Treasurer Scott Morrison said in his budget announcement last week that from 1 July 2017, the government will “improve the integrity” of negative gearing.
He said this would be achieved by disallowing deductions for travel expenses, and limiting plant and equipment depreciation deductions to only those expenses directly incurred by investors.
“Together, all of these measures are estimated to provide a gain to revenue of $2.1 billion over the forward estimates,” Mr Morrison said.
In response to reports that such changes could drive down investor demand and cool the market, Multifocus Properties & Finance broker Philippe Brach said buyers in general “will not be deterred from investing in property”.
“[The mainstream media reports] are the reaction of people who don’t really understand how the new changes will apply. I think that’s being overly negative,” Mr Brach told The Adviser.
“Quite a few of my clients have called me, and I've said, ‘Hang on, nothing will change for people who already own property. It will only apply to people who are going to buy in the future and only investors who are buying a second-hand property that is only a few years old’.
“To say that it would affect the property market, I don’t think so, unless people react with a lack of understanding of what is happening.”
Brokers who may receive questions from confused clients should gain a detailed understanding of what the changes actually are.
“It’s about understanding what the changes are and how they affect investors, and once they know that, they can easily explain to the clients what the situation is. I think it’s a question of reassuring clients that the wheels aren’t falling off the whole system. It’s a very minor tweak to the rules,” Mr Brach said.
He explained that the limitation placed on plant and equipment depreciation deductions – which refers to anything that can be removed from a property, such as ceiling fans, washing machines and curtains – will only materially affect investors buying ‘near new’ property.
“If you’re buying a brand-new property, you are in a perfect boat. If you are buying a property that is established and near new, you are affected. But if you buy an existing property that is over 10, 15 years old, then the impact is minimal, because all the electronics and equipment have already been depreciated by the previous owner,” Mr Brach said.
“What has happened in the past is that, if for example, I buy a property that is brand new, and then I sell it very quickly to someone else, that someone else could actually get the depreciation on the same items that I already did. And that’s why the Treasurer says they were double dipping, because one investor has already claimed some depreciation, so why should the next investor be able to do the same?”
Mr Brach said the overall proportion of people that could be affected by the changes to plant and equipment depreciation deductions “is not massive”.
“It will not affect the whole concept of investing in property and negative gearing. People will not be deterred by these changes from investing in property.”
Mr Brach also stressed that the changes to deductions for travel expenses are “not a major item”.
“What has happened is that the ATO got frustrated with the fact that so many people were abusing that rule that allows you to deduct expenses when you travel to visit a property or do some maintenance. What happens is that people say, ‘Let’s go on holidays near where we’ve got an investment property’ and then claim all the expenses. And the ATO got frustrated because so many people are abusing the system, so all they’ve done is just disallow it.
“I don’t feel very strongly about it because for a normal investor, these expenses should be minimal anyway. It won’t deter investors from investing.”