Proposed Reforms To Negative Gearing

Reforming negative gearing and capital gains tax (CGT) could save the federal government more than $1.7bn annually without hurting mum and dad investors, according to new research commissioned by the Australian Housing and Urban Research Institute (AHURI).

Conducted by researchers from Curtin University and Griffith University, the research sought to explore an approach to reform that would have the least impact on investors with the lowest incomes. Cgt

“Current negative gearing policies are heavily skewed towards high income earners, raising concerns about the extent to which these policies exacerbate income and wealth inequality in Australia,” said report co-author Alan Duncan from Curtin University.

“There is concern among policymakers that reforms to negative gearing may have adverse impacts on mum and dad investors.

“Our modelling suggests that a progressive rental deduction for investors cushions less wealthy mum and dad investors from significant drops in tax savings, and may be an appropriate policy option.”

The reform model proposes that investors in the bottom 50% of the income distribution continue to receive 100% in rental deductions.

Those in the 51st–75th percentiles should receive a lower 50% rental deduction, and those in the 76th-100th percentiles (who are classified as “sophisticated” investors) should receive zero rental deductions.

Duncan said such reforms would save the federal government more than $1.7bn from the annual $3.04bn cost of negative gearing deductions, a 57.3% saving.

The AHURI report also noted that CGT discounts are heavily weighted towards those who’re more affluent. 

These investors, on average, own a property portfolio worth more than $730,000 and have a tax assessable income of $82,000, compared to $31,000 for renters who don’t own any properties.

Report co-author Rachel Ong ViforJ from Curtin University said modelling indicates that reducing CGT exemptions means high income investors will have to pay more tax than lower income investors.

However, the tax amount will represent a lower proportion of their take home income.

“The reform would be progressive in nature, reducing negative gearing tax savings by greater margins as tax assessable income increases,” ViforJ said.

“It remains that any CGT policy reform will need to be carefully communicated to avoid a misconception that the changes will have a proportionate impact on rental investors’ net incomes.”

Reducing negative gearing benefits would impact rental supply

Not all analysts are convinced that AHURI’s proposals will have the desired positive impact on the system.

Michael Yardney, director of Metropole Property Strategists, said AHURI’s research is “just another attempt to stimulate debate on negative gearing and encourage the government to tax entrepreneurial Australians, from a left of centre organisation that doesn’t really understand how property investors think.”

“In my opinion, any reduction in negative gearing benefits would significantly reduce rental investment in both new and existing properties and would worsen rental affordability through a reduced supply of investment housing,” Yardney told Your Investment Property. Ahuri

“A reduced rental supply means lower rental vacancies and increased rents, which is the opposite effect of what AHURI is looking for.”

With more than 30% of Australians living in rental accommodations, it’s clear that property investors provide an essential service to millions of people.

“Property investors save a deposit, buy a property, commit to a loan for 25 or 30 years and provide accommodation for others in our community.

In return we expect to get a reasonable return on our investment risk, just like other business people do,” Yardney said.

“We know that the rent won’t cover our expenses, but accept that certain tax benefits plus the long term capital growth will make up for this. Sometimes it does, and sometimes it doesn’t.

“Property investment is a real and effective method for bolstering the savings of middle Australia, at the same time providing accommodation for those who the government can’t or won’t help and should remain as is.”


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'Proposed Reforms To Negative Gearing' have 2 comments


    March 18, 2018 Jeff

    There is clearly very little if any understanding of property investment or even reality for that matter.
    How anyone with a tax accessible income of $82,000 and a property portfolio of over $730,000 can be considered affluent is beyond me.
    The average full time Australian annual wages / salary is around $85,000.
    For a property portfolio to be “negatively” geared it would need to be making a loss which would further reduce this tax accessible $85,000 and also mean that the property is actually owned mostly by the bank not the supposed affluent investor.
    To me this sounds just like your typical “mum and dad” investor who they don’t want to affect.
    Unless an investment property is sold there is no capital gains tax. You don’t buy investment properties to sell them. I have absolutely no intention of ever selling any of my well chosen investment properties. They can’t be an investment if you no longer own them !
    Capital gains tax affects developers and flippers more so than buy and hold investors (until they eventually sell).
    Negative gearing is a term used to describe (in property investment) what is standard tax deductions in all forms of business. If I had an equipment hire business and I borrowed money to buy all new equipment to rent out , the interest would be tax deductible , the equipment would be able to be depreciated at a much faster rate than a house , and all of the related expenses involved in the running of the business (even including the finance expenses of purchasing work vehicles) would be tax deductible.
    Why would anyone expect someone operating a property hire business not to receive the exact same tax deductions.
    If the tax deductions are taken away and the capital gains discounts are taken away there would be no point in the long term investment in properties.
    There has to be profit in a property hire business or it will go broke just like any other business – unless the user pays by increasing the rent !
    Two really good ideas that could help keep rents more affordable could be tax deductions and capital gains tax discounts – oh hang on a minute – I think that has been tried before and it upsets everyone.
    Maybe we could all stop thinking of these tax deductions as benefiting the greedy affluent people who invest in property hire businesses and see them for what the government actually intended them to be.


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