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‘Step in the right direction’: Experts say negative gearing cap would help ease housing pressures

A partial winding back of negative gearing tax breaks would help ease housing pressures, according to leading experts, who have welcomed reports the federal government is mulling reforms.

Sep 26, 2024, updated Sep 26, 2024

Prime Minister Anthony Albanese faced questions on Wednesday about whether Labor will cap negative gearing after a story in Nine Newspapers revealed the Treasury is modelling the policy.

Options being mulled include restricting the tax breaks rather than phasing them out totally, while the reports also claim that a paring back of capital gains discounts may also be considered.

“I’m sure the public service are looking at policy ideas,” Albanese told reporters on Wednesday.

“That’s because we value them. But we have our housing policy. It’s out there for all to see.”

Leading economist Saul Eslake, who has long argued negative gearing and capital gains tax discounts contribute to higher property prices, said a cap would be a “step in the right direction”.

“I’m not one to let the perfect be the enemy of the good,” he said.

negative gearing cap

Prime Minister Anthony Albanese has not ruled out negative gearing reforms. Photo: AAP. Photo: Lukas Coch/AAP

Eslake explained that at the end of the 2021-22 financial year, 29 per cent of property investors had more than one property in their portfolios, meaning that a cap could make a difference.

“The tax figures show someone in the top tax bracket is three times as likely to be a negatively geared landlord as someone who isn’t,” he said.

“It is something that high-income taxpayers disproportionately use.”

Australia Institute senior research fellow David Richardson also welcomed the reports, saying a cap could have a significant effect on housing, particularly for the wealthiest property investors.

Grandfathering the reforms also means it would not impact millions of investors who have already purchased investment properties.

“It would modify the worst of the distributional impacts [on wealth inequality],” Richardson said.

Negative gearing reforms

Negative gearing allows Australians to offset investment losses against their taxable incomes, helping people to borrow more money to purchase two, three or even dozens of properties.

The government has not adopted a new policy position on negative gearing yet and so the details of any proposal it might take to the election are unknown.

But Albanese has been under pressure to take action to address the housing crisis, particularly from the Greens, who back tax reform and are blocking Labor’s housing agenda in the Senate.

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Public costings requested by the Greens earlier this year showed the combined cost of negative gearing and capital gains tax breaks will balloon to more than $22 billion over the next decade.

Labor has backed negative gearing reforms in the past, but dumped the policy after a 2019 election loss amid argument about how much the changes undermined its election hopes.

That policy, which was first announced before the 2016 election in which Labor won seats in Parliament, would have ended negative gearing for existing homes.

It also backed lowering capital gains tax discounts, which is an important detail because evidence shows that the combination of generous capital gains tax discounts and negative gearing is the driver of market distortions that raise prices.

Previous Grattan research has emphasised the role of CGT discounts, saying reducing them would be “the most direct way to reduce the incentive for inefficient investment activity”.

The think tank has backed halving CGT discounts and preventing rental losses from being offset against wage and salary income, which could lift the federal budget by billions of dollars a year.

Eslake said that rates of negative gearing soared after the Howard government raised CGT discounts to 50 per cent, underscoring the importance of reforms to both tax breaks.

“It was the change to the CGT regime in 1999 that turbo charged negative gearing,” he said.

Real Estate Institute of Australia president Leanne Pilkington said such changes would cost renters.

“Current speculation regarding abolition of negative gearing would put a halt to this just as we are seeing a pick up in the proportion of housing loans going to investors, back to the levels of a decade ago. Numerous studies have shown that such action would lead to additional rent increases of between 7 and 12 per cent.”

Shadow treasurer Angus Taylor described the floated changes as “new taxes”.

“In a cost-of-living crisis where housing is right at the heart of that cost-of-living crisis, the idea that you would solve that cost-of-living crisis by imposing new taxes is only something that this Prime Minister and this Treasurer could dream up,” Taylor said.

AAP

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