The nation’s wealthiest families are collecting the lion’s share of an $8 billion tax break on negative gearing, according to research that escalates the political fight over how to balance the federal budget.
Workers on average incomes gain a small share of the tax break by value, even though they make up a large number of those claiming the benefit, revealing the scope to make savings by targeting the changes at the biggest investors.
But as ordinary taxpayers increasingly rely on property to build their savings, the new figures highlight the political risk in extracting too many savings from middle Australia.
More than half the benefits from negative gearing are flowing to the richest 10 per cent of households, in a dramatic trend that counters government claims that “average” workers are the main beneficiaries of the divisive concession on property investment.
About $4.2bn of the annual tax break goes to households earning more than $206,000 a year, putting them in the top 10 per cent of the country by income.
The findings by the Australia Institute come with a call for political action to tighten the rules for negative gearing by applying it to new buildings only or limiting it to the first 10 years of an investment.
The conclusions also build a case for scrapping a discount for taxpayers on the capital gains tax they pay on investment properties, which currently ensures that only 50 per cent of the gain is taxed. “A good tax is efficient and equitable. Negative gearing and the CGT discount fail on both those criteria,” the Australia Institute says in a report to be issued today based on data from the National Centre for Social and Economic Modelling.
“These two tax policies are highly inefficient as they distort the residential housing market by encouraging speculation. The benefits also overwhelmingly flow to high income households. These are taxes that are ripe for reform.”
The findings come after Labor Treasury spokesman Chris Bowen said it would be “irresponsible” to go to the next election ruling out changes to negative gearing, sparking concerns within his party about a voter backlash.
Tony Abbott has ruled out changes to negative gearing while Joe Hockey warned last week that any change needed to be “properly considered” because it could shrink investment and push up rents. Social Services Minister Scott Morrison has declared that Australians should be encouraged to take care of themselves by investing, saying net rental losses are claimed by 54,000 teachers, 36,000 nurses and tens of thousands of other ordinary workers.
While it is under pressure to find new ways to cut the deficit, the government is relying on figures from the Property Council of Australia showing that more than 1.2 million taxpayers claimed a net rental loss and that 883,000 of them earned about $80,000 a year or less.
When the Australia Institute analysed the concession by the value of the tax deductions, however, it found that average workers collected modest amounts compared with the benefits flowing to the relatively wealthy.
Negative gearing allows a taxpayer to claim tax deductions on the mortgage and other expenses of an investment property, cutting his or her tax bill while paying off the loan and making a capital gain. The taxpayer also gets the benefit of the CGT discount on the increase in the value of the property.
NATSEM estimates that negative gearing reduces revenue by $3.7bn a year. Of that, 34.1 per cent of the financial gain goes to the top 10 per cent of households and 15.7 per cent goes to the next 10 per cent. The CGT discount is estimated to sacrifice $4bn in annual revenue. Of that, 73.2 per cent goes to the top 10 per cent of households.
Australia Institute researcher Matt Grudnoff said the figures showed reforms could be made without hurting the vulnerable. The Australia Institute estimates that ending the CGT discount, restricting negative gearing to new housing and limiting negative gearing to the first 10 years of an investment would raise $7.4bn a year. The top 10 per cent of households would pay $4.1bn of that.
Negative gearing, as well as a commitment to frugal living, has helped Lisa Curtin build a mortgage-free property portfolio that she hopes will allow her to retire early. Ms Curtin earns $75,000-a-year in her day job yet in the past 11 years she has bought seven investment properties near her home in Rockingham, 47km south of Perth. She lives in one of just three federal Labor seats in WA — the marginal electorate of Brand held by Gary Gray.
Ms Curtin is proud to say she began buying her investment properties while raising her children as a single parent. She now offers her tips to other women on a blog and a Facebook page. She credits a disciplined approach.
“I tell people don’t go in for a new car, you have to make sacrifices,” she said.
Ms Curtin acknowledges that no amount of careful budgeting or help from family would have been enough had she been unable to offset losses through negative gearing.
“I could not have done it without negative gearing, that is a fact,” Ms Curtin, 46, said yesterday.
This article first appeared in The Australian Business Review.