In their second Shedding light on the debate: Mythbusting tax reform report, Deloitte has defended negative gearing as being no different to the other methods used by people to reduce their tax burdens.
“Negative gearing is seen as a loophole, with the rich making out like bandits from it,” the report said.
“Yet the ability to deduct expenses incurred in earning revenue is an accepted principle of our tax system – and most other tax systems too.
“It is standard practice to allow taxpayers to claim a deduction for a real economic loss that they incur to earn their income.”
The report also downplays the idea that negative gearing has had an adverse effect on housing affordability, instead claiming that interest rates and other tax arrangements have resulted in prices increasing.
“Interest rates have a far larger impact on house prices than taxes do. Housing prices are through the roof mostly because mortgage rates have never been lower,” the report said.
“Among tax factors, it is the favourable treatment of capital gains that is the key culprit – not negative gearing,”
According to Deloitte the current CGT discount arrangement is too generous and it should be decreased from 50% to 33%.
“Australia should consider options such as a lower discount applied across a broader base. That would still compensate for the double taxation of savings, while also reducing the distortion in investment decisions that the tax system currently creates.
“Cutting the discount rate would also remove some of the unfairness in the current CGT regime, while still providing a benefit to those who save for the long term.”
While the report is supportive of negative gearing, it does blow a hole in one of the arguments used by supporters of the arrangement, who claim its removal would results in rents increasing.
“While negative gearing isn’t evil, nor would ditching it have a big impact on rents over the longer term. Tax settings can only change housing rents if they sustainably change the supply or demand for homes.
“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 Property Council of Australia welcomed Deloitte's report, with chief executive Ken Morrison saying it proves many of the criticisms of negative gearing are nothing but myths.
“Deloitte’s report adds to an expanding base of evidence which debunks the myths around negative gearing,” Morrison said.
“As the report shows, pointing to negative gearing as the primary driver for higher house prices is wrong."
