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Time to level the tax field
27 April 2010
Published in the Australian Financial Review.
The Henry review is the best chance in decades to reform the tax treatment of households' two most important assets - superannuation and housing. Their present tax treatment consistently benefits people with substantial housing wealth against those entering the market, and high wage earners against the low paid.
It would be a mistake to sidestep these issues on political grounds. After all, the goal is not to eliminate tax concessions for saving or housing, but to restructure them so that they benefit the majority of Australians.
Tax concessions for saving should target low and middle income earners, who are less likely to be able to save in the absence of tax breaks and more likely to rely on the age pension. Yet Treasury estimated last year that a quarter of the $10 billion in annual tax breaks for superannuation contributions went to the top 5% of wage earners. The flat 15% tax on contributions means that a high income professional sacrificing salary for super saves 32 cents for every dollar invested while a part-time labourer receives no tax benefit.
The solution is simple: everyone should receive the same tax rebate for each dollar invested in their superannuation account up to an annual cap. A revenue-neutral reform of this kind could boost the after-tax contributions of low and middle income earners by 2-3 per cent of earnings at no extra cost to themselves, employers, or government.
We are repeatedly reminded of the perils of house price inflation by the latest interest rate rise. Housing is more expensive here than in virtually all OECD countries, yet its tax treatment is among the most generous. Tax breaks become part of the problem when they add fuel to housing booms.
The main winners from the exemption of owner-occupied housing from most taxes on property investments and our very generous deductions for investors in rental property, are those with substantial housing wealth. The losers are those trying to enter the market at the bottom end. Research for the Brotherhood of St Laurence found that the top 20% of households received over four times the tax savings obtained by low income. New housing developments that would otherwise improve affordability face their own tax, in the form of infrastructure levies.
There is a strong case for extending the principle that home owners and investors contribute to local public infrastructure costs through taxes based on the value of their land. Property owners benefit from gains in the value of their property that accrue from public investments in roads, sewerage, and other facilities. If these taxes were strengthened, the proceeds could be earmarked for investment in these facilities, thereby lowering the costs of new housing developments.
The unlimited deductions for ‘negatively geared' investments in property, together with the cutting of capital gains tax in 2000, contributed to a surge of investment in rental property that trebled the rental losses claimed. This inflated housing prices, especially at the top end of the market. This tax break has contributed little to resolving the rental affordability crisis and may have made matters worse. It should be replaced by tax incentives that directly promote the construction of affordable housing, for example by expanding the National Affordable Housing Scheme.
Fair and efficient reform of the taxation of housing and superannuation is and desirable and achievable because it will benefit the vast majority of Australians.
By Clare Martin, CEO, Australian Council of Social Service.