RBA calls for review of negative gearing

The Reserve Bank of Australia has called for a review of negative gearing in its submission to the parliamentary inquiry into home ownership

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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.
 

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