Reforming negative gearing and capital gains tax (CGT) could save the federal government more than $1.7bn annually without hurting mum and dad investors, according to new research commissioned by the Australian Housing and Urban Research Institute (AHURI).
Conducted by researchers from Curtin University and Griffith University, the research sought to explore an approach to reform that would have the least impact on investors with the lowest incomes.
“Current negative gearing policies are heavily skewed towards high income earners, raising concerns about the extent to which these policies exacerbate income and wealth inequality in Australia,” said report co-author Alan Duncan from Curtin University. “There is concern among policymakers that reforms to negative gearing may have adverse impacts on mum and dad investors.
“Our modelling suggests that a progressive rental deduction for investors cushions less wealthy mum and dad investors from significant drops in tax savings, and may be an appropriate policy option.”
The reform model proposes that investors in the bottom 50% of the income distribution continue to receive 100% in rental deductions. Those in the 51st–75th percentiles should receive a lower 50% rental deduction, and those in the 76th–100th percentiles (who are classified as “sophisticated” investors) should receive zero rental deductions.
Duncan said such reforms would save the federal government more than $1.7bn from the annual $3.04bn cost of negative gearing deductions, a 57.3% saving.
The AHURI report also noted that CGT discounts are heavily weighted towards those who’re more affluent. These investors, on average, own a property portfolio worth more than $730,000 and have a tax assessable income of $82,000, compared to $31,000 for renters who don’t own any properties.
Report co-author Rachel Ong ViforJ from Curtin University said modelling indicates that reducing CGT exemptions means high income investors will have to pay more tax than lower income investors. However, the tax amount will represent a lower proportion of their take home income.
“The reform would be progressive in nature, reducing negative gearing tax savings by greater margins as tax assessable income increases,” ViforJ said. “It remains that any CGT policy reform will need to be carefully communicated to avoid a misconception that the changes will have a proportionate impact on rental investors’ net incomes.”
Reducing negative gearing benefits would impact rental supply
Not all analysts are convinced that AHURI’s proposals will have the desired positive impact on the system. Michael Yardney, director of Metropole Property Strategists, said AHURI’s research is “just another attempt to stimulate debate on negative gearing and encourage the government to tax entrepreneurial Australians, from a left of centre organisation that doesn’t really understand how property investors think.”
“In my opinion, any reduction in negative gearing benefits would significantly reduce rental investment in both new and existing properties and would worsen rental affordability through a reduced supply of investment housing,” Yardney told Your Investment Property.
“A reduced rental supply means lower rental vacancies and increased rents, which is the opposite effect of what AHURI is looking for.”
With more than 30% of Australians living in rental accommodations, it’s clear that property investors provide an essential service to millions of people.
“Property investors save a deposit, buy a property, commit to a loan for 25 or 30 years and provide accommodation for others in our community. In return we expect to get a reasonable return on our investment risk, just like other business people do,” Yardney said. “We know that the rent won’t cover our expenses, but accept that certain tax benefits plus the long term capital growth will make up for this. Sometimes it does, and sometimes it doesn’t.
“Property investment is a real and effective method for bolstering the savings of middle Australia, at the same time providing accommodation for those who the government can’t or won’t help and should remain as is.”
The government cannot supply enough housing now, how will they manage when investors walk away and it all becomes government funded, buy a lot of tents?
Ive got 5 investment properties, and the diluting of negative gearing will push me to be more frugal with tenant repair requests, cut costs elsewhere (find a less experienced rental agent who charges less) and hike rent like every other investor is expected to do when leases are nearing renewals. Inconvenience for this 25yo guy “mum and dad” investor- detrimental to renters
From the investor's point of view, the rental could not cover most of the expense. The stable capital gain may a good incentive to buy properties for investment. As government would like to levy more tax from exemption of CGT. I think it may reduce the encourage of investors also lift the rental from tenants Where could cause the vicious circles.