I felt honoured to attend a housing industry round table with federal Treasurer Josh Frydenberg and Assistant Treasurer Zed Seselja at Parliament House in Canberra on Monday 18 February 2019. Prime Minister Scott Morrison opened the round table but had to leave after a short address. He left a small group of industry body leaders, from the Property Council, Master Builders, Real Estate Institute, and others, along with business magnate Mark Bouris and the Queensland contingent, Noel Whittaker and me. I imagine I was invited because I have written about negative gearing and the taxation of capital gains (e.g. Untangling the debate on negative gearing) and last year appeared on Emma Griffiths’s 612 ABC Brisbane Focus program discussing the topic.
As has been reported in the media, much of the round table discussion concentrated on the Opposition’s proposed changes to negative gearing and capital gains taxation, particularly the expected adverse impacts on the property market (i.e. lower property prices, higher rents), the building industry, and the broader economy. The proposed policy changes will have adverse economic impacts, particularly as they may well be imposed while the Australian economy is in the middle of a downturn.
The proposed restriction of negative gearing to newly built housing makes little sense. It is based on a misunderstanding of the logic behind negative gearing. It is not a rort, but is a logical feature of the tax system. It means there is a consistent treatment of debt and equity financing, as noted by the Treasury in its 2015 tax discussion paper and lucidly explained in this 2004 Agenda article by Fane and Richardson: Negative Gearing Redux.
Thankfully, the round table was more than just an opportunity for industry representatives to criticise the Opposition’s policies, and it included discussion of positive measures to promote housing affordability. Peak bodies called for cooperation between the three levels of government to bring down taxes and charges including stamp duty.
At the round table, I suggested the Treasurer should commission the Treasury to undertake a detailed study of how changes to negative gearing and capital gains taxation would impact different groups in the community. Earlier in the meeting, the Treasurer himself had noted that a lot of people who negatively geared couldn’t be described as rich or wealthy.
The Treasury should also be asked to advise on any expected macroeconomic impacts given the current outlook for the housing market and the broader economy. Alas, that outlook is not encouraging. Indeed, the UDIA representative at the round table disclosed preliminary estimates of double digit percentage declines in land sales in capital city markets so far this year. The UDIA is intending to publish its estimates in the coming weeks and no doubt they will add to growing concerns about the economic outlook.
I noted that, given Treasury’s attitude to negative gearing (i.e. it is not a rort) and concerns over the economic outlook, in its incoming government brief for a new government (the red book), the Treasury may well recommend a delayed introduction of the policy. Certainly it appears impossible that a Shorten government could enact the policy in time for it to start on 1 July this year, so a 1 July 2020 start date seems more likely.
Treasury may also recommend a watering down of the Opposition’s policy. Indeed, one well-informed member of the Canberra press gallery I spoke with after the round table suggested that, because of the views of some of the cross-bench senators, Labor won’t be able to fully implement its proposed changes to negative gearing. Instead of restricting negative gearing to newly built housing as it is currently proposing, it may instead have to impose a cap of some kind (e.g. on the number of properties that can be negatively geared or the amount of net rental property loss that can be deducted from taxable income).
The housing industry round table was extremely interesting and I’m glad I travelled down to Canberra to attend it. Many thanks for the invitation to attend the event from the Assistant Treasurer’s office and particularly to Teaghan George in his office for her assistance. No doubt the debate around negative gearing and capital gains taxation will intensify as we get closer to election day, widely expected to be 11 or 18 May.
Congratulations Gene. In the context of negative gearing it is also worth doing a proper whole of asset analysis of what the government loses. I haven’t done it yet, but may in time, but when you negatively gear, it doesn’t change the income from the asset, it changes the distribution of the income, and the liability for risk and entitlement to income. When you negatively gear you pay more interest than when you positively gear. And by gearing more highly you also increase the number of properties that can be financed. Once you take the increase in interest paid to banks, which attracts tax, and the increase in the number of properties in the economy, which produces income for tradesmen, etc, as well as GST and CGT liabilities, it is not obvious to me that the government loses any revenue at all from negative gearing. Sure, I offset it against my tax this year, but it ultimately increases my profit when I sell, or when I start collecting rent. So there is a timing advantage only, but I suspect that is outweighed by all the rest.
Worth noting also that CGT is where the next Labor government will get its biggest tax uplift.
Thanks Graham. Great comments.