Fixing Australia's productivity problem and the impact on property investment
The new Labor government is consulting with business stakeholders as part of its Productivity Commission Economic Roundtable. Reforms are centred on three priorities: productivity, economic resilience and budget sustainability.
We’ve been getting proposed outcomes drip-fed to the media over the past couple of weeks. One example is the cashflow tax proposal to replace corporate tax. While there are no concrete outcomes yet, in my view, it’s clear the government will use these roundtable recommendations to shape policy heading into the next term.
Property investment will be a key area to watch. At some point, the generous tax settings around negative gearing will tighten. I don’t necessarily have an issue with that—if it’s well communicated and designed to drive investment into productive assets like new housing, which Australia badly needs.
Australia’s current tax rules for property investors are far more generous than those of global peers. It’s true, we do need to improve productivity and direct more capital into productive use.
The problem is, what productive assets will investors shift to? Probably back to commercial property.
Regardless, now is a smart time to build your property portfolio, if you have the means, before any new changes are introduced and grandfathered in. Just like investors who bought before the introduction of capital gains tax in 1985.
When changes to negative gearing or property taxes do come, they’ll likely be grandfathered. It probably won’t happen overnight, though never say never. Governments usually give markets forward guidance before moving on major legislation, and they’ll likely take any big reform to the next election.
So while negative gearing changes aren’t imminent, the Labor government will likely use the Productivity Commission roundtable to test the waters. They’ll be emboldened by their recent success with superannuation tax changes, which won strong support at the last election.
Bottom line: This note might surprise some, as it could seem like I support changes to negative gearing. It’s not about my preference, it’s about reading the signs. As an investor, I’m looking ahead at the likely spillover effects these changes could bring to the market.
We have a great system. Better to use it than miss the opportunity. If you’re going to panic about negative gearing changes, panic now and buy, while you can still do something about it.