Senator Milne asked the Minister representing the Treasurer, upon notice, on 1 November 2011:
In regard to the debate on impact of negative gearing on the housing market at the recent Tax Forum:
(1) Did the temporary suspension of negative gearing during the Keating Government lead to an increase in rents across the country.
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(2) What proportion of negatively geared properties are newly constructed rather than existing properties.
(3) Would the abolition of negative gearing lead to an ongoing decrease in the rate of return on investment property, or just a one-off fall in prices, and does the department have any estimate of the size of any price fall.
(4) Do any overseas countries allow negative gearing; if so, can a list be provided describing any relevant differences to the Australian situation.
Senator Wong: The Treasurer has provided the following answer to the honourable senator's «question»:
(1) Press Release No. 87 of 15 September 1987 which announced the then Government's decision to remove restrictions in the tax law applying to the negative gearing of rental property investments suggested that the supply of rental accommodation was only one of the factors which led to the suspension of quarantining of rental losses.
The Press Release stated that the Government had conducted extensive reviews of interest deductions in respect of primary production investments and corporate share purchases. In both of these cases it was decided that, as a matter of principle, interest deductions should be permitted against income from any source. The quarantining of rental property investments was left as the only case of its type in the Australian tax system. As a consequence, investors tended to move out of rental property investments into other, unquarantined, forms of activity, dampening the growth in the provision of rental accommodation. It also meant that the revenue savings from the measure in 1986-87 ($11 million) was substantially less than the initial forecast of $55 million.
There was data available to Treasury such as tax returns data and changes to the 'privately-owned dwelling rents' sub-component of the CPI which indicated that investors were moving out of rental property investments.
Treasury has not undertaken further analysis on this issue.
(2) This data is not available to Treasury or the ATO.
(3) It would be difficult to quantify whether limiting the ability to offset rental losses against other income would lead to a decrease in the rate of return on investment property, or just a one-off fall in prices. The impact of changes to negative gearing on house prices is difficult to quantify because of a number of factors. These factors include the ratio of negative geared properties to owner occupied housing; the extent to which the benefit provided by negative gearing is reflected in housing prices or whether the benefits are shared with renters through the provision of lower rents; and a range of other factors which impact on housing supply and interest rates.
The 2009 Review into Australia's Future Tax System found that while their proposed reforms to taxes could play a significant role in addressing housing affordability, other policies are likely to be more significant such as removing impediments to housing supply (Report to the Treasurer (page 420)).
As noted by the Review, the increase in house prices that occurred around the start of the decade was attributed by the Productivity Commission (2004) and the Reserve Bank (2003) primarily to strong growth in demand. This demand reflected a range of factors, including growth in average household incomes, increased credit availability, and relatively low interest rates. In the short term, when housing supply is relatively fixed, price increases are an inevitable response to strong demand (Report to the Treasurer (page 414)).
The Review also noted that sustained high levels and strong growth of housing prices are only possible when housing supply cannot increase to meet movements in demand. It recommended that COAG should place priority on a review of institutional arrangements (including administration) to ensure zoning and planning do not unnecessarily inhibit housing supply and housing affordability (Report to the Treasurer (page 422)). This recommendation has been accepted by the Government.
There are other factors that influence the price of housing which make it difficult to quantify the effect of removing or reducing the benefits of negative gearing would have on housing prices including:
- other taxes including the exemption of owner-occupied housing from the personal income tax and the capital gains tax system, stamp duties on housing transactions, GST on the price of supplying new housing, council rates and land taxes; and;
- infrastructure charges which are poorly implemented or designed.
(4) It can be difficult to compare taxation arrangements across jurisdictions. Australia's taxation system is generally more favourable towards leveraged investments, in particular housing, compared to other investments. In addition to negative gearing, a 50 per cent CGT discount is also available on the disposal of rental property. Capital gains on the sale of a person's main residence are typically exempt and the implicit value of rental services provided by owner-occupied does not form part of the occupier's assessable income. The effect of inter-country differences in these and other variables (such as tax rates and the deductibility provisions) cannot be determined.
Below is an outline of the ability to claim a tax deduction for loans used to purchase investment properties in some comparable overseas jurisdictions:
In the United States, rental property losses are quarantined to rental income or passive income.
In the United Kingdom, a loss from rental properties can be carried forward to set against future profits from other rental properties;
In Canada, a taxpayer can deduct any reasonable expenses incurred to earn rental income including interest paid on borrowings to acquire a rental property. The reasonable expectation of profits test has been successfully challenged in the courts and as a result these tests have not been enforced with the same vigour as in the past.
In New Zealand, negative gearing is available to a taxpayer and CGT does not apply on disposal of the property.