Slashing tax breaks for property investors would mean more expensive rents and less homes to go around, industry groups say, as the government kicks off its tax reform debate.
The government's tax discussion paper calls for debate on negative gearing and capital gains tax (CGT) discounts, which reduce tax liabilities for investors and have been blamed for driving up property prices.
It said negative gearing allowed more people to enter the market but that potential tax advantages came from the CGT discount upon the sale of a property.
Industry groups on Monday said abolition of tax deductions for property investors would push up rents, exacerbate housing undersupply issues and punish mum and dad investors.
The Property Council of Australia said an analysis of Tax Department statistics showed 80 per cent of those who negatively geared a property earned around $80,000 a year or less, and 73 per cent only owned one investment property.
"The data don't lie - far from being a perk for the wealthy, negative gearing is actually an indispensable tax measure that enables middle income Australians to save for their retirement," the council's chief executive Ken Morrison said.
"Any move to abolish negative gearing would be a blow to Aussie battlers."
KPMG tax partner Grant Wardell-Johnson said the government paper had pointed out that it was the CGT discount rather than negative gearing that was creating problems.
He said it was unlikely that the government would abolish negative gearing, with changes to CGT more likely.
Neville Sanders, president of the Real Estate Institute of Australia, said removing CGT concessions would have less impact on housing supply than tinkering with negative gearing.
Leading economists, including Bank of America-Merrill Lynch chief economist Saul Eslake, have long called for the abolition of negative gearing, saying it drives up property prices.
Market Economics managing director Stephen Koukoulas said abolishing negative gearing was good for the tax system and the property market, making housing more affordable.
Rents may well rise in the short term, but in the longer term, house prices would fall and renters would then be better able to become home owners, he said.
"If the effect is that you reduce demand for housing and house price growth weakens or house prices fall a little bit, then the housing affordability issue is slowly being corrected and that's a good thing," Mr Koukoulas said.
"People will still be able to buy investment properties, they just won't get their fellow taxpayers to subsidise them for it."
The discussion paper also singled out stamp duty on property transactions, labelling the levy as one of Australia's most "inefficient" taxes.
The tax discouraged businesses from making productivity-enhancing purchases and dissuaded some from moving to homes that better suited them, adding to commuting times.
Industry groups and economists said they supported the abolition of stamp duty, saying it made housing more expensive and was a barrier to economic activity.
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