In what sounds like a double win for home owners and the federal government’s budgetary position, the latest Grattan Institute report on negative gearing and capital gains tax concessions says that house prices would only fall 2% while the government can deliver a revenue boost of $5.3 billion a year.
Grattan’s recommendations, to phase in a reduction of CGT from 50% to 25% and restrict negative gearing tax deductions to other investment income, and in doing so disallow claims against personal income, are a must because of the distortive effects of the current policy, Grattan CEO John Daley and colleague Danielle Wood say.
The interaction of a fifty percent capital gains tax (CGT) discount with negative gearing distorts investment decisions, makes housing markets more volatile and reduces home ownership. Like most tax concessions, these tax breaks largely benefit the wealthy.
As it currently stands, that combination of negative gearing and CGT concessions allow investors to “reduce and defer personal income tax, at an annual cost of $11 billion to the public purse”, Daley and Wood say.
Daley and Wood again reiterate that it’s Australia’s top earners reaping the benefits of negative gearing.
“The top ten percent of income earners before rental deductions receive almost fifty percent of the tax benefits of negative gearing,” they said. That’s in contrast to claims that it’s “average” Australians who are negatively gearing.
Treasurer Scott Morrison suggested earlier this year that “two-thirds of those who use negative gearing have a taxable income of $80,000 or less”.
The misunderstanding, the Grattan report says – one which provides important context around – is because “comparisons based on taxable incomes understate the earnings of those who are negatively gearing”.
That is, Grattan says (our emphasis) “taxable incomes are assessed after rental losses. In other words, people who are negatively gearing have lower taxable incomes because they are negatively gearing.”
As well as explaining the misunderstanding around the importance in the distinction between before rental deduction income and “taxable” income, Daley and Wood also say the notion that it’s “nurses, teachers, and clerical staff” who are the primary beneficiaries of negative gearing is also incorrect.
“Analysis of Australian Tax Office (ATO) data shows that a higher proportion of workers in high-wage occupations negatively gear and receive larger average tax benefits when they do so,” the report shows.
Coming a little more than a week before the release of the Federal Budget on May 3, the Grattan report is unlikely to change any priorities for Morrison as he readies to deliver his first budget, which will effectively be an election manifesto. But the report does appear to implicitly support Labor’s proposal to change negative gearing arrangements.
We are likely to hear from all sides of the debate over coming days.