Plans to limit negative gearing and slash capital gains tax concessions could cost a Labor government $32 billion in over just 10 years, according to new research from Property Investment Professionals of Australia (PIPA).
Modelling by PIPA indicates that if the proposals push through, a lot of investors could be pulled away from the market, leaving a gaping hole in government coffers.
Laborâ€™s claim that their policy would save $32 billion over a decade was a flight of fancy because the significant drop in the number of investors will result in the government losing that amount instead, PIPA Chairman Peter Koulizos claimed.
â€œNot only that, investors already pay almost four times in capital gains tax what they receive in negative gearing benefits over a 10-year period, so the government is already ahead financially,â€ he said.
According to PIPAâ€™s modelling, an investor who bought a $675,000 property today would receive about $23,583 in negative gearing benefits over a decade, but they would pay $104,703 in capital gains tax if they sold the asset. This would leave the federal government with an $81,118 net gain.
Conversely, the modelling indicated that a Labor government could lose between $10 billion and $32 billion over 10 years with its negative gearing and tax proposals enacted. In addition, fewer investment properties would push rents higher and discourage first home buyers from entering the market, PIPA claimed.
The modelling is not the worst-case scenario, said Koulizos. This is considering that 45% of investors indicated in the 2018 PIPA Investor Sentiment Survey said they would put their future investment plans on hold if Labor brought in the proposed changes.
â€œI have no doubt that limiting negative gearing and reducing capital gains tax concessions by the Federal Labor Party will discourage property investors from buying property,â€ Koulizos said.
While Labor asserts that they want to incentivize investors to buy new properties, the industry groupâ€™s research showed that 93% of investors purchase established property since they have greater capital growth potential than new property.
â€œUnder the proposed changes, investors will pay more capital gains tax, but since they have probably bought a new property that will mean lower capital growth and therefore, reduced tax payable to the government,â€ Koulizos said.
Koulizos also said that reduction in revenue is likely to be even greater after the 10-year period, as there would be fewer investors paying taxes on their positively geared properties, as well as paying capital gains tax on the strong equity growth that usually occurs after holding an established property for 10 to 20 years.
Kay Rivera, Your Investment Property, 8 March 2019