Negative gearing changes need long-term approach: Aviate Group MD

In proposing reforms to negative gearing structures, any government should take a long-term view and classify ‘new’ stock as any property up to 10 years old and not pull the rug from under the feet of investors abruptly because of economic implications, according to property research and investment firm Aviate Group. 

“Those looking to abolish negative gearing, as well as those whom support this, need to perhaps be reminded as to what it is that investors bring to the table. Not just in terms of providing rental stock to areas that may really need it, but also for the economy at large,” said Aviate managing director Neil Smoli.

Investors’ focus on wealth creation through property stimulates the economy, creates jobs and fosters a more self-sufficient population which has the knock-on effect of alleviating the burden of social housing and dependence on aged care facilities by an ageing population, added Smoli.

“Investors make a strong and undeniable contribution to housing options by way of rental stock. This provides direct housing options for those that do not have the means or have not yet sought the right advice that would allow them to enter the property market.”

There also hasn’t been near enough debate, or thought, says Smoli, of the definition of ‘new’ property stock when it comes to the proposed reforms, which are being weighted not just by the Opposition, but also by the Nationals, albeit under a varied model.

 “Applying negative gearing reforms that apply to all newly built properties in terms of their physical construction and occupation could have a knock-on effect whereby investors may ‘short-sell’ or ‘flip’ these properties in order to maximise their financial benefits,” he said.

“If it is to be successful, any well considered policy surrounding negative gearing should also take into account how long a property is, or has been, held by an investor.

“There has to be some kind of incentive for investors to take the universally respected view that property investment is most optimal when a long term view is held, rather than a short term hold to turn a quick profit by selling when a market is at its cyclical peak.”

In addition to rewarding investors that hold onto their new properties for longer, Smoli says, there should also be a period of at least a year before any successful changes to negative gearing policy are implemented.

A property should be viewed as ‘new’ when it is up to 10 years old to minimise any potential fallout or exodus from the marketplace. 

“It typically takes five to six years for an investment property to become neutral, that is, for the rent received to balance the interest payable. This is influenced by the interest rate of the day, the net rental income received after costs such as management fees, letting fees, body corporate fees and outgoings are taken into account, the investor’s marginal tax rate as well as depreciation allowances,” he said.

“A timeline of this duration for the investor to be able to use negative gearing seems logical and fair.”

Additionally, whatever changes are implemented in the context of property and associated negative gearing, the same should apply to shares and the equities market to ensure all asset classes are on an even playing field. 

Stamp duty: another opportunity for reform

In addition to possible negative gearing policy reform, Smoli also believes there are other opportunities for reform that could create a fairer balance for the property industry’s many stakeholders, particularly as the rampant transactional activity of recent years has softened in recent months.

At the top of the list is stamp duty, according to him.

“Most industry professionals seem to be in agreement that stamp duty should be phased out without delay. However in the absence of its complete abolition, the market should at least be able to rely on some national consistency when it comes to the application of this tax,” Smoli said.

“Let’s not forget we were promised an end to stamp duty when the GST was introduced. It’s clear that state governments are addicted to the revenue, but the economic benefits of abolishing stamp duty in terms of transactional activity, not to mention the fact it would relieve a significant burden for first home buyers, warrants genuine consideration at the Federal level.

“Failing this, perhaps it is time to look at more effective stamp duty models and, more importantly, introduce some national consistency as to how the tax is applied,” Smoli said.

He pointed to the implementation of a sliding scale, whereby the stamp duty payable depends on the phase in the construction cycle that the dwelling is at when the purchase is made, could be considered as the basis for a national model. 

“A fairer system, which has been used in some states including Victoria and South Australia, could be based on the principle that the earlier in the construction phase a dwelling is, the less stamp duty should be payable by the purchaser on that property,” Smoli said..

“In this way, those who purchase a property off-the-plan or early in the construction phase are rewarded for that early purchase, creating heightened demand for new supply and supporting the broader market.

“It makes sense to lessen the burden on buyers of off-the-plan properties, as these buyers are directly contributing to demand for new housing construction.

“A nationally consistent approach to stamp duty would also make it easier for investors to purchase properties outside their own state, fuelling demand on a broader scale. 

“Like the conversation happening around negative gearing at the moment, so should the industry seek to elevate the issue of stamp duty. Until its abolition comes to fruition, and the promise of many years ago is finally upheld, the more alternatives we consider as an industry the better,” he said.