Budget: Negative gearing changes could affect divorced couple’s investment properties, financial advisers fear

A couple getting divorced could lose the right to negatively gear an investment property even if they owned it before Budget night, financial advisers fear.

Financial Advice Association Australia has raised concerns about Labor’s plan to restrict negative gearing to brand new properties from July 1, 2027.

Existing homes bought or exchanged before Budget night would be able to negatively geared where a landlord can claim rental losses against their taxable income.

But the group’s general manager of policy, advocacy and standards Phil Anderson argued Labor’s legislation was so flawed an investment property could miss out on negative gearing eligibility if a 50 per cent share of this home was sold to an estranged husband or wife as part of a divorce settlement.

The concern also applied to someone passing away, leading to the property ownership being transferred to the surviving spouse.

“If there is a forced change of ownership, post 1 July 2027, we’re asking about the consequences,” Mr Anderson told the Senate economics committee on Tuesday.

“We envisage there could be a forced change of ownership after that date if, for example, an investment property is owned by a couple and one of those, in joint tenants, and one of those people passes away, and their 50 per cent is transferred to their other spouse.

“With respect to a divorce settlement, if there’s a change of ownership of an asset as a result of a divorce settlement, if it’s a pre-Budget day asset, that was validly able to do negative gearing, what was the consequences afterwards if there was a change of ownership because of a divorce settlement? Our read was that it was uncertain.”

Mr Anderson said Labor’s legislation implied an investment property passed on to an ex during a divorce or a surviving spouse after a death would be considered to be a home bought after Budget night, therefore making it ineligible for negative gearing if it was an existing home after July 2027.

“The explanatory memorandum suggests a change of ownership that happened as a result of a transaction, with respect to a joint ownership, would lead to it being considered as new ownership,” he said.

“So, you might have one person who owns 50 per cent prior to the death or the divorce settlement, that would be pre and the other 50 per cent they acquire as a result of that death or divorce would suddenly have the other half, a post-commencement date asset.”

Real Estate Institute of Australia president Jacob Caine said replacing the 50 per cent capital gains tax discount with a 30 per cent tax on inflation-adjusted gains from July 2027 would lead to higher rents.

“Housing affordability will not be solved by reshaping tax settings in a way that reduces rental investment, adds uncertainty and risks slowing the delivery of new homes,” he said.

Citing Treasury data, he argued Labor’s tax changes would only see 75,000 renters transition into home ownership over a decade, out of more than seven million renters.

“That’s effectively equivalent to one in 100 renters. The other 99 will be left in a rental market with fewer homes and higher rents,” Mr Caine said.

Modelling by Tulipwood Economics commissioned by REIA, Master Builders Australia, Housing Industry Association and the Property Council predicted 14,032 fewer new dwelling starts over the first four years.

Tony Greco, a senior tax adviser with the Institute of Public Accountants, slammed the Federal Government for its lack of consultation before the Budget changes were announced.

“We’ve pretty much thrown the book out the window in regards to process,” he said.

“There’s a good reason why we have protocols in relation to consultation.

“Bad process invariably leads to bad outcomes. This Bill was, in the main, introduced without public consultation.”