Well they say a week is a long time in politics, but this week has been a long week in Tax
The Government's announcements on Tuesday of their package to address the housing crisis has resulted in much speculation. What will this mean for renters? What will it mean for first home buyers? What will it mean for property investors? What will happen to property prices?
Having read much of the commentary written by economists and so-called property experts, it seems clear there are very mixed views on what impact these changes will have and therefore, what the appropriate reaction is. For property investors who have recently acquired an investment property, they are placed in a very difficult position. The economic analysis that they did at the time of purchase is out the window with the Government reducing the after tax return on the property with a media announcement and at the same time selling the investment may look equally unattractive with potential profits subject to the bright line tax (if the property has been held for less than 5 years) and uncertainty as to how the market will react.
The reality is the Government's proposals on interest deductibility will have very little impact in the 31 March 2022 year (with only 12.5% of interest becoming non-deductible for tax purposes). So, for someone with a $500,000 debt relating to a rental property and a 3% interest rate the tax impact in 2022 is only $618.75 (assuming a 33% tax cost). Accordingly, there may be benefit in seeing how the dust settles before making some decisions. For example, an $18 per week increase in rent would mean the above investor earns the same after tax return in 2022 as they expected when they brought the property. However, for the 2026 year (assuming the same facts) the rental property owner will have an extra tax cost of $4,950 relating to that property (when all interest has become non-deductible), that equates to a $142 per week increase in rent to put the property owner back in the same position!!!!