Winners and losers in negative gearing reform

By Leith van Onselen

Right on cue following the release yesterday of Treasury’s discussion paper on tax, the Property Council of Australia (PCA) released a spirited defence of negative gearing, arguing that its removal “would be a blow to battlers”:

Average Australian families would be the real victims of any move to target negative gearing in the debate about tax reform…

Analysis of Australian Taxation Office Statistics shows that of the almost 1.26 million Australians who declared a net rental loss in 2011/12, 883,325 people – or 79 per cent – earn around $80,000 per annum or less…

The majority of Australians who negatively gear a property – almost 73 per cent – only own one investment property. A further 18 per cent only own two investment properties…

“Negative gearing is one of the most misrepresented and misunderstood parts of Australia’s tax system,” Mr Morrison said.

“The ATO’s data explodes the myth that negative gearing is only for the wealthy.

“Any move to abolish negative gearing would be a blow to Aussie battlers and have an adverse impact on household savings and housing affordability.

“The data doesn’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 ability for low to middle income Australians to negatively gear their investments also unlocks an important source of finance for the supply of new housing stock, which benefits affordability in the rental market.

This is unmitigated propaganda. Let’s dissect the PCA’s claims one by one.

First, its claim that negative gearing is the purview of the middle class is bunkum. Sure, the ATO Taxation Statistics show that the majority of rental properties are held by middle income earners:

But it also shows that property investment is most popular amongst higher income earners, presumably due to the increased tax benefits on offer as one moves up the marginal tax scale.

In 2011-12, 35% of taxpayers earning over $180,000 held an investment property, with 24% negatively geared. By comparison, 15% of taxpayers earning between $50,000 and $60,000 held an investment property in 2011-12, with 11% negatively geared (see next chart).

Average net rental losses are also much higher in dollar terms (but less in percentage terms) for higher income earners:

However, there are major issues with the ATO Tax Stats data that significantly reduces its reliability and discredits the PCA’s argument that negative gearing is a middle-class affair.

As explained by ABC’s Michael Janda last year, the ATO Tax Stats are wrong because they only look at taxable income – after people take out various deductions to lower their tax bills:

The very reason that many housing investors fall below the $80,000 threshold is because they have used negative gearing to slash their tax bill…

The vagaries of what is counted as income for tax purposes, and of tax deductibility, mean that it is impossible to be sure exactly how many landlords really earn less than $80,000 per year.

One other interesting fact from the ATO’s figures is that the average ‘total income’ of Australian taxpayers was $55,000.

That means that on the way the tax office calculates ‘total income’ – looking at net rent and net capital gains, and excluding non-taxable items – someone on $80,000 is already a relatively high income earner.

Moreover, the Household Income and Labour Dynamics in Australia (HILDA) survey shows that the wealthy hold most of the negatively geared investment homes, as explained by The Guardian’s Greg Jericho earlier this month:

…The Reserve Bank uses data from the Household, Income and Labour Dynamics in Australia Survey. That survey found that in 2010 that the richest 20% of households were much more likely than other households to have an investment property loan:

…And since 2002 there has been a surge in investors within the richest 20%. In 2002 just 16% of the richest 20% of households had an investment loan, by 2010 it was up to 23%…

What about the PCA’s arguments that abolishing negative gearing would harm housing affordability, would damage middle income earners’ ability to save for retirement, and “unlocks an important source of finance for the supply of new housing stock, which benefits affordability in the rental market”? On all counts the data speaks for itself.

ABS data shows that property investment is a prime driver of house price growth:

So if you remove some of this investor demand you dampen house price growth. It’s that simple.

In turn, this would benefit first home buyers, who have been shut-out by the investor orgy:

And with lower house prices, younger Australians would not need to devote as much of their lifetime’s earnings to pay-off a home than would otherwise be the case.

Home ownership rates would also be higher, particularly amongst younger cohorts:

It follows, then, that the best way to ensure people’s security in retirement is to increase access to first home buyers by making homes more affordable? Surely Australians would be in a far stronger financial position, and would be far better placed to save for their own retirement (and avoid the aged pension), if they were not required to pay-off some of the world’s biggest mortgages, thanks to policies like negative gearing?

Abolishing negative gearing would also have next to no impact on housing supply, given investors overwhelmingly purchase existing homes:

So if negative gearing was wound-back and a proportion of investment properties were sold, they would be purchased by renters (or other investors that would rent them out). In turn, those renters would be turned into owner-occupiers, reducing the demand for rental properties and leaving the rental supply-demand balance unchanged.

As a result, rents would be unaffected, as was the case when negative gearing was last abolished between 1985 and 1987 (shown in red):

In short, the PCA’s claims do not stack up and are a blatant case of rentier propaganda.

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