One of the key architects of the capital gains tax regime that the Reserve Bank now says is fuelling negatively geared property investment has disputed claims the practice is pushing up house prices and warned against making changes to the current system.
Former federal treasurer Peter Costello, who now chairs the $117 billion Future Fund, has also bought into the debate about the GST, calling for the base of the tax to be broadened but warning that an increase in the rate would only lead to more wasteful government spending.
Mr Costello was treasurer in the Howard government in 1999 when it decided to halve the rate of capital gains tax for investments held for more than year.
The RBA said in its submission to a parliamentary inquiry on home ownership on Wednesday that the change had made borrowing for property investment more attractive than other asset classes. It called for negative gearing — the practice of deducting losses from interest repayments and other costs — to be reviewed.
Mr Costello said yesterday it would be difficult to carve out an exemption for property investment from the current tax regime.
“Negative gearing isn’t causing property prices to go up; what is causing that is interest rates,” he told a Women in Banking and Finance luncheon in Melbourne.
“When interest rates fall, property prices have to go up ... The quickest way to bring down property prices is to double the interest rate. I don’t think we should change the rule that allows you to deduct borrowing costs for any business, including the business of rentals if you want to go into that business.
“And I don’t think that is the answer to property prices if you think there is a problem.’’
Joe Hockey also shrugged off the RBA’s call, insisting yesterday that middle-income earners were the major beneficiaries of the tax break despite a Treasury paper last year noting that high-income earners had been the main beneficiary of the capital gains tax concession.
The RBA has called the investor-led surge in house prices “unbalanced” and governor Glenn Stevens has described Sydney’s market as “crazy”.
There have also been warnings that the major banks are becoming dangerously exposed to housing.
The Australian Prudential Regulation Authority’s international capital comparison study released on Monday warned that Australia’s big four banks needed to bolster their overall capital by $24bn in order to be “unquestionably strong”.
About half of that additional capital would be needed to cover changes to the risk weights for mortgages.
Mr Costello said he remained comfortable with the local banks’ exposure to the property market.
“The default rate in Australia is very low by international standards,” he said. “The one thing your little Aussie battler will do is hold onto their house. Sell the dog, the kids, but hold onto the house, which means the banks have not been the subject of big defaults.
“Do I see waves of household defaults? No I don’t actually. The banks are probably going to be asked to put in more capital and their risk weighting will be increased. That won’t turn the banks from being big profit-makers to loss-makers.’’
In its submission to the inquiry, the Australian Bankers Association called for more scrutiny of the impact of negative gearing on the housing market, and said there was a need for “greater transparency and certainty’’ on the issue.
While Treasury remained silent on negative gearing, its submission urged state governments to rethink stamp duty, which it said was one of the most distortive taxes in Australia.
It estimated that 70 per cent of money raised through stamp duties represented “welfare loss” and said buyers and sellers were forgoing mutually beneficial transactions in order to avoid paying it.
The Treasurer also called on the states and territories this week to have a “sensible, mature debate about long-term tax reform” that could include dropping their opposition to increasing the GST.
Mr Costello said he continued to support a broadening of the base of the tax after the Howard government had failed in its attempt to levy the GST on food.
“My view is that I always wanted a broader base,” he said. “It is a great reform. We have got 85 per cent (of the economy). We would have got 95 per cent if we had a broader base.
“The bigger question to me is: don’t ask me about broadening the base, tell me where you are going to spend the money. Because if you broaden the base and spend the money, I don’t think that is going to help anyone.’’
Mr Costello said the money should be used to cut income taxes. He also said he was opposed to increasing the rate of the GST from the current 10 per cent level.
“I just think the government would waste it,” he said.
“Let’s suppose you put it up by 2.5 per cent and raised another $10bn, they would probably just waste it.”
Additional reporting: Kylar Loussikian.
This article first appeared in The Australian Business Review.