Earlier this month, the Tax Institute confirmed that Labor’s proposal to introduce restrictions on negative gearing would apply across the board to all investments acquired after a yet-to-be announced commencement date.
While previously thought to only apply to property investment, the update will see the proposal applicable to both property and shares alike.
“As a broad principle, there is little doubt that it will add a considerable degree of complexity to the system,” the Tax Institute’s senior tax counsel, Professor Robert Deustch told Accountants Daily.
“In addition, you are attempting to enshrine in the legislation a number of carve outs, most noticeable a grandfathering provision for all pre-commencement date acquired property and a carve out for new property.
“Once you do those things, the level of complexity will increase but, in addition, here we are going to have a situation here where taxpayers will need to keep track of their carried forward investment losses which will be available for offset in future years and that I assume is going to be an indefinite carry forward – that is still not a 100 per cent clear but Labor is hinting at an indefinite carry forward.”
RSM senior manager Tracey Dunn said the policy would result in the addition of a new category of tax loss – the investment loss.
“This will result in a whole new layer of complexity when preparing individual tax returns with taxpayers impacted having to appropriately calculate, apply and carry forward investment losses in addition to dealing with capital losses,” said Ms Dunn.
In Ms Dunn’s analysis, the policy seems to favour high-wealth taxpayers with an investment mix of negatively and positively geared investments acquired prior to the proposed changes, with those with a single negative geared property set to feel the pinch.
“The typical mum-and-dad investor trying to build wealth by borrowing against the equity in their home to fund a single investment asset will be the biggest losers as they will no longer be able to help fund the purchase of the asset with the use of tax losses offset against salary and wage income,” said Ms Dunn.
Professor Deutsch said individual taxpayers will need to consider the totality of their investments.
“If you’ve got one or two and you’ve got them negatively geared, the mathematics will tell you very quickly that you will have a problem for some period of time until those properties turn positive and that may not happen even before you sell them,” said Professor Deutsch.
“It is not necessarily high-wealth versus low-wealth; it is more about limited negatively geared investments versus a portfolio of investments which are both negatively and positively geared.
“It is not just your real estate investments, it will include share investments so you might buy shares without gearing – they will count as positively geared investments and that will be a positive to your overall gearing ratio so that’s quite an important consideration.”