A 2019 Australian Federal Election Policy Guide

SECTION FOUR 

 

 

HIP POCKET ISSUES (2 OF 5)

 

NEGATIVE GEARING AND CAPITAL GAINS TAX

 SAY WHAT !  YOU WANT ME TO COOK THE BOOKS ? 

Source: https://postgutenberg.files.wordpress.com/2012/07/swedishchef1.jpg

 

 

 

NEGATIVE GEARING AND CAPITAL GAINS TAX

 

Updated 6 /1/2019

 

Background 2015-2017

 

On 7 January 2016, the Australian Government announced the establishment of an Affordable Housing Working Group following a request from Treasurers at the Council on Federal Financial Relations (CFFR) meeting in October 2015 for further work on housing affordability.

 

The Working Group focussed primarily on investigating ways to boost the supply of affordable rental housing through innovative financing models. These models are aimed at the social housing sector and the private rental market for low-income and disadvantaged households.

 

Source: https://static.treasury.gov.au/uploads/sites/1/2017/06/C2016-050_Final_report.pdf

 

The Working Group undertook a public consultation process (2 February 2016 – 11 March 2016), which included a call for submissions from interested parties on innovative ways to improve the availability of affordable housing.

 

Before the July 2nd election, Labor promised to restrict negative gearing to new homes and reduce the capital gains concessions on houses from 50% to 25%.

 

In May 2016, the SMH published the cost of other tax payers for negative gearing claims in Australia.

 

Taxpayers who negatively gear property investments cost other taxpayers an average of $310 per year, an analysis of Tax Office data showed.

 

The re-analysis of the 2013-14 tax data showed that negative gearing produced an average ‘loss’ of $8722 per year. Seven out of 10 had income in the top or second-top tax bracket. The average amount of tax saved by each of the 1.2 million negative gear claimants was $2900 per year. Spread over the remaining 11.7 million taxpayers, the average cost was $310 each. The total, $3.646 billion.

 

The calculation excluded the separate 50 per cent discount on capital tax available to negative gearers who sell.

 

Source: Peter Martin SMH Election 2016: Revealed. What negative gearing costs other taxpayer. 13 May 2016 https://www.smh.com.au/politics/federal/election-2016-what-negative-gearing-costs-other-taxpayers-310-per-year-20160513-goubz7.html

 

The 2016 Turnbull government fiercely attacked the Labor party with a persistent election ‘scare campaign’ claiming during that campaign that Labor’s housing policy would act like an “axe” and a “chainsaw” on the housing market and bring the growing Australian economy to a “shuddering halt”.

 

The Innovative Financing Models to Improve the Supply of Affordable Housing final report (2016)

 

On November 3rd 2016, all Heads of Treasury across Australia received the Innovative Financing Models to Improve the Supply of Affordable Housing final report from the Council on Federal Financial Relations Affordable Housing Working Group.

 

Source; https://treasury.gov.au/consultation/council-on-federal-financial-relations-affordable-housing-working-group-innovative-financing-models/

 

One of the things the report found was that negative gearing and capital gains tax breaks were causing ‘substantial distortions’ in the property market, pushing up house prices.

 

The report advised that the federal government should conduct a comprehensive study of negative gearing and capital gains tax arrangements “and consider alternative policies that would improve outcomes for Australians”.

 

Source; https://static.treasury.gov.au/uploads/sites/1/2017/06/C2016-050_Final_report.pdf January 8 2018. Paul Karp Labor says Treasury document shows negative gearing claims ‘outright lies https://www.theguardian.com/australia-news/2018/jan/08/labor-says-treasury-document-shows-negative-gearing-claims-outright-lies

 

The briefing also advised the current housing planning changes “are incremental and would only have a modest impact on overall housing supply [and] affordability. Broader supply and demand measures are required to address the root cause. Federal government policy levers could [contribute to improving] housing affordability.”

 

Then NSW premier Mike Baird and planning minister Rob Stokes put the advice into action by calling for a review of negative gearing. Stokes warned that negative gearing did nothing to improve supply where it was needed, instead allowing a “tax deduction on the ownership of a multimillion-dollar holiday homes”.

 

At the CFFR meeting on 2 December 2016, Treasurers debated the Working Group’s report.

 

Source:https://static.treasury.gov.au/uploads/sites/1/2017/06/C2016-050_Final_report.pdf

 

New South Wales planning minister, Rob Stokes, reignited the debate about negative gearing, saying it did nothing to improve housing supply where it was needed, but did help some people reduce their taxable income at the expense of other Australians.

 

Then Liberal Premier for NSW, Mike Baird renewed his call for the federal government to drop its “ideological opposition” to any reconsideration of negative gearing.

 

Speaking after the meeting, then Treasurer Scott Morrison said the government’s opposition to negative gearing changes was clear, despite renewed calls for a reconsideration of the tax regime. The Turnbull government would not be revisiting negative gearing because any changes to negative gearing would 'upset the market'.

 

Morrison said much of the discussion about housing affordability centred on first home buyers, but 30% of Australians rented and half of them were on low incomes. “It is the government’s view that the mum and dad investors who actually provide the capital for the nation’s rental housing stock, if we were to withdraw that, then that has the only outcome of increasing rents, which is not good news for people on the lowest of incomes who are renting,”

 

The shadow treasurer, Chris Bowen, criticised Morrison’s refusal to consider negative gearing changes as part of a suite of housing policy reforms.

 

“Scott Morrison is simply not up to the job of leading reform on tax and housing affordability. Malcolm Turnbull and Scott Morrison are oblivious of the housing affordability crisis that threatens to see a generation of Australian young people locked out of the housing market.”

 

When Gladys Berejiklian became premier in January 2017, she stressed that negative gearing is a federal issue. Berejiklian told ABC’s Radio National it was not something she would “necessarily touch in relation to housing affordability” because she believed housing supply was still the biggest issue. Gareth Hutchens. Scott Morrison shuts the door on changes to negative gearing rules.

 

Source:The Guardian Fri 2 Dec 2016. https://www.theguardian.com/australia-news/2016/dec/02/scott-morrison-shuts-the-door-on-changes-to-negative-gearing-rules.

 

Fast Forward to 2018

 

In January, reporter for The Guardian Paul Karp, lodged a report entitled

 

‘Labor says Treasury document shows negative gearing claims are ‘outright lies’

 

“Confidential federal Treasury advice from 2016 – released under freedom of information after a two-year fight by the ABC – contradicted claims by the treasurer, Scott Morrison, that changing negative gearing and the capital gains tax discount would act like a “sledgehammer” on the housing market.

 

Source: https://www.theguardian.com/australia-news/2018/jan/08/labor-says-treasury-document-shows-negative-gearing-claims-outright-lies

 

The 2016 Federal Treasury Analysis

 

The documents show the Treasurer Morrison received advice from his own department that Labor’s negative gearing overhaul was likely to have a “small” impact on house prices, causing “some downward pressure” but “a relatively modest impact” on prices.

 

This Treasury advice on Labor’s negative gearing policy was effectively, ‘withheld for almost two years’. Labor seized on the advice to government, released under freedom of information, as proof the Coalition exaggerated claims that changing the tax treatment of property would be a “sledgehammer” to the economy.

 

Treasury advise also contained a table showing the expected impact of Labor’s policy on various asset types.

 

It concludes that, for residential investment properties and owner-occupied housing, the policy “could introduce some downward pressure on property prices in the short term. In the long term, increases in taxation on rental property could have a relatively modest downward impact on property prices. Returns for Australian investors will fall under the policy, but owner-occupiers would be unaffected, limiting the impact on property prices”.

 

The document also confirmed that more than 50% of the benefits of negative gearing go to the top 20% of income earners, while the top 10% of income earners receive nearly 75% of the benefit of the capital gains tax discount.

 

Shadow Treasurer Chris Bowen said “Scott Morrison loves to selectively leak Treasury advice when it suits him and yet this critical advice was withheld for almost two years. Labor is the only major party with a set of housing affordability policies which will help level the playing field between first home buyers and property investors,”.

 

Source; Gareth Hutchens. Scott Morrison shuts the door on changes to negative gearing rules. The Guardian Fri 2 Dec 2016. https://www.theguardian.com/australia-news/2016/dec/02/scott-morrison-shuts-the-door-on-changes-to-negative-gearing-rules

 

Melbourne University Economics Department Modelling

 

Also in January, Ben Doherty at The Guardian reported on Melbourne University modelling presented to a Reserve Bank workshop by department of economics researchers Yunho Cho, Shuyun May Li, and Lawrence Uren.

 

The modelling found that

 

- Nearly 75% of Australian households will be better off if negative gearing was quashed;

 

- Close to 75% of households could own their own homes if the policy was axed, and house prices would soften by 1.2% while rents would rise “only marginally”;

 

- Home ownership rates could be lifted to 72.2% of households, the highest level since 1991

 

- The current level is 66.7%, the lowest level since the mid-1950s,

 

and

 

“We find that removing negative gearing would result in lower house prices, higher rents and homeownership rate ... the welfare analysis suggests that eliminating negative gearing would lead to an overall welfare gain of 1.5% for the Australian economy in which 76% of households become better off. However, the welfare effects are heterogeneous across different households. Renters and owner-occupiers are winners, but landlords, especially young with high earning landlords, lose. Improvements in homeownership rate are observed predominantly among young and middle-aged households who are relatively poor.”

 

The report authors stressed that the paper was “preliminary and incomplete”.

 

Source; Ben Doherty 13 Jan 2018 Home ownership would rise if negative gearing is scrapped. The Guardian. https://www.theguardian.com/australia-news/2018/jan/13/australian-house-prices-will-fall-if-negative-gearing-goes-study-says

 

The Saul Eslake Fact Finder 

 

The release of the Melbourne University paper and more exposure of 2016 Treasury advise triggered more intense speculation over negative gearing from politicians, vested interests, economists and former Treasury Advisor and former chief economist for Bank of America Merrill Lynch Australia, Saul Eslake, who didn’t hold back any ammunition.

 

In February 2018, Eslake said the Coalition had a history of creating 'alternative facts' on negative gearing and capital gains tax and again displayed a willingness to “peddle any lie” to ensure the survival of a tax system that privileges investors.

 

Writing on the blog of John Menadue, a former head of the Department of Prime Minister and Cabinet, Eslake said the freedom of information documents exposed more than the Coalition "being cute with the truth. “

 

-"First, Treasury advised the government that negative gearing and the capital gains tax benefits disproportionately benefit high-income households,” he writes. “Despite this, the government and the property industry continue to assert that the main beneficiaries of negative gearing are ‘teachers, nurses and police officers’, or (alternatively) ‘mums and dads trying to get ahead’.

 

- Second, Treasury again noted that ‘previous changes to negative gearing (1985-87) had little discernible impact on the [housing] market’.

 

“Yet the government, and the property industry, persist with the fiction that the temporary abolition of negative gearing for property investors by the Hawke government between 1985 and 1987 resulted in ‘rents going through the roof’, and that this ‘history’ would be repeated in the event that negative gearing were to be abolished – or even ‘tinkered with’ – again.

 

-“This is a 21st century illustration of the saying attributed to Joseph Goebbels, that if a lie is big enough, and it’s repeated often enough, it can become accepted as the truth.” He said Treasury noted that the extent of any impact on property prices would be likely to be limited by the response of owner-occupiers. “

 

And his conclusion ?

 

" What this episode underscores is the extent to which the government and the property industry are willing to ‘tell any lie, peddle any fiction, distort any fact, and conceal any contrary advice no matter how authoritative its source, in order to assure the survival’ of the privileged treatment which the Australian taxation system confers on investors.”

 

A month earlier then acting treasurer, Kelly O’Dwyer, told ABC’s AM program that the Treasury document “confirms what we have been saying all along: [Labor’s policy] would have a disastrous impact when combined with a weaker housing market”.

 

O’Dwyer selectively cited a passage in the document that said uncertainty around the policy “could compound upon a cyclical downturn that may be under way”. She maintained Labor’s policy would have a “significant impact” on the housing market, citing “broader advice” to government on the issue but would not offer a specific source for the “broader advise” beyond 2016 Treasury advise she was referring to.

 

Source: Gareth Hutchens.Coalition accused of creating 'alternative facts' on negative gearing.  1 Feb 2018. 

https://www.theguardian.com/australia-news/2018/feb/01/coalition-accused-of-creating-alternative-facts-on-negative-gearing

 

The year 2018 concluded with the National Labor Party Conference reaffirming Labor's committment to restricting negative gearing to new homes only and halfing Capital gains tax deductions and the Coalition allegedly  "peddling the same lies" in this space.

 

2019

 

First Home Buyers Prospects

 

The first week of the 2019 New Year came with warnings that tighter lender standards in the wake of the Royal Commission into Banks and other financial institutions would make it harder for first time buyers and low - medium income earners to get housing loans.

 

One consequence of this developing reality in the housing market would be “patchy” economic growth in the first six months of 2019.

 

Chief executives and directors of the nation's top companies were worried there could be further tightening of standards when the final report of the banking royal commission is released in February.

 

Regulators APRA and ASIC introduced tighter standards which have caused banks to implement tougher screening processes for loan applications. This has resulted in first home buyers finding it especially hard to get funding.

 

Business leaders, including those working for the big four banks, have cautioned policymakers against making any further changes that restrict lending to Australians. Banking Royal Commission 'unintended consequences'

 

CEO of one of the largest Australian non-bank lenders, Ahmed Fahour of Latitude Financial Services, warned that that the royal commission

 

"triggered heightened risk alert. What I have noticed is that there is a tendency be on the conservative side. And this is a serious issue for the economy because if the four majors do contract, this is going to have pretty serious consequences. And you can already see it in … some of the lending. Home buyers could see their borrowing capacity cut by as much as 40pc”.

 

Source: Nassim Khaden. Business leaders warn against tighter lending standards in wake of banking royal commission https://www.abc.net.au/news/2019-01-03/business-leaders-warn-against-even-tighter-lending-standards/10683046?section=politics

 

 

Conclusion

 

This issue in terms of voter perception will dumb down to a question of who you favour,

 

(a) Baby boomer property investors claiming a tax deduction at your expense as a tax payer, skimming billions of dollars from Federal Government budget coffers annually or

 

(b) Younger first home buyers competing with these property investors for access to loans in a generationally impregnable housing market also infiltrated by foreign property investors?

 

Domestic property investors will likely vote against changes to negative gearing and capital gains tax.

 

First home buyers and some empathetic baby boomer parents yet to experience a permanent ‘empty nest’ will likely vote for it.

 

The rest of us  sqauabble and struggle to get clean air sense on this election issue which has dogged Australian politicians along with energy and climate change politics for a decade. This is not surprising, given that housing affordability and dreaded power bills are central to a majority of Australian's sense of economic well being and aspirations.