Whenever governments announce changes to negative gearing, the public debate tends to become highly polarised.

Subscribe now for unlimited access.

Login or signup to continue reading

One side predicts the collapse of the property market, while the other argues the reforms will improve housing affordability overnight.

The reality, as is often the case in tax, is far more nuanced.

From the conversations we've been having with clients over recent months, there is one theme that keeps emerging: confusion.

Many investors still aren't sure whether negative gearing has been abolished altogether, whether they are 'grandfathered' or whether they should rush out and buy before the rules change.

The answer depends on one critical factor that often gets overlooked.

The proposed changes are not really about existing investors. They're about influencing the decisions of future ones.

Behaviour, not tax, drives investment

One of the biggest misconceptions I encounter is the belief that people invest in property because of negative gearing.

In reality, most successful investors I've worked with over the years have bought property because they expect long-term capital growth, stable rental demand and wealth creation over decades.

The tax deduction has simply softened the cost of holding the investment in the early years.

That's an important distinction. No rational investor aims to lose money simply to obtain a tax deduction. Spending a dollar to save 47 cents has never been a winning investment strategy.

The best property investors I've advised don't ask, "How much tax will I save?".

They ask, "Will this still be a good investment if the tax rules change?"

That's a far better question.

The investors most likely to change their minds

Where I do expect the reforms to have an impact is among first-time investors who are still weighing up whether to enter the market.

For someone buying their first investment property after the commencement date, the inability to claim ongoing rental losses against salary income could significantly change the cash flow equation.

Many new........

© The Examiner