Retrospectively terminating negative gearing would be inherently unfair to the increasing number of Australians who have included property as a part of their long-term financial strategy – among many other things.
It could also have serious implications on Australia’s property markets. There is a very real danger that such a move would see the market flooded with properties that highly geared investors could no longer afford to hold. It may well be the case that investors, forced to sell in an unfavourable market, could not recover sufficient funds from the sale to pay out the debt against the property. Owner-occupiers, who for whatever reason need to sell in such a market, could also suffer.
However, most proponents of reform say it should only apply to new investors. Following changes in the UK, groups such as the Australian Council of Social Services are calling for a Keating-esque abolition of negative gearing benefits on all new investments, preventing investment property losses from being offset against other sources of income, such as wages. Such a move will immediately remove much of the incentive to invest in new housing development.
Others would phase out of negative gearing benefits, even on existing rental properties, over a number of years. Greg Jericho, an economist with The Guardian, declared negative gearing “a rort”. He said: “Grandfathering the laws to keep negative gearing for current investors would just be a case of favouring current property owners over future ones.” He suggested phasing out negative gearing over five or 10 years, which would still significantly disrupt many a long-term financial strategy.
The Reserve Bank has also entered the debate over tax concession for property investors, taking aim at negative gearing and limits on borrowing for self-managed super funds.
Admittedly, our existing negative gearing policy is failing to stimulate sufficient investment into new housing. In 2013, there were 1,260,315 Australians who claimed a net rental loss – an increase of 252 per cent since 1994. However, 2015 data from the Australian Bureau of Statistics shows that only six per cent of investment loans are for new housing stock. The Australia Institute, which would – similarly to Greg Jericho – phase out existing negative gearing, at least suggests keeping this for new investment for a limited period.
There is a strong argument for tweaking negative-gearing benefits, but any such changes must apply only to new investors and be with a view to encouraging new housing development. In doing so, we can truly achieve the key social objective of assisting those who cannot afford to buy, and reducing demand on public housing. After all, why should the government do what private individuals are able to achieve themselves, and more efficiently? Only those who think that the government is entitled to everything would see a tax concession as a handout.
I believe it would be sensible, balanced and constructive to adopt the following four reforms:
1. Existing investments: we must not rip the rug out from under existing investors. There should be no change to how such properties are treated.
2. Purchase of pre-owned properties for investment: we should abolish negative gearing benefits for such properties, with the following exception.
3. First home buyers exception: with strong controls in place, an exception could be granted to first home buyers buying pre-owned properties as an investment, who intend to move into the property within, say, five years. This would give a leg up to those who cannot afford to get into the market without the additional rental income in the short term.
4. Purchase of new and off-the-plan properties for investment: it is important to retain negative gearing benefits for such properties. Our taxation laws must generate an appetite for new property development, ensuring the important social outcomes detailed earlier. Such development would not only occur at the fringes of our great cities, but also fill in projects close to the CBD, such as Green Square in Sydney. This policy has the added benefit of investor demand supporting the building industry, creating employment.
By restricting negative gearing tax benefits to only new and off-the-plan properties, first home buyers should face less competition when purchasing pre-owned properties. Government policy, both federal and state, obviously affects housing affordability. These suggestions should go some way to ensuring that taxation policy does not compound the problem.
ABOUT THE AUTHOR
Jai Martinkovits is chief executive of Breakthrough Brokers and co-author of Give Us Back Our Country: How to make the politicians accountable … on every day, of every month, of every year (2nd Edition).