Grattan Institute calls for changes to negative gearing

by John Maguire27 Apr 2016
Less than a week out from the Federal Budget, a new report from the Grattan Institute has suggested that changes to negative gearing and capital gains tax would allow the government to save approximately $5.3 billion per year.

The report, Hot property: negative gearing and capital gains tax reform, indicates that interaction of a 50% capital gains tax discount with negative gearing distorts investment decisions, makes housing markets more volatile and reduces home ownership. The two combined measures allow investors to reduce or defer personal income tax, costing taxpayers $11.7 billion.

The report recommends that negatively geared investors should no longer be allowed to deduct losses on their investments from labour income and that capital gains tax discount should be reduced from 50% to 25%.

Grattan CEO and co-author of the report John Daley believes the reforms would have little impact on peoples’ savings and would balance the government’s books in straitened times.

“Contrary to urban myth, rents won’t change much, nor will housing markets collapse,” he said. “The effects on property prices would be small compared to factors such as interest rates and the supply of land.

“These two sensible reforms won’t hurt private savings much but will save the government a lot of money.”

Stuart Wemyss, founder of The Mortgage Broker Revolution, told Australian Broker he was wary of changes to negative gearing, particularly as outlined by the Federal Opposition.

“I’m sure the whole banking industry would like to see negative gearing and capital gains tax unchanged,” he said. “My biggest concern with the changes proposed by Labor is that they will likely spur the property spruiking industry into overdrive.

“The proposed changes will see negative gearing retained only for new build properties, not established properties. As a result, the potential tax savings gap between new and established properties will be widened even further and the property spruiking industry will likely use these tax saving differential as a way of selling or promoting off-the-plan property.

“My fear for the mortgage broking industry is that, if Labor wins the election and implements these laws, mortgage brokers may get caught up with property spruiking and be seen to promoting such investments, primarily for their own gain. It could potentially tarnish the reputation of brokers.”

Prime Minister Malcolm Turnbull was quick to shoot down the Grattan report. In a statement on his official website he described the report as “wrong” and “littered with factually inaccurate statements”.

Speaking with Australian Broker earlier this month, Peter White, CEO of the FBAA, said, “The things that we don’t want to see in the budget are changes or negative impacts on negative gearing.”

Melbourne-based Wemyss believes changes to negative gearing could affect mortgage brokers who deal with investment lending.
“I would think that the quarantining of negative gearing would slightly reduce the demand for investment borrowings – maybe a reduction in the order of 10%. If that occurred then brokers’ loan volumes would likely be impacted.
“I don’t think the demand reduction would be significant because borrowing to invest, as a financial strategy, is still a powerful and effective strategy irrespective of the tax benefits.”



  • by Xavier 27/04/2016 8:23:32 AM

    If the tax deductions are abolished then is it fair to tax the rental income I ask?
    If the answer to this question is a 'yes' then this creates a double dip and unfair system from the ATO
    IF the answer is - logically - 'No' then this $5.3 Billion of government savings is not realistic and the change away from Negative gearing will not generate the savings put forward it seems

  • by David 27/04/2016 9:48:13 AM

    Good point Xavier. Of course the left wing Grattan Institute will come out in full support of the left wing policies. They're just not very good at seeing the very forseeable outcomes. Currently 7% of investment property purchases are for new properties leaving 93% buying established properties. Suddenly, 100% of investors will be competing for that 7% of properties. Considering the First Home Owners Grant now only applies to new homes in many states, these first home buyers will be totally left behind by cashed up investors who will be prepared to pay more so they get the tax incentives. The average mum and dad trying to upgrade their basic family home will immediately lose around 40% of available buyers now that investors won't be interested. Developers and builders will make a killing due to the massive uplift in demand for new investment stock. They won't need to worry about building owner occupied homes as they'll have plenty of business looking after the investors. Those who still want to build their owner occupied home will have to pay heavily inflated prices as they're competing with all the investors to get a home built.

  • by wow 27/04/2016 4:24:07 PM

    dumbest thing I have read in my life