Negative gearing – the policy that just won’t quit – is back.
Or to be precise, it sort of, maybe, haven’t-ruled-it-out, could be back.
After a Nine newspapers report that Labor had asked the public service to consider the idea, Prime Minister Anthony Albanese issued a non-denial.
“I want a public service that is full of ideas,” he said, before diverting to the government’s existing housing policies.
It echoes the language the prime minister used before he changed course on the stage 3 tax cuts in January, when he also stuck to saying the policy “hadn’t changed” until it did.
The answer prompted a frenzy of speculation about whether Labor plans to reheat the policies it took to the 2016 and 2019 elections.
What is negative gearing?
Negative gearing is shorthand for the tax discount that applies to rental properties that make a loss.
That is a common occurrence in Australia, where two in three rentals (just over 1 million) lose money.
One reason it is so widespread is that the Australian tax system allows property investors to deduct their losses not just against their investment income – as is standard in most countries – but against the income from your wage or your salary.
That can turn a losing investment into a winning tax structure. The possibility of financial gain is compounded by another feature of the tax system, the capital gains tax discount.
That is a 50 per cent discount on the tax you pay when you own an asset that gains value, such as a property or a share.
Capital gains tax is applied when you “realise” that gain, which is typically when you sell the asset.
If a property has grown a lot in value when it is sold – as most Australian properties have in recent history – the sizeable discount can make back the rental losses.
Negative gearing has made an investment property a popular income supplement for many “mum and dad investors,” even those on fairly modest incomes.
But about half of the financial benefit from negative gearing, and most of the financial benefit from the capital gains tax discount, go to the top 10 per cent of income earners, including a small cohort with large property portfolios.
What could negative gearing changes look like?
There have long been calls to overhaul negative gearing and the capital gains tax discount, framed variously by advocates as unfair, costly to the budget, and a barrier to home ownership.
The Henry Tax Review conducted by Treasury in 2010 recommended a 40 per cent capital gains discount, which was not adopted.
A Grattan Institute report in 2016 went further, advocating a 25 per cent discount and removing the ability to deduct investment losses from non-investment income, phased in over five years.
The Turnbull government rejected the idea, but Labor ran with it in 2016 and 2019. (ABC News)
The Turnbull government flirted with but ultimately rejected the idea. But Labor took it up and ran in both 2016 and 2019 on a 25 per cent discount and limiting negative gearing to new builds only, with all existing negatively-geared properties exempted.
The Greens want to phase out the discount entirely and have advocated ending negative gearing for all future investment properties and for anyone with two or more properties.
A limit related to the number of properties an investor owned could be favoured to sidestep arguments about “mum and dad investors,” but we do not know what if anything the government has asked Treasury to consider.
What would it do to house prices and rents?
It is broadly agreed that negative gearing and the capital gains discount have affected the character of Australia’s housing market by encouraging more investors to compete with would-be home owners.
It is less clear what the effect of any change would be, especially if the change is limited to future investments or to investors with multiple properties.
About 90 per cent of negative gearing takes place on existing housing rather than newly-built housing, suggesting that scrapping it for new houses would have at most a modest effect on housing supply.
Previous analysis by Treasury and the Grattan Institute has found that the downward pressure on house prices – a result of less demand from property investors – would be modest, in the order of 2 per cent.
There is mixed evidence on the effect of rent prices. Fewer investors would mean fewer rentals, but also fewer renters.
Owing to these modest effects, economists typically frame negative gearing and capital gains tax reform as tax policy, not housing policy, since the concessions “cost” the budget billions of dollars every year.
But the association with housing is inescapable and is already dominating the political debate over the idea, with the Greens arguing it could fix the housing crisis and the Coalition arguing it could worsen it.
Economist Saul Eslake, who has campaigned against negative gearing for decades, said there was some political risk in the idea but that the fallout would be concentrated to affluent areas.
“It’s overwhelmingly people in teal, safe Liberal [seats] or the ACT who would be adversely affected by restricting a negatively geared property,” he said.
“The second term of an incumbent federal government historically is the most propitious time during the life of a government to do ambitious reform.
“[The government] hasn’t got a lot of political capital to spend, but if [they’re] not prepared to spend political capital, what’s the point?”
