Bruce Brammall: Bought an investment property in the past decade? Jim Chalmers is about to pile on the pain

The rich just can’t cop a break. Always under attack. Governments trying to get them to pay more tax. Can’t they just build their empires in peace?

I mean, does the government really need more capital gains tax revenue? To reduce negative gearing benefits? And Albo, what are you doing sniffing around family trusts? They’re sacred, damn it! You can’t touch those!

And this in the same year that the rich have already been coward-punched with a doubling of the tax on their mega-super balances.

It will be these trio of tax changes that headline Tuesday night’s Federal Budget. Many will be cheering on Treasurer Jim Chalmers.

But when Jimbo stands up in Parliament House, it won’t be just the uber-rich that will be on the edge of their seats.

There are 2.2 million property investors in Australia. And many are battlers and aspirational.

Across the board

The leaks and chatter suggest change is afoot for CGT, negative gearing and family trusts.

For CGT, two paths are suggested. The first is the 50 per cent discount will be reduced to 25 (possibly 33) per cent.

Let’s say you buy a property for $500,000 and sell it 10 years later for $1 million.

Currently, half the $500,000 gain is ignored and the remaining $250,000 is added to income. This would mean tax of up to $117,500 for those on the highest marginal tax rate. Reducing the ignored gain from 50 per cent to 25 per cent would increase the tax paid to a maximum of $176,250.

The other option is a return to last century by adjusting the “cost base” for inflation. If inflation averaged 3 per cent, the cost base for the $500,000 property would be roughly $672,000.

The vendor would then be taxed on $328,000 ($1m minus $672,000), or a maximum of $154,160.

The weight of chatter suggests the latter is more likely.

We also don’t know whether shares and other assets will be included in the changes.

Negative nellies

With CGT, higher tax only matters if/when you make a profit. If you never sell your property, you never pay CGT.

But changes to negative gearing could be a significant “now” problem for investors, particularly if it’s not grandfathered.

Negative gearing is when the costs of holding the investment are higher than the income it produces. That loss is used to reduce your other income.

For example, a property is producing $30,000 in rent but the cost of interest, rates, agent’s fees, insurance and general maintenance for that year is $50,000.

That’s an income loss of $20,000. If you’re earning $120,000, it reduces your taxable income to $100,000. So, your tax return would be $6400 higher, effectively reducing your loss of $20,000 to $13,600.

For those on the 47 per cent tax rate, the $20,000 loss reduces to $10,600.

Upside down

The most drastic suggestion is removing negative gearing tax breaks altogether, with no grandfathering. That would hurt current investors badly.

Another is the Government could limit how many properties negative gearing could be claimed for (the suggestion is two). Or they could limit the tax deduction to, say, the 32 per cent rate of the average earner.

It’s considered likely changes would be grandfathered. But it might not. If it isn’t grandfathered there are going to be a lot of investors — from the past five years particularly — who are going to be in a world of financial pain.

Family trusts are also in the firing line. Potentially putting minimum tax rates on trust distributions. But as late as last week, there was apparently still division within Government on what to do.

Impact v benefit

Chalmers has been hosing down the potential impact, saying any affect on housing prices and rents are likely to be minimal. But he has to say that.

I think the disaster scenario is negative gearing being removed and not grandfathered for existing investors.

Negative gearing is generally highest in the early years of ownership and tends to decrease over time, as rents rise.

Spiking interest rates, as we are currently experiencing, can turn positively geared properties back to negatively geared.

If there is no grandfathering, there is going to be a lot of pain for hundreds of thousands of purchasers from the past five or 10 years that could lead to mass property sales and falling house prices.

Bruce Brammall is the author of Mortgages Made Easy and is both a financial adviser and mortgage broker. bruce@brucebrammallfinancial.com.au.