- Negative gearing and capital gains tax discount benefits skewed towards the affluent
- Reforming deductions could provide tax concessions to small investors
- Researchers say a cut in the capital gains tax discount also has the potential to reduce inequality
Reforming negative gearing so the wealthy wouldn’t get big tax breaks would save the Federal Government more than $1.7 billion a year, according to modelling by economists at Curtin and Griffith universities.
The research, commissioned by the not-for-profit Australian Housing and Urban Research Institute, models reforms to negative gearing and capital gains tax that are likely to reduce the impact on small investors – those with average incomes and just one investment property.
The proposals to reform one of the most hotly debated tax breaks would cut the annual $3.04 billion cost of negative gearing deductions by 57.3%.
The reform model proposes that investors in the bottom 50% of the income distribution, or those with more modest incomes, continue to receive a 100% deduction.
The tax breaks then gradually cut out until sophisticated investors, those with high incomes, get zero deductions.
The researchers say there are concerns around the potential distortion by the present income tax treatment of housing assets on property market stability and housing affordability.
Supporters of negative gearing say it follows the basic platform of Australia’s tax system in that it allows investors to claim a deduction for any expenses to create income, including the interest on a loan. They also say negative gearing encourages the building of new housing.
Others argue that negative gearing puts pressure on home prices and affordability, with property investors increasingly crowding out first home buyers.
The latest research shows a typical negatively geared investor is a middle-aged male, employed full-time with an average taxable income of $80,000 after deducting expenses on an investment property.
More than 1.2 million Australians use negative gearing to invest:
“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,” says report author Professor Alan Duncan, from the Bankwest Curtin Economics Centre at Curtin University in Perth.
“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 research also identified that CGT (capital gains tax) discounts are heavily weighted towards those who are 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 do not own any property.
The modelling shows that reducing CGT exemptions means high income investors will pay more tax than lower income investors, but the tax amount will represent a lower proportion of their take home income.
The researchers say any reforms would need to be carefully communicated to avoid any misconceptions.
However, they argue that their reforms are “more politically acceptable”.
“Despite periodic national reviews of the tax system such as the 2010 Australia’s Future Tax System Review, meaningful action aimed at implementing reform to the negative gearing and CGT provisions continue to be fraught with political obstacles to change,” the report says.
“A complete abolition of negative gearing reforms has often been criticised by policy-makers for its potentially adverse impacts on the financial wellbeing of ‘mum and dad’ investors.
“In a series of simulations, we distinguish between ‘mum and dad’ and ‘sophisticated’ investors and apply more generous concessions to the former so that they are less likely to exit the rental market in response to a negative gearing reform that results in a reduction in rental deductions.”