16 April 2015
In a new report released today, ACOSS is calling for action to restrict tax deductions for negatively geared property investments and the 50% discount on Capital Gains Tax, that are together costing the Budget $7 billion a year and fuelling housing price booms.
The report, ‘Fuel on the fire: Negative gearing, Capital Gains Tax and housing affordability’, dispels the myths that negative gearing makes rental housing more affordable and that the benefits mainly go to ‘mum and dad’ investors on middle incomes.
“Negative gearing and capital gains tax breaks must be front and centre in the tax reform conversation. It’s vital that the Government not rule out necessary reform in this area. This area of tax policy is shrouded in myth and those myths should be dispelled so that a sensible discussion can begin. That’s the purpose of this ACOSS Report,” said ACOSS CEO Dr Cassandra Goldie.
“Negative gearing and the tax break for capital gains don’t improve housing affordability; they make it worse by fuelling home price booms like the one in Sydney right now. Less than one tenth of negatively geared housing investments are for new properties, the other nine tenths bid up the price of existing housing.”
“These tax breaks also make it more difficult for the Reserve Bank to manage the economy. Over-heating in housing markets is making it harder for the Reserve Bank to cut interest rates when this is needed. The tax breaks are feeding a fire which the Reserve Bank and APRA are trying to put out,” Dr Goldie added.
“This is a long standing problem and it’s time it was fixed. These tax breaks have inflated housing costs in every housing boom since the 1980s. Easier access to credit and the cut to capital gains tax in 1999 have made the situation worse. Since then, lending for investment housing has risen by 230% compared with 165% for owner occupied housing.”
“The best we can say is that negative gearing and the Capital Gains Tax discount are not the only drivers in inflating house prices. But there should no longer be any doubt that they add fuel to escalating house and rent prices by encouraging property speculation.”
“It’s not your average mum and dad investors on middle incomes who are benefitting from the generous tax concessions that have allowed two thirds of individual rental property investors, or 1.2 million people, to report tax-deductable ‘losses’ of $14 billion in 2011,” said Dr Goldie.
“The reality is that half of all rental housing investor debt is raised by the top 20% of households. So they receive the lion’s share of tax deductions through negative gearing.”
“The reason that negative gearing strategies are widely used is that people can claim deductions for ‘losses’ against their wages every year, even though the investment is actually profitable because the value of the property rises every year. They then get a 50% tax discount on the value of their capital gains when it is sold.”
“There are better ways to support investment in affordable housing than encouraging people to borrow to speculate on home prices. A tax rebate on new housing such as the National Rental Affordability Scheme is one. That program should be expanded, not abolished.”
“ACOSS proposes that ‘negative gearing’ should not be allowed for new investments in property, shares and similar assets. This means that tax deductions for ‘losses’ on new investments should not be claimable against an individual taxpayer’s other income, including wages. To protect people who made investment decisions under the existing rules, existing investments would not be affected: the current rules would still apply until the property is sold.”
“We also propose, consistent with the Henry Report, that the 50% discount on individual capital gains be reduced and that the same tax break should apply to other investments such as bank accounts and rents received by housing investors. This would remove the tax bias in favour of speculation in the values of assets such as housing and shares.”
“As ACOSS and major housing organisations argued last month, there is no simple ‘fix’ for the housing affordability crisis. Federal and State Governments should also invest in social and community housing, improve Rent Assistance and ease barriers to construction of new homes including planning restrictions where these are too strict. Instead of taxing property transfers though Stamp Duties, State Governments should broaden Land Tax as proposed by the Henry Report.”
Media Contact: Fernando de Freitas – 0419 626 155
Summary of ACOSS recommendations
Tax reform is only part of the solution to our housing affordability crisis, but it is a vital part.
Along with reforms of State taxes – especially a shift away from reliance on Stamp Duties and towards a broadly based Land Tax – we advocate the following reforms to federal taxes affecting housing markets.
1. Restrict tax deductions for ‘negatively geared property investments
Income tax deductions for expenses relating to ‘passive’ investment in rental housing and other assets such as shares and agricultural schemes should only be offset against income received from those investments (including capital gains) and not against other income (including wages). This should apply to all new investments of this type entered into from 1 January 2016. Investments purchased before that date would be ‘grandfathered’, that is, the current rules would continue to apply until the asset is sold.
Revenue: $500 million in 2015-16; $1,000 million in 2016-17
2. Use part of the revenue savings to strengthen tax incentives for investment in new affordable housing, including building on the strengths of the NRAS scheme
As a first step, reinstate funding for round 5 of the National Rental Affordability Scheme to finance the construction of 12,000 new affordable rental dwellings and restore investor confidence in the program.
Cost: $40 million in 2015-16; $100 million in 2016-17
3. Increase tax rates on capital gains and reduce them on other investment incomes including interest bearing deposits and rents, to improve equity and reduce distortion of investment decisions by the tax system.
Consistent with reforms advocated in the ‘Australia’s Future Tax System’ Report, a common personal income tax discount should be introduced to replace the current tax treatment for capital gains, housing rents, interest bearing deposits, shares and similar investments (excluding superannuation and owner occupied housing). This should be substantially less than the current 50% discount for capital gains.
Negative gearing myths and facts
The Hawke Government’s restrictions on negative gearing from 1985-87 resulted in rent increases and had to be reversed.
The main reasons for rent increases at that time were higher interest rates and a share-market boom which diverted investment from rental property. Even so, this only happened in Sydney and Perth. Lending to rental property investors still rose by 42% across Australia.
Negative gearing can’t be responsible for overheating in housing markets in recent years because it’s been in place for over 20 years.
Negative gearing adds fuel to each housing boom by encouraging property speculation. Its impact has grown because investors have easier access to credit. The halving of tax rates on capital gains in 2000 (in place of the indexation of capital gains for tax purposes which was less encouraging of speculative investment) also made negative gearing more attractive.
The benefits of negative gearing mainly go to ‘mum and dad’ investors on middle incomes
This is an illusion due to the way the Taxation Statistics break down deductions for rental property investment by taxable income, which is itself reduced by negative gearing strategies. Many households that appear to be ‘middle income’ actually have higher incomes before deductions are subtracted. In reality, half the value of deductions for negatively geared investments go to the top 10% of taxpayers.