Form Phil Lowe’s Friday appearance in Parliament:
Mr THISTLETHWAITE: In May 2016, the ABC reported that there was an internal RBA briefing note under FOI that said, ‘Any change which discourages negative gearing may be good from a financial stability perspective.’ Is that still the view of the bank?
Dr Lowe : The main point we have been making repeatedly for years is that we need to think about negative gearing and the concessional capital gains tax together. Let me try and explain why that is. If you think about negative gearing, what it does is allow you to change the timing of when you pay tax. If you thought about a world where you did not have negative gearing and you had a tax loss in that year on the investment, you would carry forward that tax loss until you had a gain on that investment. If you just had negative gearing and a common tax rate across all investments and income, you change the timing of when you pay the tax. It is a small advantage to an individual investor, but it would not drive major investment decisions by itself.
Negative gearing in and of itself is not the issue; it is the interaction with the capital gains tax concession. The capital gains tax concession allows you to lower, by 50 per cent, the tax rate on some of your labour income, so it turns. You basically get half the tax rate on the loss and you are allowed that in the current year with negative gearing. So it is the combination of those two things that is the issue. If we were to remove or alter that particular combination, I find it hard to know what effect it would have on the housing market. I think it is likely it would reduce investor demand for a while, because that combination is one of the things that encourages people to buy investment properties. If you have less demand, for a while you will have lower prices, and it would take some of the current heat out of the housing market. It may have other effects as well. That briefing note written by one of our staff members was, no doubt, referring to that particular aspect of it, that there would be less heat in the housing market for a period of time, because investors would find it less attractive. That is not a piece of advocacy for that policy, because there are other considerations you need to take into account—the longer-term supply and demand dynamics in the market—but that is what that would have been referring to.
Better, Phil.
