Joe Hockey says negative gearing tax reform can’t be ruled out, but the family home is off limits

Treasurer Joe Hockey, launching the government’s discussion paper on tax reform in Melbourne today, has refused to rule out changes to negative gearing.

He says he disagreed with the long held perspective of the economist Saul Eslake.

However the paper said negative gearing played a contentious role in driving up property prices when combined with the 50% discount on capital gains.

“We haven’t done what our predecessors did and start ruling things out,” Mr Hockey said.

“We are putting the whole system down and asking what could be done better,” he said.

Negative gearing was a hot topic on last Monday night’s Q&A on the ABC.

Hockey, then and this morning, cited that when the Hawke government did away with it, rent prices shot up in some parts of Australia.

Laura Tingle in the Australian Financial Review noted the Abbott government had “thrown open the doors to a broad-ranging debate on tax reform – from changing the rate and base of the goods and services tax to increasing capital gains tax, reducing superannuation concessions, removing dividend imputation, and dealing with bracket creep by indexing income tax thresholds.”

Joe Hockey said the discussion paper marked “the start of a conversation about how we bring a tax system built before the 1950s into the new century” as globalisation and the rise of the digital economy had the potential to render Australia’s heavy reliance on income taxes unsustainable.

Earlier on the ABC’s AM he was asked by Michael Brissenden: “So are these things in the mix in the conversation – the super tax, and negative gearing?”

JOE HOCKEY: “Well we haven’t done what our predecessors did and start ruling things in and out, because if you’re having a fair dinkum conversation with the Australian people, everyone should be fully informed about what the pressures are on the tax system, everyone should be fully informed about the success or otherwise of individual taxes, and everyone should be able to express an opinion.

And if you go to the website bettertax.gov.au, people will be able to see all the information there and be able to express a view.”

MICHAEL BRISSENDEN: “So negative gearing is in the mix, then?”

JOE HOCKEY: “Well again, it’s so tempting to get into this rule-in, rule-out situation.”

MICHAEL BRISSENDEN: “Okay.”

JOE HOCKEY: “We’re putting the whole tax system down, all the concessions down, and asking Australians for their opinion about what could be done better.”

Peter Martin in The Age noted that rather than critiquing the practice known as negative gearing, which allows Australians to write off against their income tax losses made from rental properties, the Treasury calls into question the tax arrangements that makes it profitable.

“Since late 1999, capital gains tax has applied to only half of the profit made when each rental property is sold.

“The paper says it is this arrangement rather than negative gearing itself that is driving investment in rental properties,” the economics commentator at The Age noted.

The white paper advised the tax treatment of investment properties is the same as it is for investment in any asset that produces a mix of current income and capital gain.

“That is, the rental income is taxed at the individual’s marginal tax rate as it is earned, while generally only half of the capital gain is taxed, and only when the property is sold (or realised in some other way).

“Investment properties are the third most popular saving vehicle after the family home and superannuation.

“Many of the reasons people invest in housing over other assets have little to do with the tax treatment.

“However, the role of the tax treatment in driving investment in real estate and the impact that this has on housing supply and affordability is a contentious issue.

“One issue that is contested is the role that ‘negative gearing’ plays in driving investment in rental properties.” (See the charts below).

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On the family homes, the paper noted the family dwelling is both a consumer durable — a house provides benefits over time like a washing machine or a television — and also a savings vehicle.

Australian households hold 43% of total household assets in the value of the family home.

Of the 7.8 million households living in private dwellings in Australia in 2011, 5.2 million or 67% owned their own home (with or without a mortgage) and a further 2.3 million were renting either privately (25%) or in social housing (5%).

“Like most other OECD countries, Australia taxes owner-occupied housing more favourably than other types of investment (including dwellings purchased purely for investment).

“Both the ‘imputed rent’ — in other words, the value of housing services a home owner receives from their own home — and capital gains on the property are exempt from income tax; Chart 4.1 accordingly shows the effective tax rate of zero.”

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“This makes it an attractive vehicle for saving. The primary home is also exempted from the means-test for transfer payments.

“While the family home is exempt from paying land tax, it is subject to stamp duties and municipal rates levied by local and state governments.

“Given the central importance of the home for Australian families, there is a strong consensus that it would not be appropriate to tax either the imputed rent on owner-occupied housing or capital gains derived from it.”

This story originally appeared on Property Observer.