As federal budget plans progress, there are calls for a rethink of negative gearing which could boost new housing while helping balance the books.
Source:
AAP
3 Apr 2014 - 12:00 PM  UPDATED 4 Apr 2014 - 1:33 PM

The federal government could take a fresh look at negative gearing rules in the May budget to help balance the books and make housing more affordable and accessible.

Negative gearing allows investors to fully deduct costs associated with a rental property against their income, reducing their tax liability.

Government sources say one of the changes being considered by Treasury is the grandfathering of arrangements for existing investors, but limiting future access to negative gearing so only new properties will be eligible.

It is understood Treasury and the Parliamentary Budget Office have done work in this policy area in recent months.

Treasurer Joe Hockey won't comment on individual measures or what is being considered in the budget preparations, a spokeswoman said.

But there is strong support for such a move, particularly within the community sector.

The Equality Rights Alliance (ERA), which represents more than 60 community organisations, says the government needs to revisit recommendations from the Ken Henry tax review in relation to capital gains tax and negative gearing.

Capital gains tax exemptions encourage negatively geared property investment, favouring investment in existing high-rent housing rather than increasing supply of new affordable housing, the ERA argues.

The average benefit from CGT exemptions for the top 20 per cent of incomes is almost seven times greater than for the bottom 20 per cent.

The capital gain tax main-residence exemption and discount component cost the government $30 billion in forgone revenue last year.

"At the very least, options to structure the capital gains tax exemption as an incentive for affordable housing should be thoroughly investigated," the ERA argues.

Negative gearing is made more attractive by the capital gains tax exemption.

The scheme was originally put in place to boost Australia's housing stock, but it has had the effect of driving up property prices and rent.

In 1985, when the Hawke government made changes to the scheme, the then-treasurer Paul Keating described negative gearing as a way for high-income earners to "swap flats on Bondi Beach which were built 40 years ago".

And it remains true. In 2013, only about eight per cent of the money funding the scheme went towards new dwellings, with the remainder for established homes and apartments.

Limiting negative gearing to new homes and apartments would refocus the policy to add to Australia's housing stock rather than drive up the price of existing housing.

As the ERA says: "Failing to address the current tax arrangements for housing will continue a pattern of poorly targeted and increasingly expensive indirect assistance to households who need it least."

The Grattan Institute estimates that through policies such as exemptions for the family home from land and capital gains taxes and the eligibility test for the aged pension, governments provide benefits to homeowners worth $36 billion a year.

Another option being floated is the "quarantining" of losses on investments, as a replacement for the negative gearing system.

"Quarantining is where the loss on an investment can't be used in the year it is made, but can be used in future years against profits from the same investment from which the loss arose," explains University of NSW tax expert Dale Boccabella.

The system is currently used to determine whether someone is liable to pay the Medicare levy surcharge and assessment of income under the Family Tax Benefit scheme.

But such a massive switch in policy is likely to face greater political hurdles than tweaking the negative gearing system.

In any case, the housing industry would put up a fight to any changes.

The Housing Industry Association says any reduction in negative gearing benefits would have a "marked negative impact on the demand for housing".

It would also worsen rental affordability through a reduced supply of investment housing.

However, give the severe constraints on the federal budget and the prospects of a policy change boosting Australia's stock of new housing, it may be a battle the government considers worth having.