06/03/2018 - 22:14

Negative gearing changes could raise $1.7bn

06/03/2018 - 22:14

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Modelling by the Curtin University’s Australian Housing and Urban Research Institute has proposed a capped rental deduction for investors using negative gearing, arguing it will be a a budget saver that will have minimal impact on the less well off.

Property investors can deduct rental losses from their taxable incomes. Photo: Attila Csaszar

Modelling by the Curtin University’s Australian Housing and Urban Research Institute has proposed a capped rental deduction for investors using negative gearing, arguing it will be a a budget saver that will have minimal impact on the less well off.

Negative gearing is when an investor who owns a property earns less income from the rental value of that property than they pay on interest and upkeep, with the difference being tax deductible.

The system is based on the principle that a person should pay tax only on the net income they earn in a year, so investments making a loss are deducted.

AHURI’s report, The income tax treatment of housing assets: an assessment of proposed reform arrangements; said that abolition of negative gearing would increase tax revenue by around $3 billion per year.

A more measured model which limited deductions for wealthier investors proposed by AHURI would increase revenue about $1.7 billion per year, the report said.

Under the proposal, investors in the bottom 50 per cent of income earners would continue to receive a full deduction.

The next quartile of investors would earn a 50 per cent deduction, and the top quartile would get no reduction.

Bankwest Curtin Economics Centre director Alan Duncan said he believed the existing system of negative gearing benefitted high income earners.

That raised concerns about whether the policies exacerbate inequality, he said.

“There is concern among policymakers that reforms to negative gearing may have adverse impacts on ‘mum and dad’ investors,” Mr Duncan said.

“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 report used data suggesting the average income prior to deductions for negatively geared investors was $91,000, with average deductions, including other types, of around $11,000.

Rents

The impact on rents of such a move is not necessarily clear.

During the 2016 election campaign, the Labor opposition promised to significantly curtail negative gearing, while the incumbent coalition argued it would lower property prices and raise rents.

AHURI did not model those aspects of the policy in detail, although the report noted that negative gearing and other preferential tax treatments for property may be partially passed on to tenants through lower rents.

There was a further issue to note, according to the report.

Areas with high expected property price appreciation would be likely to attract higher income investors because they can effectively use a greater level of negative gearing.

Conversely, lower income investors would focus on lower value rental housing, which AHURI argued would make rents higher in relation to property values.

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