Instead of removing negative gearing and reducing capital gains tax discounts outright, a new report has suggested to phase in these reforms over a 10 year time frame to protect investors as well as the government.
The findings are made in the final report of the Australian Housing and Urban Research Institute’s (AHURI) inquiry into pathways to housing tax reform in Australia, which was undertaken by researchers from the University of Tasmania, the University of NSW, the University of Sydney and Curtin University.
The researchers argue that the “lack of access to and secure tenure within affordable housing” are “significant problems in Australia” that are being exacerbated by local, state and national taxes currently applied to housing.
The 62-page report reads: “There is increasing evidence that tax policy settings are contributing to the problem, exacerbating intergenerational inequality, inflated housing prices and reduced mobility. In recent years, there has been no shortage of credible proposals for change...
“Although there is no uniform agreement on how best to progress them, there is considerable academic and policy consensus that a range of tax-related reforms can and should be made to promote housing affordability. But despite the consensus, reforms to date have been piecemeal and ineffective, and attempts at forging a national reform program… have had limited follow-through.
“Again, there is general agreement on the reasons for this: that it is due to the influence of entrenched commercial interests on the political process, as well as the difficulties of coordinating reform across the federation and perceptions that policy change in this area will produce significant electoral backlash and therefore represents an untenable political risk.”
By utilising a political economy approach and analysing tax policy reforms and three supporting projects (on income tax treatment of housing assets; asset portfolio decisions of Australian households; and pathways to state housing and land tax reform), the researchers proposed a co-ordinated, staged program of housing tax reform that could reportedly have “minimal immediate impact on government or household budgets but will, over time, gradually shift the distribution of property taxes so that owners of higher-value properties are paying proportionally more”.
The researchers concluded that the following package of reforms could “progress the efficiency, equity and sustainability of housing tax policy, and also present viable political pathways to achieving these outcomes”:
The academics argue that, in the long term, establishing a broad-based property tax would be more efficient and fairer than state governments continuing to rely on stamp duty.
The report therefore proposes a multistage process whereby a short-term simplification of stamp duty evolves through a medium term (3–5 years) increase in stamp duties for investors in higher-value properties to a long-term (5–20 years) shift to a broad-based property tax.
According to the researchers, the above measures would save both investors and the government money.
Indeed, the modelling outlines that the suggested $20,000 cap on housing-related tax deductions would only affect 6.3 per cent of all property investors (1.1 per cent of all taxpayers) in the first year, and that even after a decade, only 28.5 per cent of high-income property investors would pay more tax (while most “mum-and-dad” investors would pay no more tax than they do currently).
The report suggests that such a reform would save the government more than $1.7 billion from the annual $3.04 billion cost of negative gearing deductions each year (57.3 per cent less).
The lead author of the research, Professor Richard Eccleston from the University of Tasmania, said: “One of our key findings is that gradually reducing the generosity of capital gains tax and negative gearing provisions over a decade-long time frame would result in only a modest impact on the after-tax return from housing investments for most ‘mum-and-dad’ investors [individual investors with lower to moderate incomes and property values with only one investment property], with the exact figures depending on wage income, interest rates and capital growth.”
The report emphasised that all proposed reforms should be preceded by an appropriate period of community consultation and engagement highlighting the broader benefits of the reform.