Research house RiskWise has disputed the federal opposition’s claims its proposed changes to negative gearing and capital gains tax (CGT) will not impact on existing investors as the measures will be grandfathered.
The Labor Party has proposed limiting negative gearing to new housing and decreasing the discount on CGT from the current 50 per cent to 25 per cent.
But it has said all investments made before the changes will be grandfathered in full, meaning taxpayers will continue to be able to deduct net rental losses against their wage income, providing the losses came from newly constructed housing.
According to RiskWise chief executive Doron Peleg, the proposed changes will create two types of property markets that will significantly affect dwelling prices.
“This sounds good on paper, but the changes will effectively create a primary market, comprising new properties and existing investment properties that qualify for negative gearing tax concessions, and a secondary market, comprising all second-hand dwellings that are sold following the changes, that do not qualify for these benefits,” Peleg said.
“This will have a significant impact on both buying and selling decisions by property investors with a flow-on effect to dwelling prices.”
He said when an existing property is sold, the buyer will not be able to enjoy the same taxation benefits as the incumbent owner. As such, the buyer will be looking to pay less for the asset and the fair market value of the property will be lower, he said.
He also noted refinancing could become an issue as many interest-only loans are maturing and as a result investors are looking to secure alternative funding with another lender.
However, the new lender will require a new valuation, and a lower valuation might not enable a refinancing arrangement to be executed, he noted.
“You can compare it to buying a new car where the dealership might give you five years’ free service, five years’ warranty and free roadside assistance services. But if you sell the car to another private owner, they will not be able to take advantage of any of those benefits – no warranty, no free service and no free roadside assistance,” he said.
He added investors do not want to buy depreciating assets and this will directly impact on buyers if the negative gearing and CGT changes are implemented.
By grandfathering the changes, the property investor can still gain tax benefits and only lose them when they sell, he said.
“He will obviously get a lower valuation if he needs to refinance,” he said.
“In other words, if they don’t want to lose the benefits, they have to hold on to the property until the market adjusts and a potential buyer will see it as a positively geared property, something that could take many years.”''