By Rosemary Johnston – Friday, April 29, 2016
The Grattan Institute hit the headlines again this week with a proposal to reduce negative gearing taxation benefits for property investors in a bid to reduce the cost of housing for home owners. They claim that housing affordability is being compromised by investors driving housing prices higher. They also argue that the investors involved in property investment are already priveledged and should be paying more tax, not less.
Negative gearing taxation benefits allow a deduction when the expenses for a rental property are greater than income. This loss can be offset against a person’s personal income. The Grattan Institute implies that this encourages high income earners to manage their personal taxation by offsetting it against negatively geared property. This reduces the amount of tax they pay.
The Grattan Institute also argues that capital gains concessions for property investors are too generous. They claim that the current 50% concession on capital gains, offered to investors, is the same as home owners. They propose that it should be reduced to 25%.
This would mean that if someone bought an investment property for $500,000, and it doubled in value in ten years’ time to $1M, that 75% of the capital gain would be taxed at their marginal rate of taxation, rather than the current 50%.
The purpose of these changes would be two fold, firstly to reduce the price of housing for home owners, and secondly to create more tax revenue from the wealthy sparing lower income earners.
The Grattan Institute claims these changes in taxation would create a one off two per cent reduction in the cost of housing. On a $500,000 property that would be a $10,000 reduction to $490,000. Will this benefit make a significant difference to home owners?
Last year the Government sought to slow the rise of the housing market. They reduced the amount of finance available to property investors from banks and other lenders. This had a very significant impact. It changed the rate of capital growth in Sydney from about 20%pa to its current 9.7% for the 12 months to 11th March 2016.
If housing was increasing by 20% pa then a $500,000 property would cost $600,000 in 12 month’s time. Now it is costing $548,500 and still trending down. This is a savings of $51,500 from the situation last year. The Government argues that this is more significant and has more flexibility than a one off change of two per cent.
The Grattan Institute claim that the above taxation changes would raise $5.3B per annum in revenue per year. They also comment that “Contrary to urban myth, rents won’t change much, nor will housing markets collapse.” This is a glib statement about the rental market, with little apparent foundation.
As a property investor would your behaviour be unchanged if you were unable to claim negative gearing? Would you also be happy to have your capital gains tax concession reduced, effectively costing you 50% more in tax when you sell the property? These changes would hit the numbers hard for some investors.
As a result it is very likely that the pool of rental properties would become insufficient to meet the needs of the community. Especially with the rate of population growth, that is increasing demand, in the larger capital cities. More people competing for fewer properties drives rental prices.
When employers can’t get staff because they can’t afford to live near their work what constraints does that put on productivity and the economy? If the Government then had to find a solution to the rental market their choices appear to be to find the capital themselves to invest in rental housing; or, offer taxation concessions to recreate a private landlord market.
The need for sufficient rental property is key to the flexibility of the workforce for our economy. Concessions for private investors leaves Government capital free to drive additional economic growth. Evaluating taxation without evaluating the impact on the rental market is like a one legged stool and likely to fall over.