Fresh from its success in proposing changes to the part pension for wealthy retirees, the Australian Council of Social Service has put forward another policy proposal to save the budget by winding back negative gearing tax breaks.
Social Services Minister Scott Morrison gave the previous ACOSS proposal on the pension a reasonably warm welcome, saying it was worth exploring.
But Tony Abbott was surprisingly swift to stamp out any discussion whatsoever on negative gearing.
Asked late on Thursday whether he would rule out changes, he replied with just one word: “Yes.”
Even though the Murray inquiry concluded that negative gearing and capital gains concessions pose a systemic risk, and the recent tax discussion paper found they cause distortions in the economy, the government has no appetite for reform.
Under the ACOSS proposal, losses on investment properties could no longer be claimed against wages, and concessions on capital gains would be wound back, saving $1 billion a year.
The starting point of the report is that the tax system encourages people to borrow more than they otherwise would to speculate on property, contributing to higher housing prices and reducing affordability.
“It’s important that the Government doesn’t rule anything out, no matter how difficult. For too long negative gearing has been left in the ‘too hard’ basket,” ACOSS chief executive Dr Cassandra Goldie said in an interview with Business Spectator before the PM’s remarks.
It’s a shame that a 27-page report couldn’t survive a day in the 24-hour news cycle and a jumpy government.
Goldie says the tax schemes encourage people to invest with tax avoidance in mind, rather than to achieve the best return at the least risk.
Taxpayers with rental income
Source: Saul Eslake
There is also a heavy cost to the budget. Two-thirds of rental property investors, or 1.2 million people, reported tax-deductible losses of $14bn in 2011, the last year for which tax statistics are available.
Loss-making landlords as percentage of total
Source: Saul Eslake
Goldie says the two tax breaks should be “front and centre” of the tax reform debate and says myths surrounding them should be dispelled.
Negative gearing and the tax break on capital gains don’t improve affordability, as the housing lobby argues, since more than 90 per cent of investor borrowing is for existing properties rather than new housing. That bids up the price of existing assets and contributes to the house price boom in Sydney.
Goldie also disputes the idea that the benefits of negative gearing mainly go to mum and dad investors on middle incomes. The tax office statistics usually quoted focus on taxable income which includes deductions rather than total income, while people who use private trusts are listed as receiving trust income rather than rental income.
"The reality is that over half of geared housing investors are in the top 10 per cent of personal taxpayers (earning over $100,000 in 2011) and 30 per cent earn more than $500,000," she says.
The report finds a fundamental mismatch between income and deductions, since CGT is only levied on the sale of the asset, while losses made on property investment are deducted every year from other income, including wages.
The key proposal to resolve this mismatch is to adopt the system used in the US, Canada and other countries where negative gearing is restricted. Expenses relating to the investment are quarantined so that they can only be deducted against income from the same type of investment -- not wages.
When the tax discussion paper came out on March 30, the government initially said all aspects of the tax system would be up for review. Yet it has already put the kibosh on a number of the issues raised in the paper, leaving almost nothing open for debate.
“The government has asked for options and solutions and we’ve given them well-thought out proposals that go to the heart of the current housing affordability crisis in Australia,” Goldie says.
Joe Hockey said he wanted a “fair dinkum” conversation about the tax system. Some form of restriction on negative gearing would reasonably form part of that debate, but the government is not prepared to listen.