Australian investors are grappling with the fallout from the bombshell property reforms unveiled by the government at this week's Federal Budget. Experts warn Labor's proposed changes to negative gearing and capital gains tax could trigger a rental crisis and discourage business investment, Fort Lake Asset Management founder Christian Baylis told Weekend Sunrise on Saturday.
Property tax reforms could push rents up 20%
The reforms, which the federal government said it hopes will reduce 'intergeneration inequality', have dominated headlines this week as economists and property investors digest the implications for the housing market. Under the new rules, negative gearing will be abolished for existing properties, though it will still apply to new investors building houses. Negative gearing allows property investors to offset losses from their rental properties against their taxable income.
Baylis said the changes could push rental prices up by as much as 20 per cent as investors exit the market. 'Think of it like a business, if your interest costs exceed your rental income, you're running at a loss,' Baylis explained. 'Previously, you could take that loss and apply it against your salary. The government is not underwriting those losses for investors anymore. That means investors will step out of the market, and it's ultimately going to push up rental prices in my view.'
Small business owners concerned
Small business owners are particularly concerned, with speculation that rents could increase by as much as 20 per cent under the new regime. Baylis described further changes to the capital gains tax as 'an abomination' that removes incentives for entrepreneurship. Under the new system, someone who buys a business or property for $500,000 and sells it seven years later for $1 million would see much of their gain eroded. After accounting for inflation and tax at the top marginal rate, they would be left with approximately $132,000 from the $500,000 gain.
'It's just not worth it,' Baylis said. 'You throw your family under a bus, you put yourself under a bus and then you ultimately get nothing out of it. You can't justify going out and taking that risk anymore.'
Family home remains exempt
The family home remains exempt from capital gains tax, making it the primary wealth-building vehicle for most Australians. With only 1.7 per cent of housing stock available for rent in Australia, Baylis warned the reforms could create a perfect storm for renters. 'You've got interest rates going up, levies and taxes that make this very expensive,' he said. 'That is ultimately going to get passed on to renters.'
