The government has announced there will be no changes to negative gearing and capital gains tax in the upcoming budget. The news comes, however, as a Grattan Institute report finds changes to current policy settings could save the government about $5.3 billion a year.
Following the announcement of Labor’s negative gearing policy in February, it was reported that the Coalition had changes on the table. However on Sunday Prime Minister Malcolm Turnbull said there would now be no changes to negative gearing or capital gains tax.
“Labor’s housing tax plan will deliver a reckless trifecta of lower home values, higher rents and less investment,” Mr Turnbull said.
“Labor is taking a sledgehammer to the ambitions of mums and dads who want to invest – whether it’s established houses and apartments, commercial property, shares in listed companies, or shares in their own business.”
The Property Council has similarly argued that negative gearing helps “mum and dad investors”, pointing to ABS data that shows that many taxpayers using negative gearing have taxable incomes under $80,000 a year. However, it has been argued that taxable incomes could be under $80,000 because of negative gearing, as the costs of owning an investment property are offset against assessable income. Additionally, only 20 per cent of taxpayers have taxable incomes over $80,000, so it is unsurprising that most people using negative gearing have taxable incomes under this figure.
Following the announcement, lobby groups such the Property Council, UDIA and Urban Taskforce congratulated the government from stepping away.
“The government is doing the right thing by the 1.2 million Australians who negative gear,” PCA chief executive Ken Morrison said. “This includes over 770,000 Australians who have taxable incomes of less than $80,000 a year.”
Grattan Institute paints a different picture
The Grattan Institute report, Hot property: negative gearing and capital gains tax, found that the interaction of a 50 per cent capital gains tax discount with negative gearing distorted investment decisions, and made housing markets more volatile and had the effect of reducing home ownership.
The two measures, Grattan chief executive and report co-author John Daley said, allowed investors to reduce and defer personal income tax, costing $11.7 billion a year. He said other, less efficient taxes thus needed to be higher.
According to Mr Daley, it is not the “mums and dads” but the wealthy who benefit most from these tax concessions. People with higher incomes were most likely to negatively gear, the report found, with the top 10 per cent of income earners before rental deductions receiving almost 50 per cent of the benefits.
The report recommends that the capital gains tax discount should be reduced from 50 to 25 per cent, and that negatively geared investors should no longer be allowed to deduct losses on their investments from labour income.
This would not have the dramatic effects predicted by the property lobby and government, the report said – with property prices only minimally effected and no significant changes to rents or new development rates.
“We estimate property prices would be up to two per cent lower under these reforms than they would be otherwise,” Mr Daley said.
“Contrary to urban myth, rents won’t change much, nor will housing markets collapse. The effects on property prices would be small compared to factors such as interest rates and the supply of land.”
The report, however, is not a endorsement of Labor’s policy, which aims to restrict negative gearing to new construction. Mr Daley said this left too many problems in place and “introduced unnecessary distortions”.
The report has already been attacked by the Prime Minister, who dedicated a long blog post to pointing out inaccuracies and contradictions.
- Reduce the capital gains tax discount for individuals and trusts to 25 per cent
- Limit negative gearing. Quarantine passive investment losses so they can only be written off against other investment income
- In the longer term, aim to align the tax treatment across different types of savings