We have seen numerous examples of governments attacking the tax benefits of negative gearing. However,the most significant tax attack is proposed by Labour with the position of scrapping negative gearing altogether.
A family business, especially from Perth, almost always has property as a significant asset and factor in the succession planning of the family business. So it is important to consider how you should structure your property portfolio now to minimise the impact of the Labour government’s tax proposal.
This is especially the case if you are buying property across an extended family.
Don’t panic
The starting point is that negative gearing will not apply to your existing property portfolio. It will only apply to new properties purchased once the law is put in place.
So not only do Labour have to win government they also have to get their legislation to scrap negative gearing. It has only been recently that our (admittedly Liberal) Treasurer predicted that the laws will not be enacted given the reduced property activity on the east coast.
If the law is effect what is certain is that the grandfathered properties will be like “gold”. Investors will very much want to retain the loan balances as high as possible and focus on making newly acquired properties positively geared.
So you can still offset the tax loss from owning your current rental property against other income like business income or wages.
It is a net position only
The negative gearing proposals do not apply on each individual property. Rather the proposals are that the net rental position of an investors property portfolio will be considered.
So if you have a property that is generating a net rental income of say, $40,000, and you have another property that costs you $30,000 to hold, you will report a net income of $10,000 to the Tax Offset. In effect you are still able to negatively gear your properties – but only against properties generating income.
New homes are still allowed
Labour is proposing that you can still offset the cost of owning a newly built home against the costs of owning the home. This is in an attempt to encourage investors to buy new homes and increase the rental stock on the community.
A significant benefit for acquiring new homes is that there is typically much greater tax deductions for owning the homes than there is compared to existing homes. This is a direct result of the presence of building depreciation.
Key take-away
If you are making an investment with taxation as a key driver you should be concerned. A great investment is compelling because it is compelling. If a person is trying to demonstrate good tax outcomes as a significant reason for acquiring a property the property is likely to be a poor property.
And if the person is somebody other than a lawyer or a registered tax agent they are breaking the law by giving you tax advice.
However, the future of government policy is so uncertain, and the current desire by the Labour party to protect existing investors, is so strong that the best strategy is to continue with your property portfolio and deal with the change in tax situations as they arise.
If you are a family business, or a business family, wanting to properly use the tax benefits of different types of property ownership you should have a clear tax strategy as part of your overall property portfolio strategy.
At Westcourt our advice is independent. We are not incentivised for you to buy property, insurance, managed funds or apartments. Our fees are not contingent, success based or linked to the size of your asset pool. So you now that the only person we are focused on is you and giving you the best outcome.
And with our technical excellence in taxation coupled with our deep understanding of family business dynamics we have a clear appreciation of how property is an integral part of planning the succession of your family business – from taxation, family, business, superannuation, loan structuring and reporting.
