On 30 May, Federal Treasurer Joe Hockey released a Tax Discussion paper entitled Re:think.
The paper kicks off a national conversation between the community and Government about Australia’s tax system as part of large-scale tax review. Although we can be quick to switch off when it comes to tax talk, it is important for the welfare sector to be live to the issue, and more importantly, to engage with it.
Changes to our Federal tax system can and will have implications on the Commonwealth’s capacity to be involved in the funding of state and territory public services.
It is no coincidence that the tax review is occurring in parallel with the Reform of the Federation White Paper, which considers the roles and responsibilities of the Commonwealth and states and territories. The Federation Review aims to reduce the overlap and duplication between different levels of Government. It has been argued that the States and Territories are increasingly reliant on revenue collected by the Commonwealth to deliver services in the areas they are responsible for. Around 45 per cent of State and Territory revenues is now coming from the Commonwealth.
The Federation Review will focus on five key areas, one of them being Roles and Responsibilities in Housing and Homelessness. The final recommendations are scheduled to be handed down in 2017.
We cannot consider how we spend public money without taking into account how we collect tax revenue, and for this reason, the issues being thrown open Tax Discussion paper are worth putting our mind to as a sector.
For example, the Tax Discussion paper includes a section dedicated to investment properties and taxation. Tinkering with tax levers such as land tax, stamp duty, capital gains tax and negative gearing can have significant implications for housing supply, and a flow-on effect to the supply of affordable housing for people on low incomes.
Early indicators suggest that negative gearing will feature heavily in the tax reform debate. At the launch of the Tax Discussion paper, Treasurer Hockey said he will be raising housing supply issues with state Governments, and expressed concern about the difficulty for first home buyers to break into the market.
Although the Treasurer’s comments perpetuate the misunderstanding of the housing affordability crisis as purely a problem facing aspiring home owners (rather than a problem facing people simply trying to find somewhere affordable to live), we are pleased to see a magnifying glass being put to negative gearing.
Negative gearing encourages individuals to invest in housing by allowing them to deduct the losses associated with renting out property from all of their taxable income. The role of negative of negative gearing in real estate and the impact that this has on housing supply and affordability is contentious. It has been long-argued that negative gearing encourages people to invest in real estate, in turn creating a pool of private rentals for those who cannot afford to buy, and alleviating the burden on Governments to provide housing.
However, economists such as Saul Eastlake have argued that negative gearing only drives up the price of real estate, as investors with greater equity and more to gain compete with first-home buyers for properties.
Others warn against abolishing negative gearing, saying it would force landlords to put up rents, pointing to 1986 when the Hawke Government removed negative gearing. In actual fact, rents didn’t rise across the country, as the argument would suggest; rents only went up in Sydney and Perth, and a range of other factors played into the trend, including very low vacancy rates in those cities.
In its submission to the Senate Inquiry into Housing affordability, CHP argues that negative gearing and capital gains tax discounts are an inefficient use of tax payers’ money, and an ineffective method of creating affordable housing.
In the 2010-11 financial year, landlords claimed a collective loss of $7.8 billion for deductions including stationery, travel expenses, gardening costs and interest on loans, whilst collectively earning nearly $31 billion in rent.
Compare the nearly $8 billion the Federal Government spends on negative gearing and capital gains each year with the $2 billion spent on social housing and homelessness assistance and $4 billion for Commonwealth Rent Assistance, and a cogent argument for the abolition of negative gearing emerges.
Who pays tax and how much are fundamental questions for the community to consider, and have wide implications. CHP will follow the Tax Review process closely, and will be make a submission to the Federal Government. Submissions close on 1 June, and you can either make your own submission, or send your thoughts to Sarah Toohey to be incorporated into CHP’s paper.