‘The days of multiple properties are over’: How to invest after the budget

Labor’s sweeping changes to negative gearing and capital gains tax are set to increase investor appetite for shares that pay dividends, commercial property, and self-managed super funds as the tax landscape receives its first major shake-up in decades.

Major changes to both capital gains tax (CGT), family trusts and negative gearing were proposed by the Labor government in Tuesday night’s budget, with investors given just over a year until the new regime is implemented. So how will investors be affected? What types of investments could fall out of favour? And what do industry experts think will take their place?

Existing investment properties

Negative gearing is when landlords make a loss on their investment by renting out a property for less than the cost of owning it. Currently, investors are allowed to deduct this loss from their other income, including their salary or other investment income, to reduce their overall taxable income.

For example, a property may generate $25,000 in rental income a year, but may cost the owner $30,000 a year in mortgage payments, interest, maintenance costs and council rates. That $5000 loss can then be used by the property owner to reduce their overall tax paid.

For investors with properties bought and negatively geared before Tuesday’s announcement, the changes are minimal. Those investors will continue to be able to negatively gear those properties, and they will be able to offset the losses made on those properties against all other income.

Where these investors will see change is in how their CGT is calculated. All capital gains made from the date of purchase up until July 1, 2027, will still be able to have the 50 per cent discount applied.

However, all gains made after that date will be subject to the new indexation and minimum tax rules outlined in the budget. No tax is paid until the property is sold.

Rebecca Jarrett-Dalton, mortgage broker at Two Red Shoes, says current property investors have no reason to sell, but she wouldn’t be surprised if they did due to the “sheer confusion around how the indexing will work moving forward”.

“I would recommend that investors look at having some sort of valuation done and filed based upon the key dates for the changes,” she says. “I don’t know how, without this information, the value that is attributed to existing gains is worked out.”

Future investment properties

Investors looking to negatively gear properties after July 1 next year will be out of luck – with a few exceptions. The government has included a carve-out for new builds in an attempt to encourage more property development, so off-the-plan purchases or new builds will be eligible for negative gearing.

However, from next year all losses from existing residential investment properties will only be deductible against other income from residential properties, including capital gains. Property investors will be able to carry forward those losses, however, to offset future gains.

Bryn Evans, adviser at Integro Private Wealth, believes these changes won’t entirely sap the demand for existing dwellings that are negatively geared, noting that many negatively geared properties become positively geared over time as debt levels are paid down.

“What I think investors may look at is if they have existing properties that become positively geared, they may be able to purchase a negatively geared existing dwelling and use the losses on that property to offset against the taxable income being generated on positively geared properties,” he says.

“But the days of people buying multiple existing dwellings that generate tax losses being written off against earned income to reduce income tax will become a thing of the past.”

Lastly, if you signed a contract of sale any time after 7.30pm on Tuesday night, you can negatively gear that property, but only until – you guessed it – July 1 next year.

Self-managed super fund owners

Labor has said the changes to negative gearing will cover individuals, partnerships, companies and most trusts. However, it has exempted widely held trusts, such as managed investment trusts, and superannuation funds.

‘It is a fundamental change to the way that many Australians have built a nest egg for a secure retirement.’

This means SMSF holders will still be able to negatively gear their properties, a move Vincents Private Wealth director Paul Green says will “certainly” see an increase in older Australians opting for SMSFs.

“For older people, it may well suit them to put [property] assets inside superannuation and hold assets outside of superannuation that don’t have capital gains, like a fixed-interest portfolio or shares they have no interest in selling,” he says.

Negatively geared property inside SMSFs can’t be offset against a salary, though Green notes the losses can be offset against the 15 per cent tax paid on concessional super contributions, and other gains within the fund.

Future capital gains

As mentioned, all capital gains accrued from the date of purchase until July 1, 2027, will still be able to have the 50 per cent discount applied. Any gains accrued after that will be subject to a new calculation based on your tax rate, your returns and the inflation rate over the period you held the asset.

When you sell your asset, the tax office will determine how much the value grew in real terms by comparing it to the rate of inflation. You will then pay tax on the gain accrued on top of that amount.

However, a baseline tax rate of 30 per cent has also been introduced, meaning even if your calculated tax is under that amount, it will be raised to 30 per cent. Investors who receive a form of income support payment, such as JobSeeker or the age pension, will be exempted from the baseline rate.

Alex Vynokur, chief executive of ETF provider Betashares, is critical of these changes, saying it unfairly punishes self-funded retirees who had made the risky decision to invest their money.

“A retired investor on a 16 per cent marginal rate selling a long-held equity portfolio currently faces 8 per cent tax on nominal gains as opposed to 30 per cent on indexed gain under announced changes,” he says.

“That is not a minor adjustment. It is a fundamental change to the way that many Australians who have lived within their means and invested for decades have built a nest egg for a secure retirement.”

Where to invest now?

Broadly, financial advisers expect this change will spur an influx of investment into equities, bonds, and other market-linked investments. Rob Wilson, director of investment strategy at online trading platform Selfwealth says these changes could see a shift away from investors chasing high-growth assets – which could incur higher CGT charges – to more steady, yield-producing ones.

“Under the old system, growth investors seeking capital gains had two meaningful tax advantages: the 50 per cent CGT discount halving the taxable gain, and the ability to time a sale to a low-income year to minimise the rate paid,” he says. “From July 2027, both are curtailed.”

William Buck’s head of wealth, Scott Montefiore, says property investors may now look at commercial property as an option, along with listed real estate investment trusts.

“Commercial property at this early stage appears to be exempt from the negative gearing changes. Given the yield and ability to negative gear, it’s likely to be preferred to residential house and land growth properties,” he says.

Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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