The Reserve Bank is open to a negative gearing review after revealing that an increasing number of investors are using the tax concession.
The central bank told the federal Inquiry into Home Ownership that Australia’s tax system is relatively generous to small investors, compared with some other countries.
That is because of both negative gearing and capital gains tax concessions – although some countries offer investors even more support, according to the bank’s submission.
“Australia’s treatment of property investors is at the more generous end of the range of practice in other industrialised economies, but not overwhelmingly so,” it said.
“In particular, a wider range of expenses, including some non-cash expenses, may be deducted against non-property income than is possible in some other jurisdictions.”
The Reserve Bank said the share of investors taking advantage of negative gearing increased from about half in the late 1990s to just under two-thirds in 2012/2013.
Negative gearing rates would probably be higher if not for a “major tax change” in 2003, which lifted the threshold for the top marginal rate.
This has reduced the proportion of taxpayers with the strongest incentive to minimise tax through negative gearing, the Reserve Bank said.
“The bank believes that there is a case for reviewing negative gearing, but not in isolation. Its interaction with other aspects of the tax system should be taken into account,” it said.
“The ability to deduct legitimate expenses incurred in the course of earning income is an important principle in Australia’s taxation system, and interest payments are no exception to this.”
The Reserve Bank said that negative gearing “may be helpful for housing affordability for tenants” to the extent that it induces landlords to accept a lower rental yield.
However, it also said that government policy should not unduly advantage investors at the expense of prospective owner-occupiers.
[Related: Federal inquiry attacks negative gearing]