Date posted: 18/02/2019 4 min read

Labor’s proposed limitation on negative gearing deductions for real estate

Time to ask questions like it’s 1985.

In brief

  • What practical questions are CAs likely to get about Labor’s negative gearing policy?
  • When will Labor release more policy detail?
  • Are there learnings from Labor’s 1985 to 1987 legislation?

One advantage of being a very old tax practitioner is remembering the heady tax reform days of the Hawke Labor government, the leadership of then Treasurer Paul Keating and the implementation work of an outstanding team of long since retired Treasury and ATO officials.

One of Keating's many reforms - but not a lasting one - was to limit negative gearing deductions.

Jump forward to 2019 and a Shorten Labor government, if elected, will have another go at negative gearing.

To date, most of the media commentary and community debate has focused on the big picture issues.

For example, does negative gearing:

  • Result in higher house prices?
  • Boost the supply of accommodation?
  • Keep rents affordable?
  • Support economic activity (i.e. construction and employment)?
  • Only benefit 'the rich'?

I hear all that. They are important questions.

But back in 1985 CAs were being asked just one question:

'How will Labor's limitation on negative gearing deductions affect me?'

CAs working in the mid-80's are probably searching attics for their notes on Keating's negative gearing legislation – sections 82KZC to 82KZK of the Income Tax Assessment Act 1936.
For younger CA super sleuths, negative gearing was announced on 17 July 1985, enacted and then disappliedfrom 1 July 1987. The ATO valiantly endeavoured to provide guidance in IT 2343 (Withdrawn).

Go on – read the links. Knock yourself out.

Can you discern the client questions that came our way back then?

They're questions Labor is unlikely to want to answer in the context of the 2019 Federal election campaign.

"Shadow Treasurer Chris Bowen wants cut-through messaging to voters. No pre-election technical talk with tax boffins thank you."

But it's nonetheless surprising (at least to me) that Labor's brains trust hasn't released a bit more detail about its negative gearing policy.

Personally, I think it's politically dangerous not to prep general answers to obvious tax questions which a savvy journalist might ask on the campaign trail.

Anyone remember Mike Willesee's excruciating 1993 interview with John Hewson about the application of GST to a birthday cake?

A sample of 1985 negative gearing (real estate) questions

So, before I shuffle off stage left, let me share with you some of the questions we grappled with in 1985.

I need to refinance my rental property loan

This was a tricky topic back in 1985 – sometimes refinancing was OK (i.e. didn't attract negative gearing restrictions) and sometimes clients were caught out. Have a look at paragraphs 35 to 37 of IT 2343 to see what I mean.
Labor's 2019 negative gearing policy is prospective, but I think it should address refinancing, pronto.

For example, there are currently many interest only rental property loans which will switch to principal and interest loans (and this often involves changing lenders). Or what if I simply switch lenders just to get a better deal? Or what if I draw down on equity in existing property to expand my geared investments?

"Shadow Treasurer Chris Bowen is expected to announce the proposed negative gearing start date when the election campaign kicks-off. Clients will want advice on acquiring or renovating a rental property before the start date."

Will my geared rental property be grandfathered forever?

Think of scenarios like inherited real estate, properties acquired in a divorce settlement, and changes in the composition of ownership interests or partnerships holding properties. The 1985 legislation and ATO guidance endeavoured to cater for these and other situations.

My recollection is that grandfathering was easily lost, especially by taxpayers who didn't get advice.

My rental property has been damaged in a fire, flood etc. I need to borrow to rebuild

Will Labor marry its negative gearing grandfathering rules with CGT rollover - replacement asset relief?

The mortgaged home I currently own and live-in will be rented out whilst I live and work inter-State or overseas

Grandfathering or carve-out for mobile workers Mr Bowen?

I want to borrow to renovate my rental property

Borrowing to renovate a rental property was caught under the 1985 legislation.

I reckon there could be a spike in 2019 home improvement loan applications, if we only knew Labor's start date. Tradies and Bunnings take note.

"Corporate bodies contemplating a large Special Levy which some owners need to debt finance might anticipate Labor's policy and strike levies sooner rather than later."

What about rental properties held via entities?

The gearing limitations back in 1985 weren't just relevant to direct real estate investments by individuals.

CAs had to grapple with interest rate limitations impacting a rental property company, partnership or trust (and 'securities' issued by them). 'Land rich' tests based on net rental value applied to determine whether they were caught or not. Oh the memories...

Since 1985, SMSFs have been allowed to embark on leveraged property investments which Labor also intends to kybosh prospectively.

My accommodation is provided as a fringe benefit

Who could forget s82KZK?

Employers who provided housing fringe benefits or residual fringe benefits could find themselves deemed to be in receipt of rental property income for the purposes of applying the negative gearing limitation.

Can I transfer excess deductions? - Trapped deductions

Companies could transfer excess rental property deductions within the corporate group (s82KZF), but we didn't have tax consolidation back then.

Planning could be necessary to avoid excess rental property deductions being trapped in trusts and companies.

What's 'new' residential real estate?

This is a 2019 tax policy design issue because Labor will continue to allow deductions for negatively geared new residential accommodation. GST concepts could come into play here.

Anybody know a residential property developer struggling to offload newly constructed housing stock who rents the accommodation until a buyer is found?

Let me think now...

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