More fairness in home-owner and investor tax breaks is essential

We’re sorry, this feature is currently unavailable. We’re working to restore it. Please try again later.

Advertisement

This was published 10 years ago

More fairness in home-owner and investor tax breaks is essential

Australia's tax and social security rules strongly favour high levels of home ownership and real estate investment. That is a good thing. Home ownership is one of the cornerstones of our society and encouraging investment in real estate ensures a supply of rental properties.

But the incentives help push house prices higher, making it more difficult for first-timers to get onto the property ladder. Family homes are exempt from capital gains tax when they're sold, generally exempt from the land taxes levied by the states and territories, and excluded from the age pension assets test.

Why should tax breaks be given to those buying their second or third investment properties when they probably would buy the properties anyway?

Why should tax breaks be given to those buying their second or third investment properties when they probably would buy the properties anyway?Credit: Louise Kennerley

A report last week by the Grattan Institute found home owners received $36 billion in government expenditure a year and property investors received almost $7 billion. The author said more government assistance was going to people buying their second and third houses and to build a property portfolio rather than to people buying their first home or in rent assistance.

One of the biggest tax breaks for property investors is negative gearing. This is where, if the rent does not cover the interest costs and other expenses, the shortfall reduces the amount on which the investor pays income tax. Property investors claim billions of dollars a year in tax deductions on their loss-making properties, which they hope to recoup on selling the properties. The institute report said the tax breaks on the family home and investment properties favoured the well off. The top 20 per cent of households by disposable income received about $8000 a year in property-related tax breaks. The bottom 20 per cent received just over $2000.

Superannuation, the other investment for which there are generous tax breaks, was made less equitable with Peter Costello's superannuation reforms that took effect in 2007. The key change was making retirees' withdrawals from super tax free from the age of 60. By salary sacrificing into super, most people swap their marginal rate of income tax for the 15 per cent contributions tax on super. Salary sacrifice is limited by annual caps but most people come nowhere near hitting the caps. As with real estate, the better off can afford to make the most use of the tax breaks.

The family home is not counted under the assets test for the age pension. A couple of pension age can have about $1 million in savings and still qualify for at least a few dollars of age pension each fortnight. An age pension of only a few dollars a fortnight entitles the couple to 100 per cent of the extensive range of age-pensioner discounts.

The Herald supports incentives to encourage people to save for a comfortable retirement and ease the burden on the age pension. But why should taxpayers provide further incentives to those who have already saved enough to ensure a comfortable retirement?

The same argument applies to real estate. Why should tax breaks be given to those buying their second or third investment properties when they probably would buy the properties anyway.

The Gillard government made small changes to curb some of the super-related tax breaks to the better off, but more needs to be done to make sure taxpayers are getting value for money. There have been calls to limit the investment interest on property loans to being deductible against the rental income rather than against all income.

Advertisement

In 2010 the Henry review of the tax system recommended that only 40 per cent of interest and other expenses associated with an investment be allowed as a deduction, instead of 100 per cent. If a property has been held for more than 12 months, the investor is able to reduce the capital gain on which capital gains tax is paid by 50 per cent. As the review also recommended, why not limit the reduction to 40 per cent, instead of 50 per cent.

There needs to be a gradual winding back of tax breaks for the better off and an examination of all wasteful tax breaks as part of a wider review of the tax system.

Before the election Prime Minister Tony Abbott promised that within three years there would be a tax white paper on how Australia could have "lower, simpler, fairer" taxes. The government's announcement on Tuesday that it would conduct a commission of audit of government spending to bring the budget into surplus provides an earlier opportunity to better target tax breaks on real estate and superannuation.

Most Viewed in National

Loading