Finance Property A Liberal wakes up to damage caused by landlord tax perks

A Liberal wakes up to damage caused by landlord tax perks

rob stokes candidate to replace Baird as NSW premier
Rob Stokes praised his leadership rival Dominic Perrottet, but not too much. Photo: AAP
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NSW state Liberal minister Rob Stokes has embarrassed his Canberra colleagues by joining the growing chorus of calls to curb tax breaks for landlords, which he agreed are crowding young buyers out of the market.

Mr Stokes, the state’s planning minister, took a swing at “Canberra culture” in a politically explosive speech in Sydney on Friday.

“Earlier this year the NSW government was ready, willing and able to have a discussion about tax. Disappointingly, our leadership on this issue fell victim to the Canberra culture that promotes opposition over consensus,” he told the event organised by the Committee for Economic Development of Australia (CEDA).

“It’s a major concern to me as Planning Minister of the most populous state, but also frankly as a dad of three young children, of increasing reports that without parental support the dream of home ownership is becoming harder and harder to obtain.

“Surely the focus of the tax system should be directed towards the type of housing we need. Why should you get a tax deduction on the ownership of a multi-million-dollar holiday home that does nothing to improve supply where it’s needed?”

The government won’t budge. In a landmark speech in October, Treasurer Scott Morrison admitted that buying a house without dual incomes has become “an almost unreachable goal”, but refused to touch tax concessions.

Watch a simple explanation of the tax breaks:

His party held the line on Friday. Finance Minister Mathias Cormann told Mr Stokes to focus on his state responsibilities, and Finance Services Minister Kelly O’Dwyer criticised his proposal as “simplistic”.

The Treasurer himself was less antagonistic. He reiterated that there isn’t a ‘one-size-fits-all’ solution, but urged state and federal governments to cooperate.

Mr Stokes was referring to two popular tax laws known as ‘negative gearing’ and the ‘capital gains tax concession’, which encourage Australians to borrow heavily to invest in residential real estate, driving up prices and household indebtedness.

How the tax breaks hurt buyers

‘Negative gearing’ allows landlords to lower their tax bill by deducting the costs of owning a rental property, such as mortgage interest payments, council rates and insurance, from their taxable income.

sydney houses
The affordability crisis is worst in Sydney. Photo: Getty

The ‘CGT concession’ allows landlords to pay tax, at their marginal rate, on only 50 per cent of the capital gains they realise when they sell the property.

Together, the laws distort behaviour by making even loss-making or vacant rental properties attractive investments.

While not the only cause, the two tax laws fuel price growth, making it harder for young Australians to save for a deposit, which is the main barrier to buying a first home.

Lured by tax perks, landlords outbid first home buyers, and then rent back to them.

Without this distortive effect, investors might instead choose different investment vehicles, such as shares, bonds, savings accounts or voluntary superannuation contributions, which do not price out owner-occupiers.

reserve bank chart deposits

A wide array of experts agree that the tax laws favour wealthy investors, and contribute to the difficulty of young Australians entering the property market, at least in the nation’s two biggest cities, Sydney and Melbourne.

Critics who doubt that houses are becoming less affordable point to the Reserve Bank’s record-low cash rate. But this rate only cheapens mortgage interest repayments. It does not make it any easier to save for a deposit, nor does it reduce principal repayments.

Reforms imposed by APRA, the nation’s financial stability regulator, have also forced the banks to require deposits that are higher percentages of the purchase price.

A politically dangerous reform

A barrier to reform is that property wealth is so important to many Australians, especially those nearer retirement. For this reason, changes to the system are politically dangerous, as Mr Stokes hinted at in his speech.

Chris Bowen. Photo: Getty
Chris Bowen dares the government to follow Labor’s lead on landlord tax reform. Photo: Getty

Real estate tax breaks were a big issue during this year’s federal election. After years of silence, the Labor Party promised to halve the CGT discount from 50 to 25 per cent, and abolish negative gearing for existing properties.

On Friday, Shadow Treasurer Chris Bowen told the government to “swallow its pride”, forsake its “scare campaigns” and follow his party’s proposal.

The Grattan Institute, an economic think tank, said in a report last year that Labor’s proposals would reduce house prices by 2 per cent — perhaps not enough to satisfy the angry younger generations, but also modest enough to not scare retirees.

Defenders of the perks, including the Treasurer, argue they are used by ‘mum and dad investors’. This was disproven by a study by the Australian National University, which found that 52.6 per cent of the benefits go to the top 20 per cent of incomes, and only 5.2 per cent to the bottom 20 per cent.

The NSW Planning Minister joins the growing ranks of those who have voiced concerns about Australia’s property tax regime, including:
– Malcolm Turnbull, years ago (link)
– CEDA (report)
– The International Monetary Fund (link)
– The Grattan Institute (report)
– The Australia Institute (report)
– Prominent economist Saul Eslake (link)
– The Reserve Bank (link)
– Former RBA board member John Edwards (ABC)

The defenders of negative gearing and the CGT concession are principally those with financial or political interests in continued housing price growth, such as the Property Council of Australia, the Institute of Public Affairs, the Housing Industry Association, and Australia’s richest property developer Harry Triguboff.

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