After earlier signalling that the upcoming Federal Budget could contain changes to the tax break, the Coalition last weekend announced that it would leave it as is.
That announcement was welcomed by a number of property interest groups, but a report released this week by think-tank the Grattan Institute - Hot property: negative gearing and capital gains tax reform – claims the government would be sacrificing a significant amount of revenue and backs the proposal of the Federal Opposition to quarantine negative gearing to new builds only from 1 July 2017 and reduce the capital gains tax discount to 25%.
Report authors John Daley and Danielle Wood claim those changes, along with not allowing negative gearing to be deducted against regular wages, would generate an additional $5.3 billion a year in revenue.
Daley and Wood also claim the changes would not destroy the nation’s property market.
“We estimate property prices would be up to 2% lower under these reforms than they would be otherwise,” Daley said.
“Contrary to urban myth, rents won’t change much, nor will housing markets collapse. The effects on property prices would be small compared to factors such as interest rates and the supply of land,” he said.
“These two sensible reforms won’t hurt private savings much but will save the government a lot of money.”
Those who have opposed the idea of changing the current negative gearing and CGT arrangements have said claimed that changes would make property a much less attractive investment class, but Daley and Wood’s report disputes that.
“Switching into other asset classes will be limited. Other investments that generate capital gains, such as shares, will also be taxed more under proposed changes to CGT and negative gearing. Other investments that will be relatively more attractive after the change – for example, bank deposits and superannuation – have very different risks, returns and liquidity. As a result many investors may choose not to switch,” the report said.
“Ultimately people who invest in property take into account a host of factors, including rental returns, risk perception, familiarity with the asset class, and ability to obtain bank finance. Modest changes in tax treatment will not affect their decisions much.”
While many have claimed that changes to negative gearing will reuslty in increased rents, pointing to the 1980s when changes were made to the system, Daley and Wood again disagree with that viewpoint.
“In 1985, the Hawke Government restricted negative gearing so that rental losses could not be used to reduce tax payable on other income streams. Rents rose rapidly in Perth and somewhat in Sydney. Two years later, the policy was abolished out of concern for increasing rental prices.
“Although the tax changes were nation-wide, inflation-adjusted rents were stable in Melbourne and actually fell in Adelaide and Brisbane. In Sydney and Perth, rent rises were in fact driven not by tax changes but by population growth and insufficient residential construction – due to high borrowing rates and competition from the stock market for funds.”
“Beyond these historical lessons, economic theory and empirical research show that limiting negative gearing and/or increasing taxes on capital gains does not change rents much.”
