Treasurer Jim Chalmers tells us the government currently has no plans to change negative gearing, franking credits and capital gains tax.
The government also currently has no plans to introduce an inheritance tax or tinker with trust arrangements. But let’s not forget the government had no plans to change the stage three tax cuts.
It is therefore timely to discuss other possible tax changes given there is clearly a disconnect between what Labor claims are its solemn intentions and what it actually will do. The clear theme of the changes to the stage three tax cuts is that the rich should pay more; redistribution is the main game. It follows that other tax arrangements seen to favour those on high incomes will also be in line for adjustment.
In the case of negative gearing, it is extraordinary that Chalmers would even be considering any changes given the crisis in the private rental sector. The reality is investors have been selling up because of poor net returns and additional regulatory risks. In combination with the surging population, the net effect has been to render residential rental accommodation in short supply, leading to rental growth well above the rate of inflation.
The basic principle of negative gearing is straightforward; it applies to other types of investment beyond property. One way or another, it is part of the tax code of every developed economy.
Investors are entitled to deduct the costs of an investment when calculating taxable income. If the costs, including interest payments, exceed the associated income, then investors can use this sum to reduce the tax they pay.
The net effect is to make rents lower than they otherwise would be because the taxpayer is picking up part of the tab. Were negative gearing to be abolished or trimmed back, the impact would inevitably involve higher rents.
In fact, a number of countries have tinkered with their negative gearing rules, although many have not. In these instances, the presumed benefit of more affordable housing has failed to materialise; the UK is a case in point. What is absolutely clear is that the key variable is supply of housing and how closely increases in supply can match growing demand, both by type and location.
The opposition of the Greens and some ill-informed government backbenchers to negative gearing stems from some notion that the current arrangements are not fair, particularly for those investors with multiple rental properties - like some politicians. Of course, these investors are providing a useful service by offering up rental accommodation but this fact is overlooked.The proposed solution to any consequent housing shortage is to push for more government investment in public housing. Over time, there has been a decline in the availability of public housing. Notwithstanding some recent efforts by state governments, the private sector provides the vast bulk of residential rental accommodation. Any net increase in the stock of public housing will be both slow and expensive.
There is little doubt changes to negative gearing could be up for consideration. The recently released Tax Expenditures and Insights Statement – I’m still looking for the insights – estimates the revenue forgone of rental deductions for 2023-24 was $27bn.
This means that if there were to be no allowance for the costs of holding rental properties, and using the heroic assumption that the level of investment would not alter, the government would be $27bn better off.
The broader point about the tax expenditures is that there is an underlying assumption that almost all gross income belongs to the government and any money retained by taxpayers is a concession. The Treasury explains it as follows: “A tax expenditure arises where the tax treatment of a class of taxpayer or an activity differs from the standard tax treatment (tax benchmark) that would otherwise apply. Tax expenditures can include tax exemptions, some deductions, rebates and offsets, concessional or higher tax rates applying to a specific class of taxpayers, and deferrals of tax liability.”
No consideration is given as to why these exemptions, deductions and the like apply, even though they are overwhelmingly there for perfectly rational reasons. If the government wants to encourage investment – and it does – it makes complete sense for the cost of investment to be a deductible item. The annual statement remains a very unhelpful document, contributing to very misguided policy thinking.
To give you an example of just how bizarre it is, there is an inclusion of a substantial amount for the Exemption for the National Disability Insurance Scheme. It is the sixth-largest individual tax expenditure, amounting to $10.5bn in 2023-24.
According to Treasury, “payments and benefits provided under the NDIS, whether directly or otherwise, to NDIS participants for approved reasonable and necessary supports are exempt from income tax”. In other words, Treasury is saying NDIS payments and in-kind support should be taxed as normal income.
To further illustrate the subjective nature of the statement, both the Capital Gains Tax exemption of the family home and the CGT discount component are included. Were the family home to be fully subject to CGT and the CGT was paid at the full marginal tax rate of the owners, the additional revenue to the government would be $47.5bn.
Some (dimwitted) members of the government might think some of that money could be put to better use rather than as an assumed benefit to well-heeled homeowners. The costs of various GST exemptions are also strangely included in the estimates of tax expenditures. The biggest one is for food, which cost just over $9bn in 2023-24 in terms of revenue forgone. But is anyone talking about including food in the GST? Even the Greens would baulk at that.
The bottom line is this: The government has lost all credibility when it comes to honestly flagging its intention in respect of changes to the tax system. Having repeated that the government had no plans to ditch the stage three tax cuts, it did just that. It’s clear from the accompanying information statement put out by Treasury that the plan to redesign the cuts had been worked on for a considerable period of time.
With that loss of credibility comes the obvious speculation that other tax changes are being contemplated. After the electoral defeats of 2016 and 2019, it might be assumed that some changes, such as to negative gearing, trust arrangements, CGT and franking credits, are still off the table. This assumption is looking increasingly shaky, particularly if any changes can be shown to soak the rich.
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