Substantial changes to negative gearing touted

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By Steve Blizard   9 March 2016

In Australia, “negative gearing” allows private market investors’ to claim a tax concession against their personal income for losses incurred on a rental investment property.

It is estimated that the federal government provides approximately $8billion pa in tax concessions in order to subsidise rental housing costs.

In a substantial policy change, the Federal Labor Party has unveiled plans to limit the negative gearing tax break to newly built housing and end it for existing homes.

At the NSW ALP state conference in Sydney on 13 February, Opposition Leader Bill Shorten said if elected, a Labor government would make changes to negative gearing and to the capital gains tax discount to ensure a “level playing field for first home buyers competing with investors”.

The tax break has been criticised as giving investors an unfair advantage over first home buyers.

“We will put the great Australian dream back within the reach of the working and middle-class Australians who have been priced out of the housing market for too long,” promised Shorten.

Bill Shorten cited rising house costs as the basis for Labor’s policy move, saying that “30 years ago, houses cost around 3.2 times average income — today it’s 6.5 times average income.”

Labor’s changes include:

  • Negative gearing will only apply to new housing from July 1, 2017:Investments prior to this will not be affected with taxpayers eligible to deduct net rental losses against their wage income.
  • Capital gains tax discount to be reduced from 50 percent to 25 percent:The capital gains discount will be halved for all assets purchased after July 1, 2017 but will not affect investments made by superannuation funds.

Shorten says the changes, while grandfathered for existing investors, would still result in future budget savings of $32.1 billion over a decade.

However Labor fails to explain how the new changes will produce a more efficient rental supply outcome compared to the existing unconstrained free market system.


The US experiment

In his recent column in “The Australian”, economist Henry Ergas writes that Labor emphasises its proposals would align our tax system more closely with the US which in 1986 eliminated negative gearing and increased the tax rate on capital gains.

Hence there is already a “natural experiment” against which Labor’s plan can be more closely assessed.

Ergas makes reference to the analysis of the US experiment conducted by James Poterba, Professor of Economics at MIT, who found that the 1986 changes did not only decrease home prices and housing investment, while raising rents; they did so to a much greater extent than anticipated.

US Tax policy, designed to subsidise less efficient rental schemes in preference to private investors, has resulted in a worsening US rental affordability crisis.

The American Community Survey (2014) similarly found that half of all renters in the US live in housing considered unaffordable.

More than 11 million US residents pay more than half their income for housing, up from 7 million at the start of the century.


UK tax changes due

From April 2017 UK small “buy-to-let” investors will also be hit by new tax changes.

HM Treasury will phasing in changes which will see landlords pay tax on the entire rental income they generate from their properties, while no longer able to deduct the cost of mortgage interest.

However as UK landlords structured as companies are exempt, property investors are actively arranging to restructure as investment companies.

This is a foretaste of what could occur in Australia if gearing laws change.


Rents can fall under gearing

While housing supply issues in Sydney and Melbourne are well reported, according to analysis by property data company CoreLogic, in the year to February 2016, average rents remained unchanged across all Australian capitals at $485 per week.

Notably, under existing negative gearing rules, people living in Darwin have been the biggest beneficiaries of regional downward trends with rents slashed by 13.3 percent.

Costs have tumbled in Perth by 8.4 percent and by around one percent in Adelaide and Brisbane.


Rezoning and land release

The Real Estate Institute of Australia (REIA) President Neville Sanders said while there was a housing affordability crisis in Melbourne and Sydney, changing negative gearing was not the answer.

“Zoning issues and land release is a problem,” he said.

“In Melbourne and Sydney there are good quality housing estates in outer suburbs. The cost of transport and other issues do, however, come into play then.”

Mr Sanders said changing negative gearing would lead to turmoil in the market and exacerbate the affordability problem.


Competitive rentals  necessary

While negative gearing is blamed for housing supply problems, both Labor and the Coalition fail to identify the high levels of stamp duty on the family home as a major disincentive for today’s mobile workforce to buy instead of rent.

REIA’s Sanders said that “Baby boomers are sitting on blocks that could be developed, however, the cost of them downsizing is a problem, including stamp duty.

300,000 retired baby-boomers have also been reluctant to downsize and free up housing supply, as this will see their government age pension further slashed under the new Centrelink Asset Test set to take effect from 1 January 2017.

While recognising the substantial tax subsidy provided to private investors, Treasury has neglected to report analysis of the on-going cost to Government of the alternatives in boosting rental supply, including the subsidy cost of building more public housing, should gearing be curtailed.

steve@blizard.com.au

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