Melbourne investors rethink plans after negative gearing changes

Sudesh Piyatissa started investing in property 10 years ago and has watched it become progressively more complicated since the Covid pandemic arrived in Australia.

A doctor by trade, he now owns homes in two of Melbourne’s affordable northern suburbs, both as a way to invest and so that he is helping to house people who are choosing not to buy — or who cannot meet the high prices needed to enter the city’s market these days.

But after the federal budget revealed major changes to negative gearing and capital gains tax arrangements for investors, he’s considering alternatives including regional towns and even commercial property.

Sudesh Piyatissa is giving thought to investigating regional and commercial property investment after the latest federal budget. Picture: Mark Stewart.

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The big changes announced include limiting negative gearing to new builds after July 1, 2027. And unless you buy a new home or purchased before the budget announcements, you will no longer receive a 50 per cent flat discount on CGT.

Instead you will need to rely on a more complicated tax regime that, for most residential investors, will leave you handing over more money to the government than you would have.

“The federal budget has changed things a bit with my goalposts shifting, so I will be looking at different strategies to make the numbers work from here,” Mr Piyatissa said.

“Before I was looking at properties across Australia, and you could find a lot of places where the numbers did work. But now, with the changes, the locations will be more important, and finding prime real estate will too.”

A doctor and investor, Sudesh Piyatissa is currently considering his options for future investments. Picture: Mark Stewart.

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He’s also conscious that to get similar returns he might need to extend into new territory and consider developing properties, which he likes the idea of as a way to increase housing supply at a time when the nation needs it — but is also conscious could be challenging.

“Unfortunately property is getting beyond the reach of a lot of the population to purchase, and I like to give that opportunity to people to have a home,” Mr Piyatissa said.

“But I’m bullish on Melbourne and I do think that the rents will rise quite a lot of these government changes, and so holding the properties here will be quite a lot easier compared to other places.”

The Budget’s Big Changes For Property Investors

Negative Gearing

– From July 1, 2027, negative gearing is limited to income you are drawing from rental properties, and you can’t deduct against your full income;

– Losses that are not claimed can be rolled forward into future tax years, up to and including when you sell the home, then deducted against future rental income or against the capital gains tax at the time of sale;

– Homes bought after 7.30pm, May 12, can only claim negative gearing until July 1, 2027;

– Homes bought before 7.30pm, May 12, will have negative gearing grandfathered;

– Exemptions: commercial property, new builds, off-the-plan purchases, homes bought as part of a Self Managed Super Fund;

Capital Gains Tax

– From July 1, 2027, the 50 per cent capital gains tax discount for investment properties owned for more than a year will be replaced by indexation and a minimum 30 per cent tax rate;

– Inflation will be deducted from the capital gain, then any real gains left over will be taxed at your marginal tax rate — though not less than 30 per cent;

– The major change is that under the older system 50 per cent of the capital gain was not taxed;

– It is believed homes bought after 7.30pm, May 12, and sold more than a year after that date, but before July 1 will be able to claim the old 50 per cent discount — however this may yet be clarified differently by the government;

– 100 per cent of any gains made for a home owned less than a year are subject to taxation;

– Homes bought before 7.30pm, May 12, will have capital gain fixed on July 1, 2027, with the home valued at that time and the new tax setting applied for any future gains thereafter;

– Exemptions: Your primary residence (100 per cent tax discount applies), buyers will be able to choose the old system or the new one when they purchase new builds and off-the-plan properties, superannuation funds are exempt from the changes;

– Experts believe properties that achieve annual growth below 4.5 per cent a year will likely be better off under the new system, which is fairly common for commercial investments;

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