- Intense debate surrounds negative gearing and CGT and its impact on housing.
- Several popular arguments debunked by taxation specialist.
- Holistic tax reform urged to address piecemeal changes and broader policy implications.
Intense debate surrounds negative gearing and capital gains tax (CGT) concessions and their role in Australia’s housing market.
Navigating the negative gearing debate
Green’s spokesperson for housing and homelessness, Max Chandler-Mather, calls negative gearing a “tax handout”, helping wealthy property investors purchase more properties instead of first-home buyers chasing the Australian dream.
Last week, Everybody’s Home spokesperson, Maiy Azize, proclaimed that “handouts” like negative gearing and CGT discounts were elevating home and rental prices in Australia.
On the other hand, proponents of the status quo contend that tinkering with negative gearing and CGT incentives will cause the housing supply to collapse and rents to skyrocket in its wake.
In fact, some argue that Australia needs more tax breaks. Raine & Horne’s executive chairman, Angus Raine proposes a two-year CGT exemption and means-tested stamp duty cut targeting older Australians, with the idea that these changes will incentivise the immediate sales of tightly held properties, adding fresh supply to the market.
Most notably, PIPA alleges that meddling with negative gearing may end up being a $58 billion dollar mistake.
On the role of negative gearing: Separating fact and fiction
Nexia Australia’s national tax director, David Montani, is no stranger to Australia’s negative gearing dialogue.
Published in the journal Taxation in Australia in 2017, his paper Negative Gearing: Separating fact from fiction remains significant considering the topicality of negative gearing reforms.
“The points in the paper are still relevant, arguably more so as time passes without proper reform,” Montani told The Property Tribune.
Will limiting negative gearing cause rents to rise?
In the paper, Montani says arguments that limiting negative gearing will induce a rent rise are based on a brief quarantining of negatively geared rental losses from 1985 to 1987.
During this period, losses for newly purchased properties were quarantined and carried forward, with their losses only being deducted against future rental profits and capital gains. Existing properties were exempt from the changes.
Negative gearing proponents argue that the quarantine caused investors to exit the market, lowering the supply of rentals and causing rents to surge. Moreover, they maintain that the rise was worsened by new investors raising rents to cover the tax burden.
However, upon the policy’s reversal in 1987, rents only rose in Sydney and Perth. Meanwhile, they stayed the same in Melbourne and even decreased in Brisbane and Adelaide.
Montani says this suggests that the changes in rents were a function of local factors, like the differing points in a normal vacancy cycle, rather than being caused by negative gearing adjustments, as evidenced by the falls in rent.
Additionally, he says that new investors subject to the quarantining rules would be unable to compete with existing investors had they raised rents to cover their losses.
Does negative gearing encourage more supply?
The paper also rebuts the oft-repeated claim that negative gearing encourages property investment, which in turn, improves housing supply. Montani points to how 93% of property lending is for established homes, which does not add to the housing supply.
Conversely, the paper dismisses the idea that limiting negative gearing will lower housing demand and, subsequently, easing housing prices substantially. Modelling data produced by several bodies have estimated a slight, one-time decline of 1% to 2%.
The problem with Negative gearing and CGT discourse
Montani told The Property Tribune that the myopic focus on negative gearing and CGT discounts obscures the fundamental issue: that Australia’s taxation system is ageing and in dire need of sweeping reform.
“I don’t mean to single out PIPA, because many others do this as well, but their comments on negative gearing and the concessional taxing of capital gains reflect a widespread two-fold problem in public discourse on taxation policy,” Montani said.
“The first problem is the tendency to focus on a single component in isolation, ignoring its interaction with other components of the tax system. The second is that the discourse on a particular issue often touches only part of the story. That leaves many in a less-than-fully-informed state of not only the tax issue itself but also the wider policy ramifications, including non-tax policies.”
“Siloed half-conversations about an isolated tax issue miss the bigger picture, which is that our taxation system as a whole is in desperate need of genuine, holistic reform, encompassing all components of the system.”
David Montani, Nexia Australia
“Negative gearing and concessional taxation of capital gains are merely components of the wider system, a bit like individual pieces of a jigsaw puzzle. If you change the shape of one piece but ignore the others, the puzzle no longer fits together, leaving a distorted bigger picture. That has been the story of our tax system for a long time now, suffering from piecemeal tinkering that is not reform,” he said.
“If the conversation were to incorporate income tax more widely, and company tax, GST, state taxes and so on, and how well (or poorly) these pieces of the puzzle fit together, it would be a much more productive conversation.
“And history demonstrates that people are more open to an unfavourable individual tax change if it forms part of a coherent package of reforms. In other words, if you don’t like one or two changes out of a coherent reform package of 10 changes, but you do like the other eight or nine, most would accept the package.
“Thus, instead of engaging in the game of tax whack-a-mole on isolated issues, our collective attention is better directed to developing a coherent package of reforms (which may well include changes to negative gearing and the taxing of capital gains).”
Providing more supply is paramount
“The subject of the housing crisis is outside my field of expertise, so I can offer only a personal observation. As in most markets, price is a function of supply and demand. If demand exceeds supply, the price goes up. Demand for housing is not going to fall, and so we need to increase supply. But we must achieve that in an economically, environmentally and socially sustainable way,” Montani added.
“All three tiers of Government impact housing in different ways. Policy in one tier might be ineffective due to conflicting or inhibiting policies or practices in a different tier.”
“Accordingly, it seems to me that addressing the issue requires a coherent policy approach across all three tiers. It is the Federal Government that would need to take the lead on that, and the policy and people challenge is substantial.”