Middle Australia has embraced property investment so eagerly that average workers are using real estate tax breaks more widely than ever, escalating the political risks for Labor as it considers a crackdown on concessions worth $8 billion a year.
Joe Hockey is hitting back at Labor in the growing fight over tax reform by using official figures to show that police officers and train drivers are using negative gearing more widely than some of the nation’s wealthiest professionals.
In his strongest warning yet against changing the tax breaks, the Treasurer told The Weekend Australian there was “no merit” to amending the rules on negative gearing for residential property.
Australia’s thirst for real estate was confirmed again yesterday when the Reserve Bank revealed that investors spent $6bn on the property market in June, one of the largest monthly figures on record.
Strong competition at auctions is also driving prices higher, with analysts at CoreLogic RP Data estimating that Melbourne prices increased by 4.8 per cent in June, the city’s biggest jump since at least 1996, and Sydney prices increased by 3.2 per cent.
The political clash on tax reform follows Labor’s formal decision last weekend to consider scaling back the concessions, giving Treasury spokesman Chris Bowen clear authority to target the rules to help balance the federal budget.
Labor’s decision risks antagonising voters who are turning to the property market to build up their wealth, with figures from the Australian Taxation Office showing thousands of ordinary households rely on negative gearing.
As a proportion of workers in various occupations, more police officers use negative gearing than tax accountants and management consultants, according to the ATO statistics analysed by the Treasurer’s advisers.
“Negative gearing is a way for people on medium incomes to get into the property market,” Mr Hockey told The Weekend Australian. “Many hard-working Australians have invested money in real estate … to give themselves some financial security.”
While the government is preparing to outline tax reform options in a white paper before the next election, Mr Hockey made it clear negative gearing would not be one of the targets.
“The tax white paper will consider the tax system overall, but we can’t see any merit in changing negative gearing on residential real estate,” he said.
The government analysis shows that 22.6 per cent of police use negative gearing, a bigger proportion than the 17.3 per cent of tax accountants, 16.7 per cent of management consultants and 11.9 per cent of university lecturers. It also finds that 19.2 per cent of ambulance officers and paramedics use negative gearing compared with 17.4 per cent of financial advisers and 15.6 per cent of economists.
And it concludes that 18.9 per cent of train and tram drivers use negative gearing compared with 17.2 per cent of solicitors and 18.6 per cent of real estate agents.
But Labor questions the reliance on the ATO data to suggest that negative gearing is being used so widely, noting that figures from the Reserve Bank show that 80 per cent of total investor housing debt is held by Australians in the top 40 per cent by income.
Negative gearing allows tax deductions on the mortgage and other expenses of an investment property, cutting a tax bill. The taxpayer also gets the benefit of a 50 per cent discount on capital gains tax on the increase in the value of the property.
The RBA suggested two weeks ago that the rules be amended because Australia’s treatment of property investors was at the “more generous end of the range” compared with other countries.
“The bank believes that there is a case for reviewing negative gearing, but not in isolation,” it said in its submission to a parliamentary inquiry into home ownership. “Its interaction with other aspects of the tax system should be taken into account.”
Labor is yet to decide its policy but speakers at its national conference urged a cut to the tax breaks on the grounds that wealthier Australians were getting the biggest benefits.
Mr Bowen has laid down two principles in any reform: that negative gearing would not be abolished and that any changes would limit the impact on existing investors by “grandfathering”.
Those principles would limit the budget saving and focus the change on future investors, but could help Labor minimise the backlash while allowing it to portray its policy as a fair reform that targets those on top incomes.
Negative gearing reduces government revenue by $3.7bn a year, according to estimates by the National Centre for Social and Economic Modelling. The capital gains tax discount is estimated to sacrifice another $4bn in annual revenue.
The Australia Institute and NATSEM estimate that 34.1 per cent of the financial gain from negative gearing goes to the top 10 per cent of households by income and 15.7 per cent goes to the next 10 per cent.
This article first appeared in The Australian.