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Our tax system makes our housing too expensive and needs fixing
The tax treatment of housing helps explain why Australia’s housing is so expensive and as some commentators have claimed, is both “upside down and back to front.”
The way we tax, or exempt housing from tax, provides greater benefits to those on higher incomes than those on low incomes and to those who have established themselves in the market rather than those trying to.
It also gives free kicks to investors to generate personal wealth rather than using public money to provide a public good, in this case affordable rental housing.
The Rudd Government’s Nation building and jobs stimulus contained nearly $6b worth of new investment in affordable housing, however the most important reform to housing should be its tax treatment.
The exemption of owner occupied housing from a range of taxes, exempting investors from 50% of capital gains and their ability to offset losses against any income source (negative gearing), costs the tax system over $28b each year, every year.
On top of this, first home owner grants (FHOG) fuel demand whilst not adding to net supply, adding further inflationary pressure. FHOG may help many to get a foothold but it will cost them in the end. Grants are one off, interest bills may last forever.
The base problem with Australia’s housing markets is an inability to supply sufficient housing to meet demand. This is particularly so at the lower end where we now have a shortage of 251,000 affordable rental properties.[i]
Whilst we have this shortfall house price inflation continues to deter general investment in residential rental because rental yields continue to fall relative to the capital value of property.
Negative gearing encourages investment at the upper end of the market rather than the low and contributes to this problem. Whilst this has been somewhat offset by the welcome National Rental Affordability Scheme, there is still an imbalance of scale.
There is also a major impediment to NRAS developing its potential because of the uncertainty about its effect on the charitable status on the many community housing providers who administer the scheme.
As Ken Henry sits down to frame his report on tax and welfare he should consider a number of measures to address these problems.
Limit or remove the capital gains tax exemption on higher priced owner occupied housing above a reasonable threshold such as a $2m value.
Limit the inflationary pressure of current negative gearing provisions by quarantining the deductibility of costs on rentals housing to the income from rental housing, rather than any income.
Provide support to first home owners through the tax system instead of a grant to reduce the inflationary effect of boosting demand via lump sum grants that only end up on first home prices.
Provide certainty for investors in NRAS and the community housing providers by establishing the provision of affordable rental housing as a charitable activity.
Use the tax system to encourage other forms of investment in affordable rental, such as tapering negative gearing so its benefits maximised to investors at the lower rather than upper end.
Henry George, the 19th century American social philosopher argued for a single tax on land as a means to stop the inevitable inflation of house prices beyond incomes which we are experiencing in Australia, it is time a shift to land tax was also more seriously considered.
Adrian Pisarski, Chairperson National Shelter.
» :: The way we tax, or exempt housing from tax, provides greater benefits to those on higher incomes than those on low incomes and to those who have established themselves in the market rather than those trying to.
It also gives free kicks to investors to generate personal wealth rather than using public money to provide a public good, in this case affordable rental housing.
The Rudd Government’s Nation building and jobs stimulus contained nearly $6b worth of new investment in affordable housing, however the most important reform to housing should be its tax treatment.
The exemption of owner occupied housing from a range of taxes, exempting investors from 50% of capital gains and their ability to offset losses against any income source (negative gearing), costs the tax system over $28b each year, every year.
On top of this, first home owner grants (FHOG) fuel demand whilst not adding to net supply, adding further inflationary pressure. FHOG may help many to get a foothold but it will cost them in the end. Grants are one off, interest bills may last forever.
The base problem with Australia’s housing markets is an inability to supply sufficient housing to meet demand. This is particularly so at the lower end where we now have a shortage of 251,000 affordable rental properties.[i]
Whilst we have this shortfall house price inflation continues to deter general investment in residential rental because rental yields continue to fall relative to the capital value of property.
Negative gearing encourages investment at the upper end of the market rather than the low and contributes to this problem. Whilst this has been somewhat offset by the welcome National Rental Affordability Scheme, there is still an imbalance of scale.
There is also a major impediment to NRAS developing its potential because of the uncertainty about its effect on the charitable status on the many community housing providers who administer the scheme.
As Ken Henry sits down to frame his report on tax and welfare he should consider a number of measures to address these problems.
Limit or remove the capital gains tax exemption on higher priced owner occupied housing above a reasonable threshold such as a $2m value.
Limit the inflationary pressure of current negative gearing provisions by quarantining the deductibility of costs on rentals housing to the income from rental housing, rather than any income.
Provide support to first home owners through the tax system instead of a grant to reduce the inflationary effect of boosting demand via lump sum grants that only end up on first home prices.
Provide certainty for investors in NRAS and the community housing providers by establishing the provision of affordable rental housing as a charitable activity.
Use the tax system to encourage other forms of investment in affordable rental, such as tapering negative gearing so its benefits maximised to investors at the lower rather than upper end.
Henry George, the 19th century American social philosopher argued for a single tax on land as a means to stop the inevitable inflation of house prices beyond incomes which we are experiencing in Australia, it is time a shift to land tax was also more seriously considered.
Adrian Pisarski, Chairperson National Shelter.
