We have included below a cutout from the Courier Mail, written by Noel Whittaker, regarding how the GST affects the rental market. We found it quite interesting reading and thought that you might too!

A taxing time for landlords
By NOEL WHITTAKER

Residential landlords face a challenging time when tax system changes take effect July 1.

First will be the reduction in their rental income. This will happen because rents paid by the tenants living in residential property will be GST free, but their landlords will have to pay tax on many of their outgoings.

The technical term is ‘input taxed’ as tax is paid on the inputs with no relief.

Take a typical example of a fully owned residential property that is leased out (see box).

It may turn out worse than this example, as it is still not clear if garbage collection and some other local authority imposts will be subject to GST.

Sure, the landlord might try to raise the rents to compensate for the increased costs, but rents tend to be a by-product of market forces and raising them may encourage a good tenant to seek alternative accommodation.

Next is the loss that will be suffered by middle income earners who are negative gearing.

CASE STUDY: Jack earns $50,000 a year from his job but incurs a taxable loss of $10,000 a year on his rental properties due to his high borrowings.

Negative gearing allows him to save $4300 a year in tax now, but when his marginal rate drops to 30% after June 30, his tax savings will drop to $3000.

He will be able to take some immediate comfort in the tax deductions created relief is temporary as any tax saved will be clawed back when he sells.

Will the extra costs and lower tax savings be made by higher values? That is the wild card in the pack.

People who sign a contract after June 30 to buy their first home (new or established) will receive a non means tested grant of $7000, and this will almost certainly cause a slump in the first homebuyer market until June as buyers wait for the date to change.

There will be no GST on established homes, so the bigh questions are how much will new homes raise because of GST and will this flow through to established homes?

First there is no certainty that new homes will rise by anything like 10%, because builders may cut their margins to make sales. Also, a rise in new homes would not necessarily cause on in established homes, which are a separate market.

In the end it will get back to supply and demand.

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