The income tax treatment of housing assets: an assessment of proposed reform arrangements

Key findings How do existing elements of the Federal income tax system (in particular the availability of deductions and CGT provisions) potentially impact on housing ownership and affordability? Currently, the Australian tax system offers preferential income tax treatment to both owner-occupied and own-to-invest properties. Owner-occupied properties are exempt from many taxes, including CGT. There is no imputed rent applied to claw back the exemption. In respect of own-to-invest properties, the report's policy audit has shown that the income tax treatment of investment property provides an annual tax deduction to the owners of negatively geared property that subsidises the holding cost of property. This deduction is made up of a combination of cash outgoings, of which the most significant is loan interest, and capital allowances that are non-cash expenses. In contrast, when the property is sold the gain is included on the capital account. The amount is included on realisation and is subject to a CGT discount of 50 per cent when derived by an individual or a trustee, or 33 per cent when derived by a superannuation fund. Hence, the policy audit identified two key sources of asymmetric (or unbalanced) treatment of rental income and capital gains in the investment property market. First, there is a mismatch in the timing of the deduction and the capital gain, with the deductions predating the capital gain. Second, the amount of the rental deduction is not discounted, whereas the capital gain is discounted. This combination of factors provides an incentive for the owners of investment properties to borrow a larger proportion of the acquisition price. The incentive arises because the interest deduction is allowed in full whereas only 50 per cent of the capital gain is included. A leveraged investment will result in a higher capital gain where the growth in property prices exceeds the interest rate. Which investor groups, household types and housing market segments benefit or are disadvantaged by current negative gearing and CGT provisions? Negatively geared investors who receive the highest tax savings are typically middle-aged full-time employed males. On the other hand, the ones who benefit the least are females and older investors aged 55+ years who are not in the labour force. Home-owner investors who own both a family home and at least one rental investment property received the greatest CGT discount benefits, while renters who do not own properties do not receive any CGT discount. CGT discount benefits are heavily weighted towards those who are more affluent in terms of both income and property wealth. On average, a home-owner investor can own a property portfolio worth over $730,000. Home-owner investors' average tax assessable income is $82,000 compared to $31,000 among renters who do not own any properties.