Tinkering with investor tax settings is nothing more than good optics

Along with possible changes to the capital gains tax discount, modifications to negative gearing settings are likely be considered in the Federal Budget in May.

Negative gearing allows a property investor to deduct losses incurred on their investment from their income, reducing their taxable income. The benefits of this vary depending on the tax bracket the investor is in.

It has been reported the Federal Government is considering removing negative gearing for investors who own three or more investment properties.

Investors are often portrayed as the cause of all evil in the property market, so changes to tax policies are good optics for the Federal Government. However, will the proposed changes to negative gearing changes really benefit the market?

According to 2022-23 Australian Tax Office (ATO) data, just over 97,300 – or about four per cent – of Australia’s 2,261,000 investors have three or more negatively geared properties. The majority of these (60,700) have three negatively geared properties.

Those investors could sell some of their properties to drop below the three-property threshold and remain eligible to claim negative gearing. This may boost supply for homebuyers for a short time but it would be very unlikely to improve housing affordability significantly.

However, it would remove rental stock from the market, which would put upward pressure on rent prices. Instead of selling, the investors may try to increase their rents where possible to reduce their losses. In both cases, affordability decreases for tenants.

It is widely claimed that investors compete with first homebuyers, using tax policies like negative gearing and the capital gains tax discount to give them an unfair advantage in the market.

Changing negative gearing settings is likely to see investors wanting to build a portfolio of properties look to lower-priced suburbs where their investments can be neutrally or positively geared. These are usually the suburbs where first homebuyers seek to enter the market. The proposed change could have the unintended consequence of increasing competition between investors and first homebuyers.

Investors are frequently vilified but we all need to remember they provide an essential service. In Western Australia, about 86.5 per cent of rental properties are provided by private investors. While some own multiple properties, according to ATO data, 74.9 per cent of WA investors own one, with 17.1 per cent owning two.

Until State and Federal governments find another way to provide enough rental properties to meet demand, we need to have balanced and stable policy settings supporting existing investors and encouraging new investment.

At the federal level, political parties need to carefully consider changes to tax settings and the potential effect on already-constrained rental markets across the country.