By Nick Chapman, independent NSW candidate for the Australian Senate.
Expensive Housing
Housing in Australia is expensive. Sydney was recently ranked in January by Demographia as the 2nd most expensive in the world, in relation to income.
Expensive housing is not just a financial issue, it is also a social issue. Young people and the less well-off are struggling to buy a home and homeowners are spending huge amounts of money on mortgages. Australia’s outsized housing market diverts investor money away from other areas. Huge mortgages also pressures people to prioritise earning money over their family and social life.
I believe the current trajectory of housing affordability will entrench a wealth gap between poor and rich, and young and old.
One of the drivers of increasing home prices are the generous tax incentives available to investors – particularly negative gearing and the Capital Gains Tax (CGT) discount.
I will explain these two incentives and my proposal for housing investment to make them fairer. Just to be clear, these proposals are specifically for housing investment.
Negative Gearing
Negative gearing essentially allows investors to make a loss and claim a tax deduction for this loss against their income tax. If expenses such as loan interest exceed rental income, the difference can be used to reduce income tax paid. It is available for various investments, including shares, but is most commonly associated with housing investment.
This is particularly beneficial for high-income earners as it reduces their tax. It was once ‘spruiked’ to me by an accountant as only worthwhile if you earn over $80,000.
Warning, we will start to get a somewhat technical here!
Capital Gains Tax
But it is the combination with the CGT discount where investors really benefit.
If you sell the home you live in you pay no CGT, ie, the profit is tax-free. I support this.
However, CGT is due (at your income rate) for investment profits. But you pay only half the rate if you hold the investment for more than 12 months. So for a high-income earner you would pay 24.5% tax on your investment property rather than 47%.
And there are even ways to get around the CGT altogether for investors.
When an investor buys a property they can move into it immediately for 6 months, qualifying it as their Principal Place of Residence (PPOR). They can then rent it out for another 6 years and sell it for a profit and pay no CGT. The ATO does have eligibility rules for this – there is also plenty of free and paid advice on how to qualify for those rules.
Ultimately, the combination of these two tax incentives results in speculative investment in property. The significant tax savings, especially to high-income earners, means property is invested in like growth shares – there is little intention of making a positive yield, ie, making an ongoing profit from rent, only a bet on values increasing in the future.
This drives up prices in a distorted manner that is not linked to wage growth, making it harder for non-investors to afford property.
Taxpayers are also indirectly funding investors through these tax incentives.
While negative gearing deserves scrutiny, I think the CGT discount is where the big dollars are.
My proposals in this area are as follows:
CGT Discount Proposal
The waiting period for CGT discount for property should be extended from the current 1 year to somewhere between 3 and 5 years.
I believe a discount is warranted to encourage people to invest and take risk, and to deal with inflation. However, 12 months is too short a time-frame, encouraging short-term speculation which drives prices up.
This would be implemented gradually by extending the waiting period by one year annually until we reached the desired waiting period.
Following the waiting period being extended and the impact to the housing market assessed, we should also consider reducing the discount from 50% to 25% over a 3 year period.
Principal Place of Residence Loophole
The ability to have a home classed as your place of residence when you don’t live in it needs to be tightened up or possibly abolished. You should not be allowed to make a tax-free profit on an investment property.
The current policy is open to exploitation and there is advice out there to help you.
Here’s some examples of advice from a Domain article: “You can live in your property, then let someone else live in the same property, but still claim it as your principal place of residence (PPOR) for up to six years” and “The obvious big plus is that if you own two properties, the one with the most capital gain can be claimed as your PPOR. Talk about a good idea!”
This needs to be addressed.
Neutral Gearing Proposal
According to the Australia Institute the only OECD countries that allow full deduction of interest payments are Australia, Japan, and New Zealand.
The deduction essentially allows property that makes a negative rental income to still be viewed as viable. Again, it encourages speculative investment for capital gain.
I propose that expenses, including interest, only be deducted against the investment income. Essentially, your investment loss claims would be quarantined to your investment, it could not be claimed against other income.
This would be neutral gearing rather than negative gearing.
This would be phased in over 4 years by dropping deductibility in excess of investment income 25% annually until it reaches 0%.
A phase in of this policy could avoid any dramatic impact to the property market, and also allow for interpretation of the effects of the policy.
Finally…
I suggest phased changes to avoid any sudden impact to the housing market. This phased approach would also help negate the need for “grandfathering” of current arrangements as is proposed by Labor. Grandfathering allows those investments benefitting from current arrangements to continue to do so indefinitely, while new investments would be made under the new rules. Grandfathering adds unnecessary complexity to the tax system and entrenches the wealth divide, particularly between young and old.
My proposal would help to reduce speculative demand in the property market and also increase federal tax revenue. It would help to reduce price growth in the property market giving the average person more chance of buying their own home and reduce our nations unhealthy obsession with property.
(The below 3 examples compares current incentives versus my proposal).
What are your thoughts on housing affordability?
About Nick Chapman: Nick is a consultant whose experience includes working in Canada and the UK. Nick values freedom, respect, integrity and innovation and believes in policies that benefit society as a whole. Nick stands for:
• A fair economy for a healthy society
• An independent check on government power
• Individual freedom and individual responsibility
• Political transparency
Find out more at www.nickchapman.org
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