1.. do we really believe everything printed in the media.
2. If ng was abolished, how will this impact on the NRAS scheme, considering you could possibly neutrally gear the property and then get a extra $10K back after your tax is done. Would the government want to get rid of this scheme...
As NRAS is specifically aimed at housing low income earners, perhaps instead of totally abolishing NG all together the governement may make it easier to make a existing property a NRAS in order to keep rental affordability down. However with the NRAS scheme as it is, it is also promoting more buildings to be built and therefore employing people in the building industry so i doubt they would do this.
If NG was abolished then how many NG NRAS properties would not get sold, which leaves this scheme failing.
How will it impact? Well, first everyone needs to understand that the NRAS incentive has nothing to do with tax offsets claimed on losses associated with owning an investment property. It's a separate tax incentive paid via a Refundable Tax Offset and a Non Assessable Non Exempt Cash incentive. Whilst the Federal Component ( The Refundable Tax Offset) is certainly paid to an investor as part of their annual ATO refund, it is a separate piece. It is added on to the ATO refund that is currently paid to an investor as a result of claiming deductible losses - but it is paid in addition to those refundable amounts, not as part of those amounts....
That being said, let's look at the scenario you have proposed, where neg gearing legislation is amended, and no longer allows investors to claim any losses associated with owning their INV property.
If you were to consider the impact of neg gearing being removed on a NON NRAS property valued at say 400K, assuming 105% gearing ( 420K of debt) @ 5.5% (whether that is done via cross collateralisation, or by drawing 15%, 20% or 25% from equity and then funding the remaining 80%, 85% or 90% against the INV property ) that investor would be required to cover interest costs of $23,100 per year plus ownership costs (lets assume 5K per year) for a total commitment of $28,100 per year. If they are getting a 5%ish yield of say, $400 per week, that would equate to $20,800 per year. Such an investor would end up with a negative cash flow (loss) of $7300 per year, with none of that being refunded through the ATO. No tax offsets would be allowed for that loss or for depreciation, so that investors bottom line would be an $7300 net cash flow loss. And with slightly higher rates the story would be worse than that.
That same property, approved under NRAS, and carrying the same debt level and similar ownership costs ( lets add $1000 to cover the "extra" NRAS costs of NRAS admin and higher Property Management) would cost an investor $29,100 to hold for a year instead of $28,100. Rental income would be 20% less ($16640) resulting in a cash flow loss of $12,460. If none of that was deductible , the investor would still be entitled to a Tax Free Refundable Tax Offset and NANE Cash gift totaling $9981 under NRAS, reducing their "loss " to $2479. So that investors cash flow would end up $4821 better off than the investor who purchased without NRAS.( he or she is losing $7300- see above) And the story for the NRAS investor would only get better, as the NRAS incentive increases in line with rental CPI annually (5.69% average increase since inception in 08/9 financial year, FYI) so he or she could reasonably assume they would reach CF+ status within 4 years or so.
So the impact? I think people would see just how sensible it is to carry at least one NRAS approved property in a portfolio. The structure under which the incentive is paid provides significant insurance/ protection against any changes to NG laws. We already know that under current neg gearing legislation NRAS cash flow significantly outperforms non NRAS in every way mathematically ( because you DO get to claim the 20% larger deductible loss AND still get a CF+, Tax Free outcome) Now we've just seen how NRAS also outperforms traditional investment property strategies in the event NG laws are amended or removed.
But just to anticipate the naysayers- lets do the same modeling for a 400K property only geared to 70% LVR, with NG removed from the equation.
Debt is now $300K @ 5.5% (280K plus 20K for stamps, legals etc) instead of 420K ( 20K for stamps, legals etc) - so repayments= $16500
Other Costs - $5000
Total Costs $21,500
Rental Income remains $400 per week, so $20,800
This investor would end up $700 cash flow negative... so basically pretty close to neutral. Any upward adjustment to interest rates would put them in a worse position.
Same property under NRAS...
Repayments remain $16500
Costs $6000 ( Ive allowed 1K extra, just like I did above)
Total Costs = $22500
Income is 20% less - 320 per week = $16,640
Cash Flow Loss is greater = $5,860
NRAS = $9981 Tax Free
Net Cash Flow = CF+ $4121 Tax Free. Better Off by $4821! Just like above
So the removal of NG may be the greatest thing that could happen to NRAS. It would crystalise for many investors, just how flawed a traditional "run it at a loss and hold for growth" strategy can be... because that strategy relies so heavily on a tax friendly environment AND strong capital growth just to get ahead, and it drains cash flow from you along the way, which you could be redeploying towards debt reduction on your PPOR, creating additional equity with which you can purchase additional properties even sooner. NRAS makes you tax free money without needing either NG or Growth. The numbers Ive just shown you only confirm that fact.
But dont get me wrong, it's better with NG being included also
Just making the point that it covers all bases under all scenarios you have proposed.
