The RBA calls for a review of negative gearing, but wants Australia to face some truths about housing

In its submission to the Senate home ownership inquiry the RBA has added its voice to calls for a review of negative gearing. That will put more pressure on the federal government which is resisting such a move.

But in an important caveat it stressed that any review should not happen in isolation.

Much of the current debate centres around the deductions available to investors, and the belief that a small cabal of rich Australians benefit most from current negative gearing tax arrangements.

The RBA addressed both these issues in its submission.

On the tax treatment the RBA said, “Australia’s treatment of property investors is at the more generous end of the range of practice in other industrialised economies.”

However, in terms of the overall debate it added a very important caveat saying while this treatment is at the generous end of the spectrum it is “not overwhelmingly so.”

The RBA agreed that in Australia a “wider range of expenses, including some non-cash expense” are able to be deducted from non-property income than other jurisdictions while it also noted that Capital Gains Tax (CGT) also gets a concessional treatment.

But while all the focus is on the good deal for investors, the RBA also highlighted that non-investors, or owner occupiers, also get special treatment under Australian tax law relative to other nations. That is particularly so for those with little or no debt, the RBA said.

“Although they cannot deduct mortgage interest repayments from tax as in some other countries such as the United States, neither are they subject to taxation on imputed rent,” the RBA said. The RBA also highlighted that in Australia there’s no CGT on gains made on the sale of the principal place of residence.

In other words, Australians are building up a lot of wealth through their own homes and not paying a dollar in tax. That is generous.

While there may be issues around the tax shelter investors gain through their property purchases, owner occupiers also enjoy a significant tax shelter as well.

And this really really is the nub of the current debate. Prospective and actual owner occupiers believe they are being crowded out of the property market so they can start accumulating wealth that doesn’t attract much tax.

On the question of wealth, and wealthy Australians, the RBA acknowledged that “the Household, Income and Labour Dynamics in Australia (HILDA) Survey also suggests that most investor households are in the top two income quintiles,” and that they hold around 80% of the debt.

But, it also added that because of changes in the tax system (through the Howard era marginal tax rate adjustments) and super low-interest rates, wealthier Australian’s incentives to negatively gear had diminished.

A major tax change since 2003 is that the threshold for the top marginal rate has increased significantly relative to overall income distribution. This has reduced the proportion of tax payers with the strongest incentive to minimise tax through negative gearing. With mortgage interest rates also having fallen over this period, some properties might no longer be negatively geared.

Commsec Chief economist Craig James told Business Insider that “these are the calm reasoned comments that you expect from the Reserve Bank. In simple terms, the environment has changed, so it’s worth a look to see if that means that has any implications for the practice of negatively gearing.”

That means the RBA is recommending that there is a case for a review of negative gearing “but not in isolation.” Rather the bank believes any review should take into account negative gearing’s “interaction with other aspects of the tax system,” and the economy.

Specifically the RBA noted the interaction of negative gearing with other parts of the taxation system, particularly changes to CGT in 1999 which allowed the 50% reduction on CGT rates, “resulted in capital gain-producing assets being more attractive than income-producing assets for some combinations of tax rates, gross returns and inflation.” The result of is it may have had “the effect of encouraging leveraged investment in property.”

But, the RBA noted that negative gearing has positive aspects for tenants because it can induce “landlords to accept lower rental yield than otherwise,” would be the case. This aids rental affordability, they said.

Treasurer Joe Hockey again ruled out any chance of a review of negative gearing yesterday. “By removing negative gearing on real estate as some are suggesting.. they are creating an exception to a standing rule in taxation law, and that is that you can deduct the losses against another form of income. That (abolishing negative gearing) would be creating another exception,” he said.

The thing is, the RBA doesn’t disagree. But it does want a review, as long as other parts of the tax system are considered in parallel.

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