Chalmers to possibly limit negative gearing to a maximum of two investment properties

Key Concepts

• Negative Gearing: A tax strategy allowing investors to offset property costs against income.
• Capital Gains Tax (CGT) Discount: A reduction in the tax payable on profits from the sale of an asset, currently 50% in Australia.
• Federal Budget Deficit: The amount by which a government’s spending exceeds its revenue.
• Independent Parliamentary Budget Office (IPBO): A non-partisan body providing budgetary and fiscal analysis to the Australian Parliament.
• Housing Affordability Crisis: The difficulty individuals and families face in securing suitable housing due to high prices and limited supply.

Proposed Changes to Negative Gearing & Potential Impacts

The Australian Treasury is currently reviewing potential limitations on negative gearing, specifically proposing a cap of two investment properties per individual. This is part of the Albanese government’s efforts to reduce the federal budget deficit. Simultaneously, changes to the Capital Gains Tax (CGT) discount for existing properties are also under consideration. Currently, there are no limits on the number of properties eligible for negative gearing.

Financial Implications & Government Revenue

The Independent Parliamentary Budget Office (IPBO) estimates that negative gearing currently results in $7.9 billion in foregone revenue for the federal government annually (specifically for the 2027 financial year). The speaker contrasts this potential revenue gain with losses incurred due to changes in tobacco taxation, stating that the government has already lost more revenue than the projected gain from limiting negative gearing through alterations to the tobacco market.

Impact on Investors & Wealth Redistribution

The proposed changes are predicted to disproportionately affect “mom and dad” investors – individuals who own a small portfolio of investment properties (e.g., three or four units) as part of their retirement planning. The speaker argues that limiting negative gearing will not increase housing supply or substantially reduce costs. Instead, it will likely redistribute wealth from these smaller investors to wealthier individuals who can afford to purchase properties outright, capitalizing on potential market downturns. As the speaker states, “What you’ll do is redistribute the wealth from mom and dad investors to even wealthier people. What a great idea.”

Rental Market Consequences

The speaker predicts that limiting negative gearing will lead to increased rental costs. Currently, investors can deduct losses from their investment properties, helping to offset mortgage costs. Removing this tax deductibility will force landlords to raise rents to cover increased mortgage payments resulting from higher interest rates. The speaker emphasizes, “rents are going to have to start going up to meet what people are paying in extra mortgages because of higher interest rates.”

Flawed Logic of Increased Supply

The argument that limiting negative gearing will flood the market with properties and lower prices is dismissed as unrealistic. The speaker contends that potential sellers won’t necessarily have the funds for a deposit on another property, meaning the properties will likely be purchased by wealthier investors seeking long-term capital gains. This directly contradicts the intended outcome of increasing housing affordability for first-home buyers.

Overall Assessment

The speaker views the proposed changes as ineffective in addressing the housing affordability crisis and potentially detrimental to smaller investors and the rental market. The core argument is that the policy will not increase housing supply, reduce costs, or benefit first-home buyers, but rather exacerbate wealth inequality and increase rental burdens.