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There is no question that negative gearing in Australia is headed for a significant change. The concept is currently under fire from a variety of political interests. There are some who argue that making major changes to this law would benefit first-time home buyers in Australia, amongst other groups. On the other hand, you have an extremely vocal contingent who believes that the consequences of making changes to negative gearing would be severe, particularly to those who rely on its advantages. Furthermore, these same people argue that first-time home buyers wouldn’t even really benefit from the changes.
Who is correct? How is this law going to change over the coming months and years? As you can imagine, these are somewhat complex questions to answer.
Negative gearing refers to a tax rule that gives an individual the ability to claim losses acquired through their assets in the form of tax deductions. The Australian Tax Office makes it clear that rental properties are going to be “negatively geared”, if the properties in question have been purchased through borrowed funds, and your net rental income is smaller than the interest on your borrowings.
Although this tax rule can in fact apply to other types of investments, it is primarily used in relation to property. This rule tends to be the most effective when it is applied to an asset that increases at a rate that is multiple times the rate in which you are gearing.
One of the main problems some people have with this rule is that it tends to most keenly favour the wealthy. In other words, although a wide range of individuals can benefit from negative gearing, the truth of the matter is that the wealthier an individual is, the more they can take advantage of this rule.
The government is looking to make some major changes to the rule. Naturally, the proposed changes to deductions, qualification, and even the rule’s relationship to capital gains tax are being met with a great deal of resistance from certain groups. Under the suggested changes, individuals negatively gearing a property will have the ability to do so until next year with their existing deductions. After July 1st of next year, only newly-built properties will qualify. While existing assets can be grandfathered into capital gains tax concessions at fifty-percent, properties purchased after 1st July next year will only qualify for twenty-five percent.