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James Mitchell
Negative gearing is one of a large number of loopholes and concessions in the tax system that detracts from its fairness and adds to its complexity without doing anything to increase the supply of housing, according to an industry figure.
Speaking at yesterday’s federal government tax summit in Canberra, Grattan Institute economist Saul Eslake told a roomful of government officials, including prime minister Julia Gillard and treasurer Wayne Swan, that the practice of negative gearing transferred $4.5 billion per year from ordinary tax payers to affluent ones.
Speaking to Real Estate Business this morning, Mr Eslake said negative gearing results in a loss of revenue of at least $4.5 billion a year, enabling people who are affluent enough to be able to absorb paying more in interest than they earn in rent, both to defer and to reduce tax.
“If there was clear evidence that this loss of revenue had a beneficial effect in terms of increasing the supply of housing, particularly housing at affordable rents, then it might be a price worth paying,” Mr Eslake said.
“But since more than 90 per cent of negatively geared investors buy established properties rather than new ones, and since despite Australia being one of the few countries in the world which allows negative gearing in the way that we do, rental vacancy rates are much lower than in countries which don’t allow negative gearing,” he said.
“In my view it is impossible to conclude that negative gearing serves any purpose than to allow wealthily affluent tax payers to defer and reduce tax.”
Mr Eslake’s comments, if taken seriously by the federal government, have serious implications for existing and future property investors in Australia.
Many investors rely on the windfalls of negative gearing, the practice that allows investors to write off losses made on rental properties against other income.
The rule was briefly suspended under the Hawke government, but popular beliefs that the measure caused a surge in rents are unfounded, Mr Eslake said.
“If you look at the evidence from the consumer price index from that period, that’s simply not true,” Mr Eslake said.
“Rents did go up in Sydney and Perth, but that’s because vacancy rates were less than two per cent at that time. In other cities rent inflation either didn’t change or, in Melbourne, went down,” he said.
“If it were true that the abolition of negative gearing would lead to landlords selling their properties on a large scale, and there’s no evidence that they did that in 1986-88 either, then the result would actually be that the price of investment properties would fall, homebuyers would be able to buy them and there wouldn’t be any upward pressure on rental markets, so I don’t think that common assertion has any merit.”
Mr Eslake added that he is supportive of abolishing negative gearing for all investors, not just those who invest in property.
- <p>Negative gearing is the practice of renting out a house for less than the cost of ownership. In other words the owner is subsidising the tenant. The tax position is that the owner gets a rebate of (typically) 30c for every dollar of subsidy to the tenant. Mr Eslake does have a point about the cost to government revenue but there are a lot of tenants (read voters) who might see things differently.</p>0
- <p>First mistake made by this economist is assuming all property investors are 'affluent'. 95% of property investors own one property which they plan on using for their retirement. University based economists may have a tenure and fantastic superannuation to fund their retirement, but the average Australian is not so fortunate.</p>0
- <p>Once again economists miss the big picture when looking at a perceived unfairness in the system. We are forever told that we must provide to look after ourselves in retirement and realistically the only way the average bod can hope to do this is by accumulating property. You don't have to be wealthy to do this you just have to go without a lot of other things in order to reach this goal. Negative gearing is one help in acheiving this goal but it also takes a lot of sacrifice in other ways which many people are not prepared to do and then complain about fairness. The government should also scrap capital gains tax altogether for people on low incomes as it takes away the incentive to try to accumulate - and double it on people with really high incomes. There is another can of worms.</p>0
- <p>Mr Eslake's comments taken on their own show signs of his too narrow field of knowledge and experience. If this topic is to be considered, we will need to look at the bigger picture. Such questions as redistribution of wealth, transition effects and timing, whether investors on incomes, say, below $100,000 pa should be allowed to continue to negative gear (otherwise they be join the ranks of Australia's poor. Should any change in policy be combined with more moves to stimulate new house building, How about retaining negative gearing for lower income families building new properties? I believe the time has passed for ad hoc policy changes that give the perception to the voter that little thought has gone into wider implications. We need now to demonstrate clearly that policy changes as far reaching as this, are well thought out and will produce actual benefits for most people, particularly on low to medium incomes. Otherwise we will just make social issues worse in our lucky country.</p>0
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