How many of Australia’s 2.2 million property investors would lose out under a new plan to curb negative gearing?
- Written by Martin Duck, Post-Doctoral Research Associate, University of Sydney
The Australian Council of Trade Unions is pushing to limit[1] negative gearing and capital gains tax discounts to just one investment property.
So who stands to win or lose the most if it happens? And is the Albanese government likely to act on the proposal, given Labor has been burnt on the issue before?
My research[2] on Australian housing finance shows negative gearing and capital gains tax discounts were not designed with rental housing in mind – yet this is where they’ve had their greatest impact.
How do the tax breaks work now – and what might change?
Under current negative gearing[3] rules, investors are able to deduct losses incurred from an investment property (such as interest payments and other expenses) against their own taxable income. These can be claimed on an unlimited number of investment properties.
High-income earners tend to have greater incomes to buy properties, and larger tax bills to make deductions against.
With the 50% capital gains tax discount[4], only half the increase in price of an asset is taxed when it is sold. High-income earners also tend to benefit more from this than low-income earners.
Under the ACTU’s proposal[5], the current negative gearing and capital gains tax discount arrangements would stay the same for the next five years.
That would give investors time to adjust their property portfolios before a change to only getting tax breaks on a single investment property.
ACTU Secretary Sally McManus is putting forward the idea at this month’s national economic reform roundtable[6]. She warns continuing to give investors tax discounts to own multiple properties is making home ownership “nearly unimaginable for young people”.
Who would win and lose under the proposal?
According to analysis of the most recent Australian Tax Office statistics from 2022-23[7] by RMIT researcher Liam Davies, there were 2,261,080 individuals with an “interest in property” – meaning they have an investment in at least one rental property.
Of those investors, 1,117,175 (49.4%) were negatively geared. And of those who were negatively geared, 810,875 have an interest in one property, and 306,300 have an interest in two or more properties.
So yes, there would be some losers under the ACTU proposal. About 306,300 out of 2,261,080 investors – 13.5%, or roughly one in seven property investors – would be affected by the new proposed limits. That’s just over 1% of all Australians.
But for the majority of other investors who negatively gear now – 810,875 people at last count – they would continue on with the same tax breaks as before.
Read more: What is negative gearing and what is it doing to housing affordability?[8]
What tax breaks cost now – and what they could fund
It’s also worth noting that negatively geared investors “lost” (or claimed deductions for) a total of A$10.4 billion in 2022-23, with $4.8 billion being “lost” by investors with an interest in two or more properties.
The ACTU estimates its change would raise about $1.5 billion[9] in tax revenue each year.
That money could go towards housing in other areas – such as the government’s Housing Accord target of helping finance 40,000 social and affordable homes[10] over the next five years.
We’ve known for years that a tiny fraction of investors[11] actually get the vast majority[12] of these tax breaks.
The Parliamentary Budget Office has reported[13] around 80% of the benefits of the capital gains tax discount go to the top 10% of Australian income earners, while 60% of the benefits of negative gearing go to the top 20% of income earners.
Over the past decade, foregone revenue from negative gearing and capital gains taxation has totalled more than A$80 billion[14].
Tax breaks that were never meant to work this way
Neither negative gearing nor the capital gains tax discount were initially targeted[15] at rental housing.
Negative gearing provisions actually date back to an unclear loophole[16] in the 1936 Income Tax Assessment Act.
And until as recently the mid-1980s – just two generations ago – there was no capital gains taxation in Australia. Back then, it was much harder for investors to get finance to buy rental properties.
The big change came in 1999, when then-prime minister John Howard acted on a Treasury recommendation and applied a blanket 50% discount to all assets held for a year or more.
At the time, the stated aim[17] was to get more people investing in Australian businesses[18], such as through the share market. Instead, many people ploughed money into housing[19] and have bid up house prices[20] ever since.
What are the prospects of change?
Within the past year, Labor has repeatedly ruled out[21] changing negative gearing or the capital gains tax discount.
Labor has been cautious about it ever since Bill Shorten’s failed 2019 election campaign, which proposed limiting negative gearing to newly-built dwellings and reducing the capital gains tax discount from 50% to 25%.
But the simplicity of the ACTU’s proposal – and the fact that it would leave the majority of property investors untouched – may make it simpler to implement and also easier to win over voters.
The Greens have already said they back[22] the ACTU’s proposal. So if the Albanese government chose to act, it would have enough support in parliament to pass it.
Public support for limits on how many properties investors can own has also grown in recent years[23]. Gen Z and Millennial voters now comprise almost half the electorate[24] – and their most pressing concern is housing (un)affordability.
Read more: This election, Gen Z and Millennials hold most of the voting power. How might they wield it?[25]
The ACTU’s proposal is a modest one. In the eyes of some, it won’t go far enough.
If the Albanese government finds the will to take on the proposal, it would have more winners than losers – and would make the housing system slightly fairer than it is now.
References
- ^ pushing to limit (www.abc.net.au)
- ^ My research (ses.library.usyd.edu.au)
- ^ negative gearing (treasury.gov.au)
- ^ 50% capital gains tax discount (www.ato.gov.au)
- ^ the ACTU’s proposal (www.actu.org.au)
- ^ economic reform roundtable (treasury.gov.au)
- ^ statistics from 2022-23 (data.gov.au)
- ^ What is negative gearing and what is it doing to housing affordability? (theconversation.com)
- ^ about $1.5 billion (www.abc.net.au)
- ^ 40,000 social and affordable homes (www.housingaustralia.gov.au)
- ^ tiny fraction of investors (www.theguardian.com)
- ^ vast majority (theconversation.com)
- ^ reported (www.pbo.gov.au)
- ^ A$80 billion (theconversation.com)
- ^ targeted (hdl.handle.net)
- ^ loophole (heinonline.org)
- ^ stated aim (webarchive.nla.gov.au)
- ^ investing in Australian businesses (www.smh.com.au)
- ^ ploughed money into housing (www.rba.gov.au)
- ^ bid up house prices (journals.sagepub.com)
- ^ ruled out (www.theguardian.com)
- ^ they back (greens.org.au)
- ^ grown in recent years (www.abc.net.au)
- ^ almost half the electorate (theconversation.com)
- ^ This election, Gen Z and Millennials hold most of the voting power. How might they wield it? (theconversation.com)
