Goodbye negative gearing?

New report calls for next government to ditch property investors' favourite

Goodbye negative gearing?

A new report from the Grattan Institute has called for Australia’s next government to put an end to one of the country’s favourite tax-breaks – negative gearing.

Australians’ love of real estate investment really exploded 30 years ago. MC Hammer pants may well be out of fashion now, but property investment has shown substantial staying power – in no little part due to negative gearing (paying a lower tax rate on most property gains than on regular income, which allows investors to offset costs against one, gains against the other)

Now, however, there is yet another influential voice calling for the tax arbitrage to be halted as Grattan Institute chief executive Danielle Wood has authored a report on tax recommendations for an incoming government, called The Orange Book.

The report calls for a new government to make “bold” tax reforms to fix the country’s patchwork quilt of  “more and less efficient taxes”. And the fixes the institute wants?  Fewer tax concessions (that’s you, negative gearing).

“In the case of the current CGT (capital gains tax) discount and negative gearing arrangements, they act to distort investment decisions, increase price volatility in property markets, and put some upward pressure on house prices” states the report.

Negative gearing is, however, a hot potato for any politician. Last year Labor suggested that it would halve the CGT discount, then rapidly backtracked when it realised what a vote loser that move would be. And the calls for a reform aren’t new – seven years ago Tony Abbott ruled out any reforms when an ACOSS report was critical of the tax break. Economist Saul Eslake has called the CGT discount “One of the dumbest tax breaks ever”.

Whatever the next government’s decision, it’s been a wild ride. That ‘typical’ Sydney house that was $18,700 is slightly over $1,600,000 – nearly 100 times more.

What really drives house prices?

CGT + Negative Gearing                 1-4%
Zoning regulations                           29-42%
1% rate cut                                       8%

(Figures from Centre for Independent Studies/RBA)