change to negative gearing...uh oh!!!

  1. Yak
    13,672 Posts.
    Wont this put the cat amongst the pigeons??

    Negative gearing on notice
    By Christine Wallace
    November 15, 2003

    NEGATIVE gearing is under threat, with the Reserve Bank identifying far-reaching changes to the taxation of property investment to fix the housing bubble by dampening investor interest.

    The Reserve says investors are pushing up property prices.

    In a submission to the Productivity Commission inquiry into housing affordability, the bank yesterday identified low interest rates, easy bank lending and the boom in investment property purchases as the source of the bubble.

    It said the favourable tax treatment of property investment in Australia, compared with other countries, had led to a flood of investment money into property, despite extremely low yields.

    And the bank has linked investors' thirst for tax breaks to the "relatively low income" at which Australia's top marginal tax rate cuts in.

    It paints first-home buyers as collateral damage in a property market driven sharply up by tax-driven property investors.

    Older Australians had benefited from 30 years of asset-price inflation, "while new entrants to the workforce struggle to buy their first home", Reserve Bank governor Ian Macfarlane told The Australian's Pursuing Opportunity and Prosperity Conference in Melbourne on Thursday night.

    The bold bank submission to the housing affordability inquiry poses a challenge for the Howard Government, which is unlikely to welcome anything that unsettles property investor sentiment in the run-up to next year's federal election.

    The bank was at pains to say that it was not its place to recommend changes to the tax system.

    However, its forceful and controversial analysis and critique of negative gearing's role in the property boom demands careful attention from the Productivity Commission and a robust response from government.

    Opposition Treasury spokesman Mark Latham, under political pressure shortly after taking over the role mid-year, ruled out changes to negative gearing.

    The bank urged the Productivity Commission to look at tax changes in three areas to improve housing affordability and bring the tax treatment of investment property into line with international standards.

    First, the bank questioned whether negative gearing should be allowed on property investments where there was little prospect of its being cashflow-positive for many years.

    Second, it said the ability to claim depreciation on loss-making investments should be reconsidered.

    Third, it said that the interaction between depreciation allowances and the capital gains tax, which led to lower effective tax rates than intended, should be looked at.

    "For every new dollar lent for housing purposes, around 40c now goes to investors - a figure much higher than we have ever experienced before," the bank said in its submission.

    "The stock of credit outstanding is rising at nearly 20 per cent for owner-occupiers - an exceptionally rapid pace - but for investors the growth rate is closer to 30 per cent a year."

    Extremely low rental yields were the result, - 3.5 per cent in Australia, compared with 7-10 per cent in comparable countries overseas.

    This fell to around 2.5 per cent and less in Australia after rates, strata levies and the like were deducted.

    "Thus, we find support for the view that investors have been contributing disproportionately to the increase in housing demand over recent years, with the effect that affordability, especially by first-home buyers, has been reduced," the bank said.

    "We accept that owner-occupiers moving to more expensive and better houses is also an important influence on prices, but it is the investor demand that is growing most rapidly."

    The bank linked the attraction of property investment to the top marginal tax rate, which cut in at the "relatively low income" of $62,501, leading to a "large proportion of taxpayers who are attracted to investments which will lighten their tax burden".

    The bank said it did not challenge the validity of negative gearing or claim the tax system singled out property for favourable treatment.

    However, compared with overseas tax regimes, property was more attractively taxed and "resources and finance are being disproportionately channelled into this area".

    "The most sensible area to look for moderation of demand is among investors," the bank said. "... the work undertaken in preparing this submission has highlighted a number of areas in which the taxation treatment in Australia is more favourable to investors than is the case in other countries."

    The Australian

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