Negative Gearing and CGT: Smart Finance Strategies

You are ChatGPT, a large language model trained by OpenAI. Transcribe the following sentence. Only return the text of the sentence in the spoken language. That means now a lot more investors won't be able to actually borrow for what they might be looking to invest in. Or they have interest-only loans that they borrowed when they could use negative gearing, and then when the interest-only rolls over to P&I on a shorter loan term, they can't refinance because the servicing is not there.

And see, that comes back to actually impact the investor market too. Now, not just from what they borrow, but what they currently own. And we're seeing that when you apply in Victoria, for example, lots of taxes and costs onto an investor, an investor exodus starts occurring, rental stock starts tightening, and then rents start rising. And that's one thing many people will forget. Yes, the market decides the rent, not a tax policy.

It's not like you can just go, hey, yeah, tax policy is coming in, everyone's going to rack up their rents. No, if the market's got supply there, they're not going to jack up their rents. But that policy has a flow-on effect to people's confidence of staying in that housing market or entering the housing market, especially if borrowing capacity is going to go, less people will enter it. And then suddenly what will happen is that less rental supply becomes available and rents rise. So your whole journey, if you're someone who's on the other side going, I can't buy because of negative gearing, well, each week you're paying rent, right?

And as you're paying rent, your rents will likely increase over time because these policies have been removed, the flow-on exodus of investors, rental stock reduces, and then now as an investor, now as a tenant, you're going, I want to buy, but you're now not saving the deposit you were quickly saving before because the rent's coming out of your deposit you're trying to save, and you're back to square one, but just in other ways. Like it doesn't have to equal the same way, like as in you now have less competition, you can therefore buy, you now have more competition on the rental side. And so that's an interesting thing that many people don't often realize about negative gearing. The other thing I want to share, Jack, is like CGT. What do you think happens when CGT, if that were to come off and stop, what do you see happening there?

So, yeah, I didn't really get across this. So they're talking about removing capital gains tax completely. I mean, like there's some people who are saying like, let's just make tweaks to these gearing policies and gains tax to investors who own X or more properties. And then others are saying, let's scrap it completely. Now, I'm of the opinion here, I'll share my thoughts, like if they scrap it completely, you're going to have a whole bunch of people not selling.

Because if you just look at it as a business decision or you look at it as a financial decision, whichever way, a business if it's an investment, personal finance if it's a home to live in, if you've got a property that's, say, grown in 100K in value, increased in 100K in value, and then from a CGT you get the 50% discount after 12 months, and that now comes down to, say, 50K taxable instead of the 100K. Say if someone scraps that, you're now paying double the tax that you were before. Okay, so they're talking about removing the discount altogether. I was going to say, because I thought what you said was they're not going to charge any capital gains tax. I was like, oh, that's off-brand.

Come on. That's off-brand. That's off-brand. No, no. I've yet to see a day where they just chuck out freebies and nothing comes back of it, right?

Why would anyone want to cop that tax bill? People have a hard time copping that tax bill now. Imagine if they doubled it. Yeah. And all of a sudden what's going to happen is that people are not going to supply the house with existing supply.

Supply is the housing market with existing supply because sometimes people think that it's new builds and everything. If you get new stuff coming in, they'll solve Australia's crisis. Funnily enough, it's not the new builds that are needed the most. They're needed for sure. Don't get me wrong.

It's people selling. It's people selling just established housing. If you take a look at Australia and different segments of markets, Sydney and Melbourne, their five-year listing averages and where it is now, some parts of these cities are well above their five-year average. It means there's enough stock to service people who are looking to buy them. Now, go figure, Sydney's quarterly rise has been under 1% in quarterly growth and then Melbourne's been flat and in some parts declined.

That's an example of supply being available. You go to the other side of the country and you go to Adelaide and Perth, 30%, 40% plus. Some SA3 areas have even 50% plus below the five-year average of established housing for sale and you're in the same country with the same interest rates, with the same macro outlook, except one city just a few hours drive or maybe not a few hours drive from those cities, maybe a few hours flight from those cities, different housing market, like completely different housing market. Their housing's in a big boom right now in Adelaide and Perth, growing more than 1% a month. That clearly shows supply is the killer there of the two.

If you're going to go and make changes to these taxes, you're going to hold lots of people back from selling because they're going to see the financial part not being worth it for them and you're just going to kill the supply. Again, the whole point of housing affordability you're trying to create, you're going to have housing affordability come back and be an issue again because you're not having supply come to the market. Even if it's not investors competing, owner-occupiers will be competing on less stock anyway. That's a couple of things of what our thoughts are on this whole CGT and negative gearing stuff and all of it, in my opinion, tends to come back to increased costs down the line but just not immediate. What are your thoughts though on the borrowing capacity?

That was a big factor there. You've also seen some other borrowing capacity views though, Jack, when it comes to people looking at money in their offset or savings accounts and how negative gearing has helped them when they have a home to live in. How does that work? Yeah, it's big. It's quite common that people don't really know this and it's a big eye-opener for people.

Sometimes they have, surprisingly, people just have hundreds of thousands of dollars in their account but even if you just have 100K or 50K just sitting in an offset and you're going to allocate that towards a purchase of an investment. But if you have owner-occupied debt and that's sitting there offsetting your own occupied debt, if you use that to purchase an investment, you're not able to claim that interest as an investment expense. So what some people do, say you've got like a 500K loan and you've got 100K or you've got an inheritance for much more, say 300K, you could use that money, put it into the redraw facility of your own occupied property, tell the bank to take it, reduce the limit of your loan completely and just have a much smaller balance, which means you have a much smaller repayment as well, and then you can cash the money back out as an investment purpose loan and then you use that as a deposit for the investment property. So not only does it reduce your non-deductible owner-occupied debt and repayment, it increases your investment debt and there's a better negative gearing aspect to that. So it gives you better serviceability but it also gives you better cash flow once you do your tax return.

There's more negative geared debt associated with the purchase and a much lower expense of where you're living. That's the finance strategy we were talking about. So everyone at the start of this podcast, I mentioned reaching out to Jack at forakerfinancial. com. au.

That is a perfect example of a big difference maker because now you've had like a three-tier approach that you've gotten more deductibility in tax, which helps your tax returns. You've gotten more deductibility in terms of like now impacting your borrowing capacity, but then also you've reduced your loan on your home. Yeah, and if you cash out, say you got 200K, you pay down your own occupied debt and you cash out another 200K, you don't have to use the full 200. You can keep a little bit of a buffer there as an investment buffer because most people want a buffer, but they assume that it has to be placed against their own occupied debt as savings. But really, you can build in your cash buffers to your investment cash out loans and there's a better outcome there tax-wise as well.

Well, that's a killer approach because I actually - so that's a really good approach. I actually did something similar in 2020, 2021 when COVID first strike. That obviously scared many people, like what's happening, what's going to happen in the world, and those with equity in their investment properties or homes, they're able to cash out, leave it sitting in their buffer accounts, and suddenly you're well insulated to ride out. And this is something many economists and many doomsday forecasters don't get right because they just don't recognize how much equity exists in Australia. It's over $10 trillion in housing value and just over $2 trillion in loans.

So if the income allows the serviceability to cash out, there's a lot of people sitting on it. Also, in terms of resale value, there's a lot of opportunity for people to resell and clear all their debts. That's right.