Negative gearing and CGT in depth

Reforming Negative Gearing and the Capital Gains Tax discount would be one of the most effective ways to remove the massive structural inequity in our tax system, to restore fairness to our housing market, and to generate over $117 billion in revenue over the next ten years.

The Greens' proposal to reform negative gearing and the capital gains discount is based on models outlined in consecutive reports by a wide range of advocates and economists including the Reserve Bank of Australia and overwhelmingly by housing, taxation, and social welfare advocates.

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What is the CGT discount?

Broadly speaking, Capital Gains Tax (CGT) is paid when an asset is sold for more than it was purchased for, minus some deductions. Since 1999, Australia has had a 50 % discount on CGT if the asset was held for more than 12 months by an individual or a trust. The discount means that only half the capital gain made on an investment is subject to tax.

For example, if an investment property was purchased for $200,000 and later sold for $500,000 - the investor made a capital gain of $300,000 – but only 50 per cent (or half) of that amount is actually taxed. The tax applies to capital gains realised when an asset is sold. Owner-occupied housing is exempt.

How much does it cost?

The Capital Gains Tax discount is Australia's sixth largest tax expenditure. According to the Treasury's Tax Expenditure Statement the capital gains discount will cost $6.84 billion in 2016-17, and $7.6 billion in 2017-18 in lost revenue.

Property investment makes up the highest proportion of assets attracting the capital gains discount (40%) followed by shares (37%) and other assets (20%) including art and collectables.

Who benefits from CGT discounts?

Data overwhelmingly shows the vast majority of benefits go to the wealthy. NATSEM data shows 73% of capital gains discounts go to the top reducing tax revenue by $3.7 billion per year.

The most recent ATO data also shows 506,070 individuals reported a net capital gain in the 2012-13 income year; of these 70% had a taxable income over $180,000, and only nine per cent had taxable incomes less than $80,000.

Why was it introduced?

Capital gains tax was introduced in 1985 by the Keating government as part of a tax base-broadening package.

The discount was introduced by the Howard Government in 1999, following a report by the Ralph Review of Business Taxation, which recommended that only half of capital gains be taxed 'to encourage greater investment in venture capital' and to 'support a stronger investment culture amongst Australian households.'

It certainly achieved its purpose - Australians have one of the highest rates of investment in OECD countries, particularly in property – but at a massive cost.

What is negative gearing?

Negative gearing allows investors to deduct losses made on rental properties from their other income, reducing their overall annual tax liability.

How much does it cost?

The Australia Institute using NATSEM figures estimates that negative gearing of residential investment property is currently reducing tax revenue by $3.7 billion per year.

The Grattan Institute has also estimated that negative gearing of real estate alone costs Federal Government coffers about $4 billion a year.

In June 2015, the Parliamentary Budget Office estimated the Greens' proposal to remove negative gearing (with assets purchased prior to July 2015) would raise $42.48 billion over the next ten years to 2024-25.

A tax subsidy for investors worth about $4 billion a year is the equivalent of a cheque for $1781.43 for every Australian citizen.

Who benefits from negative gearing?

The biggest winners from negative gearing are the nation's highest income earners:

  • Over half of individual taxpayers with negatively geared rental housing investments are in the top 10% of personal taxpayers, with 30% earning over $500,000
  • The tax benefit of negative gearing is 10 times more for the highest income earners than for the lowest
  • The number of people using negative gearing is almost four times higher for those with incomes of $150,000 than for those earning $50,000 or less
  • 1930 millionaires collectively claimed rental property losses of $115m – a tax deduction worth almost $60,000 each

The majority of property investors are in the two highest income quintiles.

It shows as income increases so does the average 'loss' or deduction claimed. The average net property loss reported in 2011-12 was $10,870; but for those earning between $250,000 - $500,000 the average loss was $38,500.

The proportion of low to moderate income earners who are negatively geared is very low: only 10% of people earning a total income of $50,000-$100,000 are claiming a net property loss.

If negative gearing were removed, 95% of people earning $50,000 or less would be unaffected, along with 90% of people earning a total income of $50,001 to $80,000.

Mythbusting negative gearing

The combined impact of negative gearing and the CGT discount

One of the major problems in our housing market is the way the current capital gains discount encourages negative gearing and speculation in the property market, which drives up housing costs and locks out first home buyers. It also creates a rental market stacked in favour of investors rather than tenants.

Normally investors would not be interested in an investment that is expected to run at a loss. But many are happy to purchase property where the rental income doesn't cover the interest payments because in the future, they expect to make large capital gains, which are taxed at a massive discount when they sell it.

When the headline rate of capital gains tax was cut to half the income tax rate by then Prime Minister John Howard in 1999 it made negative gearing much more attractive and also sparked a climb in house prices. Figures clearly show as soon as the capital gains discount was introduced, Australia suddenly became a 'nation of losers'.

In the financial year before the discount was introduced property investors actually reported a net rental income of $219 million, but in 2000-2001 suddenly investors reported almost half a billion dollars in losses, with the amount rising radically over the next ten years to $7.9 billion in 2011-12.

Not only does capital gains tax discount encourage property investors to speculate on massive windfall gains that they are not taxed fairly on, but the benefits of the combined negative gearing and capital gains discount, worth about $7.7 billion per year, are skewed towards higher income earners:

  • 56 per cent of the benefit goes to the top 10 per cent of income households
  • Just four per cent of the benefit goes to the bottom 20 per cent of households

Data also shows the dollar value of the combined benefit is also worth much more to higher income earners:

  • The weekly dollar value of the benefit of the discount is worth $1 to the lowest income quintile but $6 per week to the middle quintile and $30 per week to the highest quintile
  • The top 20% receive thirty times the benefit received by the lowest bracket, and five times the benefit that middle-income earners receive

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