Emerald Chamber of Commerce Inc

Federal budget 2016: Top earners benefit most from negative gearing, Grattan Institute finds

• Peter Martin - April 25 2016 - 9:10PM

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Surgeons, anaesthetists, finance managers and lawyers will be the overwhelming beneficiaries of the Turnbull government's decision not to touch negative gearing in the budget, research shows.

Negative gearing to remain untouched

Who are the real winners with the government deciding not to touch negative gearing in the budget? Peter Martin explains.

Prepared by the Grattan Institute using Tax Office data, it finds that teachers, nurses, hairdressers and sales assistants are among those least likely to negatively gear. The top 10 per cent of earners collect almost half the negative gearing tax deductions and three-quarters of the concessionally taxed capital gains.

Shown to the government early, before its announcement on Sunday that it would leave negative gearing and capital gains tax concessions untouched, the Grattan Institute research finds the two concessions combined cost the budget $11 billion a year.

The top 10 per cent of earners collect almost half the negative gearing tax deductions, the research finds.  Photo: Louie Douvis

It endorses Labor's plan to cut the tax discount for capital gains from 50 per cent to 25 per cent and to restrict negative gearing deductions to non-wage income. Its plan differs from Labor's in that after a phase-in period existing investors would not be exempt and nor would those who invest in new properties.

The Grattan report, Hot property: negative gearing and capital gains tax reform, finds negative gearing reduces home ownership rates and, by encouraging turnover, reduces renters' security of tenure.

"Investors now account for more than half of new loans for housing, up from 29 per cent two decades ago," it says. "This is one reason (though by no means the only one) why rates of home ownership are falling among younger age groups."

Negative gearers need to keep switching properties to stop annual rent increases eating into their tax losses. About 80 per cent of all properties bought by negatively geared investors are sold within five years, compared with an industry average of 60 per cent.

The institute says that so generous is the combination of negative gearing and capital gains tax concessions that some negative gearers are able to pay less tax in total than if they hadn't geared at all, despite making profits on their investments. "In effect, they pay no tax on their profits, despite receiving a tax bonus," it says.

Prime Minister Malcolm Turnbull said on Sunday that Labor's plan would take a "sledgehammer" to property prices by taking one-third of the buyers out of the market. But the Grattan Institute says its plan would dent prices by less than 2 per cent and scarcely affect rents.

Government won't touch negative gearing

Prime Minister Malcolm Turnbull says the government won't 'have a bar of' negative gearing. While Labor sticks with its plan. Vision ABC News 24.

"Every time an investor sells a property to a renter, there is one less rental property, and one less renter. There is no change to the balance between supply and demand," it says. "Others may sell to another investor, but one that doesn't rely on negative gearing. Again, this doesn't reduce the number of rental properties."

Although Labor's plan to restrict negative gearing to investors in new housing would make little difference to housing supply, it could be worth doing "if it appeals to intuitions that tax benefits will produce more new housing, even if theory and history suggest that the effects will be small".

Every time an investor sells a property to a renter, there is one less rental property, and one less renter. There is no change to the balance between supply and demand.

John Daley, Grattan Institute

The institute says Australia is almost alone, along with New Zealand, in allowing rental losses to be deducted from ordinary wage income. The United States only allows deductions against other investment income, while Britain only allows deductions against capital gains from other rental properties.

The report's principal author, John Daley, said he was disappointed that the government wouldn't be changing the rules given the strength of the case for change, and also "somewhat bemused" by an example cited by the Prime Minister of a family that was negatively gearing to buy a property for their one-year-old daughter.

He asked: "What sort of country is it in which the only way you can expect to get into the housing market is if your parents start saving for you when you are aged one?"

The top 10 per cent of earners collect almost half the negative gearing tax deductions, the research finds.

This story has been brought to you by the Emerald Chamber of Commerce Inc.