Housing affordability and negative gearing

Whether you are 25 or 35, buying a home or an investment property may be on your mind, but research shows that fewer and fewer people are able to achieve the great Australian dream of owning their own home. According to The Australian Millennial Report 2019, the cost of living is the single most important issue ahead of the federal election for Australians aged 19 to 36. Our government have attempted to make it easier for young Australians to afford buying their first home in previous years with new stamp duty measures, the ability to use super contributions to use towards a house deposit and an annual charge for foreign property investors whose property is vacant for more than 6 months of the year. But what proposals have been made that could assist further?

Around 10% of taxpayers use negative gearing to claim a tax deduction, and to access this benefit you would need to own an investment property and paying tax. The Australian Labor Party want to limit the use of negative gearing to only new houses. This means that in situations where income from a property (for example rent) does not cover the costs (such as mortgage repayments), a tax deduction can only be claimed for newly built properties.

The Coalition opposes this plan and has commented that it could put downward pressure on house prices in the short term depending on market conditions. They believe factors such as restrictions on lending and the ability to get a loan could influence property prices.

Personal income tax

In the short term, there aren’t huge differences between the Coalition and Labor’s income tax cut policies.

Both propose to increase the tax offset for low- and middle-income earners, with the largest difference being that Labor has promised to ramp up the tax offset for 3.6 million people earning less than $45,000 a year. Individuals who earn between $45,000 to $90,000 would receive an offset of $1,080 (was $530) before it gradually reduces to $0 at a taxable income of $126,000.

Regardless of who is elected, those earning between $45,000 and $120,000, will be taxed the same at 32.5% from July 2022. If we extend out to 2024/25, the plans for both parties look significantly different. If the government is re-elected, it has plans to flatten out the tax rates and lower the marginal tax rate from 37% to 30% from July 2024. This would give additional tax relief to everyone earning between 45,000 and $200,000 – more than 94% of all Australians.

Labor has opposed changing the tax rate and will not abolish the 37% tax bracket in the future.

Here’s a table that outlines this quite clearly:

This is a significant change to Australia’s progressive tax system, which is based on the principle that those who earn more should pay a higher percentage in tax.

Superannuation – catch up concessional contributions

In the last few years, there have been major changes to our superannuation system and quite honestly, I do not blame people for having a large amount of uncertainty as a result of it.

The Australian Labor Party have announced $400 million towards extending super payments to parental leave, a huge change aimed at boosting superannuation balances of those who take time out of the workforce.

On the contrary, as mentioned in my colleague Nathan Lear’s blog earlier this week, Labor has also proposed abolishing the provision to catch up on concessional contributions. The ‘catch up concessional contribution’ was introduced by the Coalition on 1 July 2018 to enable those who take time out of the workforce (to care for children, on extended leave or simply a career break) to still have the ability to build their superannuation balance in later years (should you have a total super balance of less than $500,000). Removing this provision could reduce the flexibility individuals have to focus on their retirement savings after returning to the workforce.

When we are young, it makes sense that we focus on home loan repayments, growing families and travel, but while Labor strives towards fairness and equality, removing already successful rules such as the catch-up concessional contribution could be disadvantageous.

As you may have read time and time again in the last few weeks, there is a lot of discussion about proposed policies and what each party is trying to achieve for Australians. In light of this, it is important to completely understand what is being proposed and how this may affect your financial future should these policies become law.

The Hewison Private Wealth team will continue their insights into next week and are here to answer any questions you may have.