Financial advisors brace for major tax changes for property as popular wealth strategy to be ‘less powerful’
The government’s stated objective is to address generational inequality in the housing market. (Source: Getty)
Property investors and those working in the financial advice industry are bracing for once in a generation tax changes to be announced in just weeks. The federal government has been priming the electorate, and now expectations are sky high that major changes are coming in the federal budget.
The federal treasury is modelling all options when it comes to reducing the capital gains tax (CGT) discount for property investments. Multiple leaks and media reports about that modelling reveal the government is strongly considering reducing the discount from the current 50 per cent to a less generous number, likely 33 per cent.
Financial advice experts are now bracing for the change and the flow on effects they will have for wealth building and popular personal finance strategies enjoyed for decades.
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Federal Treasurer Jim Chalmers won’t officially confirm the government’s plans (despite the consistent leaks) but has steadfastly said he plans to hand down his most ambitious federal budget on May 12.
“The budget that we contemplated in February won’t be identical to the budget that I hand down on the 12th of May,” Chalmers told ABC radio this morning referring to the fallout from the Iran war and warnings overnight from the IMF of a potential global recession.
“But it will still be ambitious, it will still be responsible and it will be focused on two things overall: resilience and economic reform,” he said.
Along with an expected reduction to the CGT discount for property investments held for more than a year, the government is also expected to tweak the rules around negative gearing to potentially limit the number of properties it can be applied to.
According to the latest leak on Tuesday, new housing could be exempt from the reduction in the CGT discount. In order to encourage more housing stock, new builds could keep the 50 per cent CGT discount under a plan being considered, according to The Australian Financial Review. A government source told the publication no decision had been finalised, but said the Labor government was leaning towards exempting newly built housing and making the change only apply to future purchases, not currently held investment properties.
Finance advisor and regular Yahoo Finance contributor Ben Nash said cutting the CGT discount from 50 per cent to 33 per cent might sound like a small change, “but it’s really not”.
In a video to social media followers this week, he said it will mark a clear line in the sand when it comes to wealth building.
“If you’re selling a property with a $1 million capital gain, under the current 50 per cent tax discount, you’re taxed on half a million bucks – and that’s about $235,000 in tax. With the discount dropping to 33 per cent, it means you’re taxed on $670,000, that means $80,000 more in tax.
“And it’s not just that $80,000 you miss out on because that’s the extra capital that you can’t then reinvest. And even on conservative assumptions, you’re looking at close to half a million bucks over 20 years in lost compounding,” he said.
The government’s stated objective is to address generational inequality in the housing market, but an unavoidable byproduct of the proposed rule changes will likely entrench current investors.
Nash admitted the strategy that many older Australians have hitherto used to build wealth – and the strategy he consistently advocates – is about to get less attractive, calling it a “structural reset” for how fast people can build wealth through property investing.
“There’s a lot of people saying that this is just gonna impact the Boomers that have been riding it hard … But it really doesn’t because for anyone who wants to catch up, get ahead and set themselves up, property is a really important and powerful way to actually do that. But it just got a little bit less powerful.
“Whoever is investing today is not going to have it anywhere near as good as the people who have invested up until this point.”
The changes, or what date they could come into effect, have not been announced.
The financial services sector is preparing clients for the changes. (Source: TikTok/taxinvestaccounting/BenNash)
Tax accountant Belinda Raso also took to social media overnight to tell her followers that the CGT changes “were all but signed off on” given all the media reports.
She citied a predicted $12 billion in savings for the government, questioning how that would be redeployed in the national budget.
“Where are they going to put this $12 billion worth of savings? Or is this just another way to balance the books?
“This is the one question that Aussies should demand an answer to as part of this year’s budget,” she said.
