Negative gearing should be phased out for all not just some, says economist
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Version 0 of 1. One of Australia’s most vocal advocates of ending negative gearing has warned against shielding existing property owners from policy changes, saying this could entrench “intergenerational unfairness”. The Grattan Institute chief executive and economist, John Daley, applauded the Greens for proposing a policy to stop investors claiming a tax deduction for rental property expenses, but said it should be phased in for all properties rather than applying only to future purchases. Under the Greens’ policy, released on Sunday, negative gearing would be removed for all assets purchased after 1 July 2015. Related: Greens say Australia could save $3bn by ending negative gearing This would ensure that existing investments would be “grandfathered” – meaning they would be shielded from the changes. The independent Parliamentary Budget Office (PBO) estimated the policy would improve the budget bottom line by $2.94bn over four years, but the benefit would build over time to be worth a cumulative $42.5bn over 10 years. Australia’s main political parties reacted cautiously to the proposal. The Coalition, which has previously ruled out changes to negative gearing, warned of potential flow-on effects on rental prices, while Labor, which has previously been open to partial changes, said it was still developing its housing policy. A deputy leader of the Greens, Scott Ludlam, called on the major parties to support the “really important reform” on the basis that negative gearing had “comprehensively failed as a way of introducing new supply to the Australian property market”. “We’ve got no problem at all with property investment – it’s just that people shouldn’t be forced to subsidise it through their taxes,” Ludlam said. “It’s one of the reasons that we’ve proposed grandfathering arrangements which say that effective 1 July we think negative gearing should stop but we’re not going to penalise people who have already structured their financial affairs that way.” Daley said the mere fact someone had bought an asset did not mean they were entitled to the same after-tax return in perpetuity. “If you grandfather it, you end up freezing up the housing investment market because everyone who has already bought something wants to hang on to it,” he said. Daley said grandfathering would also “build quite a lot of complexity into the system” and protect the older generation that had done well from existing tax arrangements. He said there was “a real risk of a younger generation being worse off than their parents” and any move to grandfather negative gearing arrangements could exacerbate that problem. Instead of the Greens’ model of limiting the change to asset purchases after a particular date, Daley has proposed phasing in the changes over five or more years and the policy would apply regardless of when the property was acquired. For example, in the first year all investors could claim 85% of losses, then 70% in the second year, with further reductions until it reached zero. “We would suggest it’s far better to phase it in gradually; that way you treat all generations the same and you also avoid a potential freezing up of the housing investment market,” Daley said. He disputed suggestions rental prices could increase, saying it was more likely to ease pressure on housing sale prices. “As a matter of economic theory, given that the housing market is close enough to a fixed stock of housing you would expect a change to after-tax returns … will show up in house prices but it will not show up in rent. This is another reason why you might want to phase this in,” Daley said. But a spokeswoman for the treasurer, Joe Hockey, said there was “a very strong argument that if you were to abolish negative gearing, you would see a significant increase in rents”. “If you change negative gearing, then there are significant flow-on consequences for people that rent homes, and that needs to be properly considered,” the spokeswoman said. “A lot of Australians have invested their hard-earned money in real estate, and in doing so, they have offset the losses of that real estate against their primary income, in order to give themselves and their children some financial security.” The treasurer’s office added that “trying to limit negative gearing to non-property investments or limiting it to new property only would be administratively complex”. The property industry also warned against changes to negative gearing. The Property Council of Australia said on Sunday the Greens’ policy was “dangerous” and would worsen housing affordability. “Removing negative gearing would put the brakes on the supply of new housing and any interruption to supply would only drive prices higher for both renters and home owners,” said the council’s chief executive, Ken Morrison. “It would mean less rental accommodation and less newly constructed housing, which our major cities desperately need.” Labor frontbenchers who fronted the media on Sunday avoided expressing a definitive position, but said the consequences of any changes would have to be carefully considered. Labor’s transport spokesman, Anthony Albanese, said he did not want to see “an Australia where the only way that a young person can get into home ownership is if they inherit a home”. Albanese told Sky News negative gearing was one element of the housing debate. “You’ve also got to very much look at the supply side and you would have to look at whether any changes would have an impact in terms of supply, in terms of investment in housing. When it’s been looked at in the past, that’s been the concern, that it would have a negative [impact],” he said. Labor’s environment spokesman, Mark Butler, said the party was consulting the housing sector, experts and academics “about how to improve housing affordability for Australians, young Australians and others wanting to get into the market and we’re going to do that in a measured, responsible way”. The shadow treasurer, Chris Bowen, has previously said he would not rule out taking proposed changes to negative gearing to the next election, due in 2016. In April he told the National Press Club he did not envisage either side of politics “abolishing negative gearing in its entirety” but Labor would develop a policy based on the principles of not risking the supply of new housing and not disadvantaging people who had made investments in good faith under current rules. |