Scrap or preserve negative gearing? Here's six other options worth debating

Jago Dodson, RMIT University

The Australian tax debate has placed negative gearing under scrutiny. Most of the debate lurches between retentionists, who back negative gearing as a necessary subsidy to support affordable housing, versus abolitionists, who see it as a market-distorting extravagance that delivers an unfair advantage to the wealthy.

But what if there was a middle option between retention and abolition that made it work better?

Negative gearing allows investors to claim a tax concession against their personal income for losses incurred on a rental investment property. It is estimated to be worth around A$8 billion a year in tax concessions.

There is a somewhat obscure technical argument in favour of negative gearing for equalising concessions for property investment losses with similar concessions for other investment classes. But most participants in the debate about negative gearing treat it as a subsidy for investment in housing supply.

The abolitionist argument hinges on two main issues. First, it distorts investment by encouraging deliberate loss-making in property investment. Second, as a form of subsidy, it adds inflationary pressure to housing markets that favour already wealthy investors over home buyers. And the federal government pays for it in tax revenue forgone.

Retentionists, however, argue that abolishing negative gearing would lead to an adverse supply shock in the rental housing sector. That would result in housing shortages, higher rents, and worsening affordability for low-income households.

Labor has taken a moderate abolitionist stance. It proposes to restrict negative gearing to new housing, though with the concession continuing for loss-making landlords who already receive it.

The Coalition government has not yet stated its position on negative gearing. However, there appears to be a strong retentionist stream within government policy statements. The government is also being assailed by property sector lobby groups advocating retention.

We’re flying blind on policy reform

There may be another perspective that sits between abolition and retention. A sensible reformist view might be encouraged by the federal government’s preparedness to, in effect, subsidise private market housing by $8 billion per year.

But such a view might also lament the extraordinarily ineffective targeting, outrageously poor transparency about who receives the subsidy, and egregious lack of accountability for supply outcomes.

These concerns emphasise the gross information gaps about the landlords who receive the subsidy and the rental houses that incur the concession. We generally know which landlords receive negative gearing, their occupational status and their income levels. We don’t which properties in the rental market are negatively geared, nor the social status of their tenants.

Thus there is no transparent connection between the landlords receiving the subsidy, the dwellings that are negatively geared and the status of the tenants who live in them. This means there is no direct empirical way to verify whether negative gearing benefits low-income tenants.

The federal government seems willing to forgo $8 billion in tax revenue to subsidise rental housing supply. Surely, then, it ought to ensure this concession assists the neediest tenants in the most pressured parts of the housing market and make landlords transparently accountable for this.

Labor’s partial abolition proposal takes a minimal step towards transparency by limiting negative gearing to new properties.

Let’s talk about the alternatives

A reformist approach would seek better value for the government’s A$8 billion-a-year investment, in terms of improved affordability for tenant households. How might this work?

The key requirements would be to ensure transparency about which dwellings are negatively geared and the socioeconomic status of their tenants. There are various ways to achieve this.

One model would be to tie the negative gearing subsidy to specified tenant groups. In this case, only if landlords let properties to target tenants, such as those on Newstart, sole parent or aged pension, would they receive the subsidy. This could be done by requiring tenant social security numbers to be reported with landlord tax returns to enable verification.

This approach could be extended by capping the value of weekly rents on properties to which negative gearing could apply. Locational targeting could focus the subsidy to areas with high market rents and poor affordability.

The transition to such a model could be phased in by starting with minimal transparency and accountability requirements and ramping up to more specific requirements. Additional compliance costs would raise the cost of investing in housing. But, it would weed out the investors who are seeking pure profit and encourage those with a social perspective.

A second model that extends transparency and accountability could involve converting negative gearing to a formal low-income housing tax credit as operates in the US. Such a model provides a tax credit for investors in affordable housing that is certified as managed by a legitimate social housing provider. This could be the fillip that Australia’s small community and non-profit social housing sector needs.

A third model might be to channel negative gearing to a dedicated financial investment vehicle drawing on private investment for affordable housing that is built for or let to low-income tenants. There has been a long-standing debate in Australian housing policy circles about the need for long-term institutional investment in affordable housing.

A finance vehicle that offered a return on capital to investors supported by a tax concession could underpin new affordable housing supply. Other countries have used housing bonds in this way to attract additional investment in affordable housing.

Another model could use a reverse auction approach, with landlords competing to supply housing of certain specifications to tenants of a particular income category in return for set levels of tax credit. This would operate in a similar way to the government’s carbon abatement plan, which involves a reverse auction for renewable energy projects. Though this might raise transaction costs, it might encourage helpful institutional consolidation in the private rental sector.

A fifth approach might be for the government to provide the A$8 billion as vouchers to low-income tenants for use in renting housing of a set standard or location. Landlords would then cash these vouchers in as tax concessions. The US operates a subsidy model of this type known as “Section 8”.

A final option would be to simply take the $8 billion-a-year subsidy represented by negative gearing and build desperately needed public housing. Such an approach guarantees transparency and accountability and could directly build around 20,000 dwellings a year, or more with leveraged private finance.

No doubt the current subsidy could be remixed in multiple other ways to improve effectiveness, transparency and accountability in how it procures affordable housing. The examples offered above show that we could be having a much more positive debate about negative gearing than just abolition or retention.

The Conversation

Jago Dodson, Professor of Urban Policy and Director, Centre for Urban Research, RMIT University

This article was originally published on The Conversation. Read the original article.

Lead image credit: Ryan Seychell

1 comment

theboynoodle's picture

Before proceeding, it's important to consider those 'retentionist' arguments in full..

"abolishing negative gearing would lead to an adverse supply shock in the rental housing sector. That would result in housing shortages"

The suggestion here seems to be that if negative gearing is scrapped then investors will demolish their negatively geared homes. Otherwise how, precisely, will it result in there being any fewer homes as a result? given that we know the vast majority of negatively geared properties were not newly constructed.

"higher rents"

This one works on the assumption that all these landlords are currently passing on the benefit of their tax subsidy to their tenants and not, as I would content is more likely, charging the market rent - a figure that will not change just because the subsidy is taken away.

Think of it like this.. there are two identical rental properties in a street. One was purchased 15 years ago by the landlord for $100,000 and is owned outright with no mortgage. The second was purchased last week for $800,000 and is negatively geared to the max. What is the difference in rents between the two? It's zero, of course. Because rents are set by what tenants can afford, and the difference between that and the Landlord's own costs is the Landlord's problem and nobody elses.

and worsening affordability for low-income households.

This is just a repetition of the previous argument.. because three bogus arguments are better than two, right?

I'm sorry to be flippant. And this isn't an attack on the author (who offers no opinion on the validity of the arguments cited).. but the amount of crap that people are throwing around to try and defend this entirely awful tax policy beggars belief and needs calling out at every opportunity.

But as for the article's ideas for ensuring that negative gearing benefits low-income households... why would anyone try and achieve the aim of more affordable housing for a particular group by such a convoluted path?

Indeed, any kind of subsidy to 'affordable housing' will necessarily increase the price of it as the subsidy is soaked up by the landowners. Where I'm from (the UK) there's a housing benefit which is supposed to enable low-income people to afford market rents - but what it actually does is increase the market rent because, duh, if the government says everyone gets $400 a week towards their rent then suddenly everybody's rent is $400. If the government has $8bn a year that it wants to use to lower housing costs for the poorest in society then perhaps that money could be spent financing the construction of affordable housing

Back to top
My Real Estate Mate logo

Development & Planning

Wednesday, October 26, 2016 - 12:00
South Melbourne is poised to host a new hotel on the corner of Moray and Dorcas Street, with developer Perri Projects planning to launch the luxury development. Having gained a footprint onsite during 2005, subsequent land purchases were made allowing Perri Projects to push ahead with the hotel scheme, which...

Policy, Culture & Opinion

Thursday, October 20, 2016 - 14:30
On Monday 24th of October, the iCities: World Class CBDs series conference kicks off. First held in Kuala Lumpur, this year's conference is to be held at the Langham Hotel on Southbank. iCities is owned and operated by iProperty Group, a network property under the REA Group umbrella brand. Over...


Visual Melbourne

Wednesday, August 31, 2016 - 17:00
Melbourne’s architectural landscape is a wonderful juxtaposition of modern and Victorian architecture. Although the CBD has been peppered with many skyscrapers, its historical structures have won Melbourne the title of “Australia’s most European city”. Perhaps the most striking example of this juxtaposition between old and new is the Coops Shot...

Transport & Design

Thursday, October 20, 2016 - 07:00
108 Leicester Street is a collection of eight multi-level Fitzroy townhouses that have been designed to respond to the changing face of multi-residential living in Melbourne. The hybrid inner-city dwellings combine developer/builder FOURSQ with Melbourne firm BKK Architects. The design acknowledges the housing typologies of the development's Fitzroy neighbourhood with...

Sustainability & Environment

Wednesday, October 5, 2016 - 00:00
The proposed new Melbourne Conservatorium of Music (MCM) on Sturt Street is shaping to become much more than a cutting edge venue. While the project has been given coverage to date across a range of mediums, very little has been said regarding the project playing an integral part in the...