Breaking promises: PIPA on the cost of tax reform

Potential reforms could cost the Australian economy $58bn, research shows

Breaking promises: PIPA on the cost of tax reform


By Mina Martin

Recent speculation around Prime Minister Anthony Albanese’s shift towards tax reform, particularly tampering with negative gearing and capital gains tax concessions, has stirred concerns among property investors and analysts alike, according to the Property Investment Professionals of Australia (PIPA).

After backpedaling on the commitment to uphold stage three tax cuts, the Albanese government is now reportedly eyeing broader tax adjustments that could have far-reaching effects on the nation’s housing market and federal budget.

The financial fallout: A $58 billion dilemma

PIPA estimates showed that the proposed limitations on negative gearing to new homes only and a reduction in the capital gains tax discount could drain up to $58bn from the federal government’s coffers over the next decade. This reform would not only deter investors but also significantly reduce the rental housing supply, pushing rents up and placing additional barriers for first-home buyers.

Contrary to government claims, Peter Koulizos (pictured above left), PIPA board member, said the benefits of negative gearing are overstated.

“Investors already pay more than six times in capital gains tax than what they receive in negative gearing benefits over a 10-year period, so the government is well ahead financially as it is,” Koulizos said.

A closer look at the numbers

PIPA’s analysis indicated that an investor purchasing a property valued at $925,000 today might benefit from $20,415 in negative gearing over 10 years, yet could owe approximately $116,336 in capital gains tax upon sale, resulting in a net gain of $95,921 for the government.

The proposed changes could lead to a governmental loss ranging from $19.3bn to $58bn over a decade. Additionally, a reduction in investment properties is expected to escalate rental prices, further obstructing first-home buyers from entering the market.

According to PIPA's modelling, a 15% drop in investment activity could result in a reduction of 499,000 rental properties. This significant decrease would lead to a substantial loss in capital gains tax revenue for the government and an increase in rental prices, further diminishing market accessibility for many Australians.

PIPA's modelling, based on current market conditions, showcases the potential financial impacts on both the government and the property market. With a focus on the long-term consequences, the analysis underscores the importance of a balanced approach to housing policy, one that considers the needs of both investors and first-home buyers.

A 10% decrease in investment activity could lead to 333,000 fewer rental properties and a $38 billion loss in government capital gains tax revenue over ten years. Similarly, a 5% reduction might result in 166,600 fewer rentals and a $19.3 billion revenue loss, the PIPA analysis found.

PIPA highlights risk of tax reforms

The situation could worsen, as 38% of landlords surveyed in the 2023 PIPA Investor Sentiment Survey expressed intentions to sell their properties within the next year, citing recent tax and tenancy reforms as deterrents to their investment activities.

“If Anthony Albanese suddenly adopts a draconian policy like the one Labor took to two elections, I have no doubt property investors will be seriously discouraged from buying property,” PIPA Chair Nicola McDougall (pictured above right) said.

“When it last proposed these drastic measures, Labor claimed it would incentivise landlords to buy new homes, stimulating supply, but our research shows 93% of investors buy established dwellings.”

McDougall also critiqued the government’s assumption that reducing the number of investors would benefit first-home buyers as fundamentally misguided. She pointed out that the primary obstacle to homeownership for young Australians is not competition from investors but the challenge of saving for a deposit and affording stamp duty.

“The ability to save a property deposit won’t improve by attacking investors,” McDougall said. “In fact, those hoping to buy their first home will have even less money to save if their rents suddenly skyrocket because of a mass exodus of landlords.

“Saving a deposit for your first property has always been difficult and has been made even more so by soaring interest rates and the tendency for government benefits to focus on new dwellings. That’s despite the data showing more than 80% of first-time buyers choose established dwellings because that’s what they can afford.”

Koulizos suggested that the revenue loss could exceed projections beyond the decade mark due to a decline in the number of investors paying taxes on positively geared properties and capital gains tax from significant equity growth, typically seen after owning an established property for 10 to 20 years.

“Making changes to negative gearing and capital gains tax provisions in the midst of a housing crisis isn’t smart and Anthony Albanese should carefully consider his next move. It won’t just be renters who pay dearly – but the budget’s bottom line,” Koulizos said.

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