Is negative gearing an ‘evil tax loophole’?
A big four auditing firm has addressed calls for an end to two of Australia’s most controversial tax mechanisms.
Ending negative gearing will not deliver relief for struggling first homebuyers, according to Deloitte’s second Shedding light on the debate: Mythbusting tax reform report.
Addressing the question of whether negative gearing should be wound up, the report denied the tax benefit’s influence on Australia’s record-high house prices.
“Let’s start with a key perspective: interest rates have a far larger impact on house prices than taxes. The main reason why housing prices are through the roof is because mortgage rates have never been lower. And, among tax factors, it is the favourable treatment of capital gains that is the key culprit – not negative gearing,” Deloitte said.
Negative gearing did have an impact on house prices when it was first introduced, but that change has since been absorbed by the market, to the point where it is not credible to blame the policy for current market trends.
“Negative gearing isn’t evil, and it isn’t a loophole in the tax system. It simply allows taxpayers to claim a cost of earning their income. That’s a feature of most tax systems around the world, and a longstanding element of ours too,” Deloitte said.
However, if the government were to ditch negative gearing, the change would be unlikely to have any substantial impact on rent prices – an argument often cited by proponents of the mechanism.
“Tax settings can only change housing rents if they sustainably change the supply or demand for homes. And, as long as investors are making their properties available for rent, then there will be little overall change in the number of homes available to live in (supply) or the number of people looking for a place to live (demand),” the report said.
The report did reserve criticism for the current rate of capital gains discounts, stating that while the policy is sound, the current rate has overstepped the mark.
“The basic idea of a discount on the taxation of capital gains is very much right. There should be more generous treatment of capital gains than of ordinary income, because that helps to encourage savings (and hence the prosperity of Australia and Australians), and because the greater time elapsed between earning income and earning a capital gain means it is important to allow for inflation in the meantime,” Deloitte stated.
“But we overdid it. We gave really big incentives for some taxpayers (such as high income earners) to earn capital gains, versus little incentive for others (such as companies). And the discounts adopted back in 1999 assumed that inflation would be higher than it has been – meaning they've been too generous.”
One option put on the table by Deloitte is to reduce the current individual capital gains tax discount.
“So the capital gains discount is no longer meeting its policy objectives. That not only comes at a cost to taxpayers, but to the economy as well. One possible option would be to reduce the current 50 per cent discount for individuals to 33.33 per cent.”
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