RBA calls for review of negative gearing

by Julia Corderoy16 Jul 2015
The Reserve Bank of Australia has called for a review of negative gearing, arguing that it could encourage speculative property investment.

In its submission to the parliamentary inquiry into home ownership, the Reserve Bank notes that speculation fuelled by negative gearing could raise risks in the market and drive up house prices.

“The Bank believes that there is a case for reviewing negative gearing, but not in isolation,” the submission states. “It’s interaction with other aspects of the tax system should be taken into account.”

The Reserve Bank says the ability to deduct legitimate expenses incurred in the course of earning income is an “important principal” in our taxation system. It also says negative gearing can be important for tenant affordability, if it enables landlords to accept a lower yield than otherwise.

However, combined with the discount investors can receive on capital gains, negative gearing can fuel speculative property investment. 

“It is worth noting, however, the interaction of negative gearing with other parts of the taxation system may have the effect of encouraging leveraged investment property.

“In particular, the switch in 1999 from calculating CGT at the full marginal rate on the real gain to calculating it as half the taxpayer’s marginal rate on the nominal gain resulted in capital gain-producing assets being more attractive than income-producing assets for some combinations of tax rates, gross returns and inflation.

“…Since property can usually be purchased using higher leverage than other assets that produce capital gains, property is especially affected by this feature of the tax system.”

According to the RBA’s submission, investors’ share of loan approvals has risen from a little over 30% in 2011 to almost 40% recently.

“The increase in investor activity and strong growth in housing prices, among other developments, has raised concerns about risks emerging in the housing and mortgage markets.”

The RBA’s data also shows that the share of investors that declared a net rental loss, thus taking advantage of the tax benefits of negative gearing, was just under two thirds in 2012/13, having increased from around half in the late 1990s.
 

COMMENTS

  • by David in Qld 16/07/2015 9:08:45 AM

    What will happen to rents if negative gearing is altered substantially? The availability of rental accommodation will reduce an rents "may" skyrocket....and will govt build more alternative accommodation?......I don't think so.

  • by Incognito 16/07/2015 10:48:58 AM

    Some people believe the rental market can bear higher rents.

    I'm surprised they don't put up their rents already.

    I have a ton of renters who would prefer to buy if the Sydney market wasn't so distorted.

  • by SA 16/07/2015 12:17:06 PM

    Obviously the RBA is playing the card of not wanting to reduce Rates further or perhaps provides incentive to do so if investor + property prices are held in check.
    Instead of stifling internal growth + wealth of ordinary Aussies, how about heavily taxing the Overseas Investors with much deeper pockets. It would also help take some steam out of property market and help the budget more effectively than removal to Negative gearing