The Budget Office revealed Australia would be $42.5 billion better off by scrapping negative gearing

Photo: Patrick Riviere/ Getty Images.

A push to abolish negative gearing could put a temporary lid on Sydney and Melbourne’s surging property market and bolster the pockets of the federal government.

Figures released by the Parliamentary Budget Office revealed government revenue would increase by $3 billion over the next four years — that’s $42.5 billion over the next 10 years — by curtailing negative gearing.

The tax break, allowing investors to claim expenses for rental properties to reduce their overall taxable income, is utilised by 1.3 million Australian landlords who claimed $13.8 billion in tax losses in 2012 to offset other income, according to ATO data.

Despite this, only a small sector of wealthy Australians in the top income brackets have been able to reap the benefits of negative gearing flow. Research by the Australia Institute think tank revealed one third of the rebates from negative gearing went to the richest 10% of households with more than half going to the wealthiest 20%.

Greens Senator Scott Ludlam says the move to end negative gearing is “long overdue”.

“I don’t think it’s fair that low and middle income taxpayers should be subsidising property investors and that’s really at the heart of why we’re making this proposal,” he said.

“Most of the tax concessions from negative gearing and capital gains tax exemptions, as you’d expect, are going towards people who can afford property investment in the first place and that’s overwhelmingly people in upper income brackets.”

Earlier this month, the RBA pointed out that “despite rising levels of household indebtedness in aggregate, the distribution of household debt has remained concentrated among households that are well placed to service it”.

Last year, the Reserve Bank’s head of financial stability Luci Ellis laid down a strong argument to scrap the tax concession.

The cumulation of individual decisions and government policies over many years has given us comparatively low-density cities that create large price premiums for the most convenient districts in those cities.

If prices rise beyond people’s comfort levels, it is not always feasible or attractive for households to respond by voting with their feet, and moving to cheaper areas – especially if that means moving out of a state capital and further away from work.

So an increase in investor demand for housing has less of a safety valve, because potential home buyers in the same place are less likely to reduce their net demand for housing in that district.

Even those who react by choosing not to buy now are still adding to demand for the rental stock, which actually makes rental housing a more attractive investment.

Ellis says the buildup of investors out-competing homeowners leaves young Australians disenfranchised and locked out of the housing market.

However, negative gearing escaped the Budget axe with Treasurer Joe Hockey saying cuts to the tax deduction could force up rental costs.

But Ludlam is hopeful the government may reconsider its stance.

“Labor has said some quite encouraging things in the last couple of months… I think anything is possible,” he said.

“Now that we have these costings in hand it’s time to feed this into the tax white paper and I think that it should absolutely be on the table.”

NOW WATCH: Money & Markets videos

Want to read a more in-depth view on the trends influencing Australian business and the global economy? BI / Research is designed to help executives and industry leaders understand the major challenges and opportunities for industry, technology, strategy and the economy in the future. Sign up for free at