Michelle Cull, Western Sydney University
Negative gearing and capital gains tax are back on the national agenda as Australians deal with a housing crisis and politicians look for ways to tackle the issue and win voters’ support at the upcoming election.
The Labor government confirmed this week that tax concessions were being reviewed. Meanwhile, the government is struggling to pass its Help to Buy housing assistance legislation through the Senate.
The Help to Buy legislation is aimed at helping first home buyers on low and middle incomes purchase their first home. The government would contribute up to 40 per cent of the home purchase price and require only a 2 per cent deposit from buyer. Buyers could eventually buy back the government’s equity share.
But the legislation has stalled, with the Greens wanting more including rent caps and pulling back negative gearing while the Coalition says the government “shouldn’t be in the business of co-owning people’s homes”.
The review, revealed yesterday, could reportedly include a cap on the number of properties a person could negatively gear. The changes would not affect anyone who is currently negatively geared.
Negative gearing lets taxpayers claim deductions on their tax for the expenses relating to owning an investment property. They can save on tax as the property potentially rises in value. They can also be eligible for a reduced capital gains tax when they sell the property.
But any changes to negative gearing and capital gains tax policies could face further opposition – depending on how they are implemented. The crucial issue is whether the changes free up enough housing stock and make it more affordable for buyers and renters.
Home ownership in Australia
Based on National Housing Supply and Affordability Council data, home ownership across most age groups has been declining since the 1970s.
Younger households, aged between 25 and 34 years, are hardest hit, having 34 per cent of household income spent on mortgage costs in 2022–23.
About 67 per cent of households in Australia are home owners, and the remainder renters. While the proportion of owners with a mortgage has increased since 1994, so too has the proportion of private renters.
Size of the investment market
Just under 10 per cent of all taxpayers negatively geared their properties in 2020–21, and more than 70 per cent of property investors have only one investment property.
While there have been calls for changes to negative gearing policy to cap the number of investment properties at six, this would impact about only 20,000 individual property investors.
Changes to capital gains tax
Suggestions to increase capital gains tax (CGT) need to be considered carefully, given that:
• there is no solid evidence to show that increasing CGT will increase housing supply and, in fact, it may have the opposite effect by limiting rental housing available
• any change to CGT legislation also impacts other investments (such as shares), as the CGT discount also applies to other capital gains
• multiple investment properties are often held within self-managed superannuation funds (SMSFs), which are subject to different CGT rules and also benefit from superannuation tax concessions
• the rapid increase in housing prices over recent years is likely to result in very large amounts of CGT being paid on investment properties, even with the current 50 per cent CGT discount.
Other ways to improve affordability and availability
Policy discussions around housing affordability and availability invariably lead to suggestions to change how negative gearing and capital gains tax operate. However, taxation policy is not the only solution available.
Another suggestion put forward is to allow first home buyers to use their superannuation for deposits.
Regardless of one’s position on accessing superannuation for something other than retirement, this suggestion is not viable for low to middle income earners. These households are unlikely to have substantial superannuation balances. Also, they don’t have the earning capacity to service a mortgage for the outstanding amount.
There is currently a push to use self-managed super funds SMSFs to enable home ownership. This would effectively allow individuals to become tenants in homes owned by their super funds.
However, the complexities of superannuation law mean this could cause big problems for people whose relationships break down.
Considering the generational wealth that currently exists in property, the government could consider making it easier for parents or grandparents to gift (or sell) property to their children or grandchildren, in certain circumstances.
This area has yet to be sufficiently explored.
What needs to change
The real issue of housing affordability is multifaceted, and any change needs to be done as part of a broader policy.
It is likely that on its own, changes to negative gearing and/or capital gains tax will not achieve the intended outcome of make housing more accessible and affordable for Australians who want to buy a home.
While the debate around the best way to achieve housing affordability and accessibility continues, and while there are statistics that tell us about the current housing crisis, one crucial thing that is missing is the voice of the very people who any new housing policy should be designed to assist.
More consultation is needed with younger age groups and low to middle income earners who are struggling with high rent and unable to purchase their own home.
Australia desperately needs bold new innovative housing policies that do not rely solely on the taxation system but that consider a raft of measures that meet the housing needs of everyday Australians.
Michelle Cull, Associate professor, Western Sydney University
This article is republished from The Conversation under a Creative Commons licence. Read the original article.
Very difficult to claw back tax concessions that should never have been introduced in the first place and in large part have become a huge tax avoidance rort for the very wealthy who gear dozens of properties.
At the same time these wealthy investors with huge property portfolios are driving up house prices and rents to unaffordable levels for the ordinary folk.
Crazy idea. If negative gearing were removed, then less investors would invest in property & there would be a huge drop in available properties for rent. The government gets their cut when an investor sells when they get a HUGE amount in CGT.
Not true at all as the rental houses are not going to vanish into thin air. However negative gearing might be useful for the economy if it was restricted to new builds only and actually produced some additional housing.
Remember, as of the last census, 10% of all housing was empty or in a holiday letting pool. We don’t need more houses built, but we need less red tape for landlords and more incentives to rent those properties out long term. What happened in Argentina points to the root problem: red tape! In Argentina the new government abolished all regulations in regards to the rental of properties. Very quickly supply increased and rents dropped – problem solved!
Why not introduce restrictions on Foreign Purchase of Domestic Housing.
EG:- Restrict it to Owner Occupier only, and Zero Investment Properties !!!
Housing as investment has resulted in house prices escalating out of reach of regular folk who need a place to live. Investment property for rent has equally escalated out of the reach of a sizable number. The private sector has failed to provide a solution that meets the needs of the people with full time employment yet no residences available to use. Construction of a surplus of public owned housing in an array of different forms – apartments, town houses, houses – is vital. It should also help to put downward pressure on out of control rents.