Do Commercial Investors have anything to fear?
WHILE NEGATIVE GEARING is relied upon by investors across various sectors in the Australian economy, it has once again been brought under the spotlight within the context of property investment.
And both sides of politics have shared their positions, where it has been hotly debated over the last few months.
What is Negative Gearing?
Within the property market, negative gearing occurs when the costs of an investment property exceed the income it generates each financial year. For example, when mortgage interest repayments exceed the rental income.
Negative gearing allows property investors to offset this taxable loss against other income, resulting in a lower taxable income.
Critics of negative gearing argue that it creates a tax incentive, as investors are able to reduce their taxable income through losses derived from investment properties.
In particular, critics argue that negative gearing favours investors with higher incomes, including (but not limited to) commercial property investors, who can offset that loss against a greater taxable income.
Proposed changes to Negative Gearing
The Coalition and the Opposition are proposing significant changes to negative gearing ahead of this year's federal election. Opposition leader, Bill Shorten, stated that Labor's policy will remove negative gearing concessions from existing houses purchased after 1 July 2017.
This means that negative gearing would still apply to property purchased prior to 1 July 2017.
However, after this date, investors can only negatively gear newly-constructed homes. Conversely, the Coalition has floated the concept of an annual negative gearing cap of $20,000.
Senior government sources have indicated that the cap has been rejected. However, a decision on that policy is expected to be announced in the upcoming weeks.
Negative Gearing's impact on Commercial property investors?
An immediate consequence for the commercial property market (if either policy was adopted) would be reduced demand for commercial property -- as the incentive for investors to acquire new properties, and negatively gear them, is diminished.
This reduced demand has the potential to reduce the value of commercial properties. And this may provide great buying opportunities for investors ... as properties will potentially have higher yields in the short term.
However, the potential price reduction may result in some highly-geared investors having negative equity and thereby, potentially being in breach of their loan covenants.
Bottom Line: While it is difficult to predict the impact of the above-mentioned policies, it will be interesting to see how the policies impact the commercial property landscape after July 2017.
Disclaimer: If you think a similar situation may apply to you, then you should contact us for detailed legal advice relating to the particular facts and circumstances of your property or lease agreement. This article is not intended to provide such detailed and specific advice. And, you should not act on the basis of any matter contained in this article without first obtaining more comprehensive professional advice.