);
-Managed Investment Trusts to invest in affordable housing, with a 60 per cent capital gains tax discount to invest in this sector;
-Extension of homelessness funding to the States;
-Encouraging downsizing by allowing a non-concessional contribution to made into superannuation for the over 65s up to $300,000;
-First home buyers will be allowed to save for a deposit by salary sacrificing into their superannuation account, though contributions will be capped at just $30,000 per person, and $15,000 per year;
-A Foreign Investment Levy of at least $5,000 on all future foreign investors who fail to either occupy or lease their property for at least six months each year; and
-A reinstated requirement that prevents developers from selling more than 50 per cent of new developments to foreign investors.
There were other measures too, including increasing APRA's powers to control the non-ADI sector, zoning reform, and land release.
Each of these points deserves detailed market analysis in its own right, but today I'll just take a look at the least well understood new policy, which I believe will be significant.
Negative gearing sideswiped
Instead of quarantining negative gearing deductions to new dwellings as proposed by the Australian Labor Party (ALP), the Treasurer has targeted the following areas of deductions prospectively:
Travel expenses will now be disallowed for investment properties, which is mildly annoying for landlords with plans for investment properties at Port Douglas - there is no longer an incentive for politicians to buy an investment home in their favourite holiday destinations! - but broadly a sensible move which improves the integrity of negative gearing legislation.
More pertinently, for investment properties bought after 7.30pm yesterday, the Government will also limit previously generous plant and equipment depreciation deductions to only those expenses directly incurred by investors.
What this means
Firstly this is a cruel impact for the Quantity Surveyor industry, hundreds or perhaps thousands of whom will wake up today only to discover they have very little to do. These businesses will need to pivot immediately towards new and commercial properties, though competition here will be fierce.
As for investors, going forward landlords purchasing established property will only be able to claim plant and equipment depreciation deductions on assets they have purchased themselves, while buyers of newly constructed dwellings will still be able to make a depreciation claim on plant and equipment.
Landlords will still be able to claim deductions on the construction component (Division 43, for the building's structure) of the dwelling over 40 years for properties built after September 1987.
The ruling is evidently designed to restrict 'double-dipping' whereby multiple claimants received deductions on the residual value of the existing assets, such as air conditioning, heaters, carpets, televisions, dishwashers, alarm systems, hot water systems, and so on.
In practical terms, about half of deductions would typically have been claimed for plant and equipment items on established property in the first year of claim, though this really depends upon the age and type of dwelling in question.
Copied below are just a few examples of Sydney properties bought about a decade ago. As you can see with plant depreciation disallowed on established properties the difference to deductions in the early years of ownership would have been quite substantial, though there is no impact of landlords already in the market.
Data compiled by MCG Quantity Surveyors showed that their average claim for depreciation deductions was $9,138, up to half of which was typically for plant and equipment deductions.
For new individual Mum-and Dad investors - which is most of the landlord market - this is a fairly significant change to tax legislation.
Market impacts
As always investors will try to find a way around the rules, such as by purchasing chattels off-contract, though presumably the tax office would scope out such a move through an ATO Interpretative Decision (ID) if the practice became widespread.
Overall, it may become more tax-efficient to purchase older style properties in order to renovate them, though for properties built before 1987 the building works component would already be fully depreciated over 40 years.
Somewhat ironically these changes will may create a divide between the perceived value of new and established properties in the eyes of investors, effectively creating a 'second-hand market' (which is what the Treasurer previously accused the ALP of doing with its own negative gearing proposals).
Some domestic investors may be inclined to steer clear of new properties for this reason, in turn hurting building approvals and dwelling starts, at least while the dust settles.
Ultimately what these changes will mean is that rental returns on established property in the lowest-yielding cities of Sydney and Melbourne will have to increase in aggregate, either through higher rents or through lower prices (or, most likely, a combination of the two).
I'll take a look at the wider impact of the Budget next up.
PETE WARGENT is the co-founder of AllenWargent property buyers (London, Sydney) and a best-selling author and blogger.
His latest book is Four Green Houses and a Red Hotel.
