Negative gearing survives the razor – for now
The issue of negative gearing might be off the table for the federal government, but don’t expect the topic to disappear any time soon. There’s an election looming!
In the lead up to the 2016 federal Budget handed down on 3 May, the Labor party and the government locked horns about negative gearing. Labor proposed limiting negative gearing to new homes only and putting the capital gains tax discount at 25%. And for a while, the government considered capping negative gearing deductions to $20,000 a year, but dumped those plans amid significant backlash from the property industry (among others). In the lead up to the Budget, the prime minister and treasurer clearly stated that negative gearing wouldn’t be touched. They criticised Labor’s plans to limit negative gearing to new properties, with the prime minister saying it would deliver a “reckless trifecta” of lower home values, higher rents and less investment.
So it wasn’t a surprise on Budget night when the federal treasurer Scott Morrison said the government didn’t want to “increase the tax burden on Australians who are just trying to invest.”
“Those earning less than $80,000 a year in taxable income make up two thirds of those who use negative gearing,” he said. “They are teachers, nurses, police officers, defence force personnel, office workers and tradespeople.
“We do not consider that taxing these Australians more on their investments, including increasing their capital gains tax, and undermining the value of their own home and investment is a plan for jobs and growth.”
A “perfect” combination
The confirmation by the government that it wouldn’t touch negative gearing, combined with the superannuation tax concessions outlined in the Budget – not to mention the fact that in an historic first the Reserve Bank cut the official cash rate on the same day a federal government handed down a Budget – has prompted some to speculate that there could be an increase of funds into negatively geared property.
Before the 2016-2017 Budget announcement, two of Australia’s leading actuaries, Rice Warner chief executive Michael Rice and Mercer senior actuarial partner David Knox, warned in an interview with Fairfax Media that any crackdown on superannuation tax concessions without any changes to the negative gearing rules could result in more money going into property.
Poll: Should negative gearing be axed/modified?
- NO (83%, 75 Votes)
- YES (17%, 15 Votes)
Total Voters: 90
And that’s just what happened. Negative gearing wasn’t touched and the treasurer outlined the introduction of a $1.6 million cap on the amount retirees could transfer from their super accumulation into the even more generous tax settings of a retirement account, where earnings are tax free. Other superannuation measures outlined by the Treasurer include extending the 30% tax on concessional contributions to those earning over $250,000; a new $500,000 lifetime cap on non-concessional contributions; and reducing the annual cap on concessional contributions to $25,000.
Mr Rice and Mr Knox told Fairfax Media that if superannuation was made significantly less attractive to wealthy savers, they might find other investments, such as negatively geared property or share portfolios, more attractive.
However, Finance Minister Mathias Cormann said the government was confident there would be no spike in negative gearing in response to the Budget. “Negative gearing is mostly used by middle-income earners; people with more than $1.6 million in super have other ways of managing their wealth,” he said.
And Domain Group chief economist Andrew Wilson has come out and said the measures would have a “benign” effect, with no noticeable rush to the property market.
Property sector: Important driver of economic growth
The decision by the government to leave negative gearing and capital gains tax unchanged has been welcomed by many in the property industry.
The president of the Real Estate Institute of Australia (REIA), Neville Sanders said the 2016 Budget has recognised that the housing and construction sector have a role to play as the Australian economy transitions away from a decade long reliance on mining for growth.
“Investment in dwellings is forecast to grow at 8% in 2016-17 and peak in 2017-18 with a record number of completions,” he said. “The boost to infrastructure spending, the extension of small business concessions, modest tax cuts and the retention of the current arrangements for taxation of property investments will help ensure that the property sector remains an important driver of economic growth.
“We are pleased that the Treasurer in his Budget Speech reiterated that the government will not remove or limit negative gearing or change the capital gains tax, as this would increase the tax burden on Australians trying to provide a future for their families.
“This recognises that the current arrangements increase the supply of housing for our growing population, keep rents affordable and eases the burden on social housing. With forecasts of moderate growth, an improvement in the unemployment rate, inflation well within the RBA’s target zone, and [the] rate cut the Budget is good news for home owners and prospective buyers.”
Call for reform
At the opposite end of the spectrum is the Grattan Institute, which prior to the Budget said the government could save more than $5 billion per year through changes to negative gearing. It argued that losses from new housing investments should only be deducted from other investments, instead of from wage income. And chief executive John Daly had called on the government to abolish the income tax deduction and halve the 50% capital gains tax discount.
In its Hot Property: negative gearing and capital gains tax reform report, the Institute said that current negative gearing arrangements push up house prices and that restricting negative gearing to new properties makes it harder for young investors.
The report’s authors, Professor Daly and co-author Danielle Wood, have modelled the impact of their recommendation on house prices, rents and the rate of new housing development, estimating house prices would be 2% lower than otherwise. Under their suggested changes, people would no longer be able to write off losses from passive investments like housing against unrelated wage income.
Professor Daley said halving the 50% capital gains tax discount over 10 years would raise an estimated $3.7 billion a year, while abolishing the income tax deduction after a phase-out period of 10 years would tip another $1.6 billion into federal coffers. He went on to say the combined impact of the changes would reduce house prices by 2%, adding that the impact on rents and new development would be minimal. And he criticised Labor’s proposal to grandfather existing investments. “Grandfathering is great for grandfathers, but it’s very unfair to grandchildren. Essentially you create another free kick for older investors and you make it harder again for younger investors,” he said.
The Grattan Institute report was criticised by the prime minister, Malcolm Turnbull, who insisted reforms to negative gearing would have a devastating impact on the property market, with one third of buyers now investors.
While the government has closed the door on changing negative gearing, its decision is likely to inflame the election battle, with Labor continuing to spruik its plans to restrict negative gearing and halve the capital gains tax discount.
And the Reserve Bank has, perhaps inadvertently, added fuel to the fire by saying that curbing negative gearing could be a good thing for financial stability. As reported by the ABC, an RBA internal briefing note (obtained by the ABC under Freedom of Information laws) said: “Any change which discourages negative gearing may be good from a FS [financial stability] perspective.”
According to the ABC report, the memo (allegedly produced some time between March 2014 and April this year) said the interaction of negative gearing with the capital gains tax discount “may encourage chasing of capital gains …. as it can be purchased using higher leverage than shares for example”. In addition, it said there was a “potential increase in rents” from making negative gearing less attractive. It also hypothesised there could be a large-scale sale of negatively geared properties if changes were not grandfathered.
The government has dismissed the internal memo, the ABC reports, and the finance minister has said it’s not representative of official RBA policy.
Regardless, it continues to fan the flames of the negative gearing debate. It’s been described as the “biggest political and policy fight over negative gearing in three decades.” And while the government has retreated to its corner, Labor’s ready to come out punching.
Poll: Do you negatively gear a property?
- YES (71%, 32 Votes)
- NO (29%, 13 Votes)
Total Voters: 45