Wind back on favourable tax for residential property investors: AFHPA

Reviews on negative gearing, CGT discounts, Self-managed super funds investing in residential property, foreign investment, and immigration levels are key opportunities for reform to improve home ownership in Australia, according to the Affordable Housing Party of Australia (AFHPA).

Phasing out tax advantages over a period of possibly 10 years is the mechanism suggested by AFHPA in their submission to the inquiry into Home Ownership. 

"Firstly, it is likely to encourage investors, especially long term investors, to release properties back onto the market to avoid increased capital gains tax. Hence we should see an increasing proportion of owner-occupiers within 3-5 years. 

"Secondly, as residential investment slowly becomes less tax effective there should be decline in investor interest and reducing prices over time.

"Hence the AFHPA would propose a gradual reduction on the favourable tax treatments to residential property investments.  

The AFHPA would also suggest that action be taken in the following areas:

"CGT discounts on residential property. In the first year after a change property investors would pay tax on 55% of capital gains made on property, the next year it might be, say 60% increasing each year until CGT is paid on 100% of the capital gain. 

"Increase CGT on Self-managed super funds (SMSF) investing in residential property.

"Similar arrangements would be made with SMSF however as the Federal Government has committed to a review of Superannuation the AFHPA will wait until this review is released before commenting on what the actual rate of taxation should be. 

"In the first year after a change in negative gearing investors would be allowed to claim 100% of losses on residential property against their pay as you earn tax obligations, in the second year it might be, say 90% etc."

End foreign investment in the residential property market by tightening rules pertaining to foreign investment in residential property to their pre 2008 level. 

"Because of its undoubted effect on house prices, there is an urgent need to review the current level of migration to Australia. The AHPA would encouragement the widest possible public debate before a final level of immigration was set.  

"However the AHPA position is that the current levels are unsustainable."

Demand and Supply Drivers in the Housing Market 

On the demand side, the AFHPA cites the generous tax treatment of investors in residential housing as a driver of demand and hence rising pricing in the residential property market.  

"AFHPA cites the reduction in CGT as the main driver in investor demand in the last decade. This can be seen in the increasing percentage of investor in the residential housing market since changes were made in CGT by the Howard Government in 1999. 

"Reduced CGT for residential property favours wealthier Australians. Wealthier Australians make more of their income through capital gains than poorer Australians; poorer Australians make their income through wages. 

"Reduced CGT favours Australians with excess funds that can be invested in the property market. In a similar vein the generous treatment of funds in an S.M.S.F. advantages investors over owner-occupiers. 

"However, the AFHPA also submits that negative gearing on residential property is also very ineffective. The bulk of investors using negative gearing have purchased existing properties, hence there can be no argument that negative gearing adds to the supply of housing. 

"The fact that SMSFs are allowed to included residential property further increases demand again without increasing supply. 

"Migration is not often mentioned in regard to housing affordability. The current level of immigration is one of the highest in the OECD and this increases demand in a limited market and hence puts upwards pressure on housing prices. 

"Australia now has a business migration program where applicants for immigration are selected on their financial status. The basic idea being these applicants will have funds to invest in Australia. 

"To date the AFHPA knows of no economic study as to where these funds are being invested. If the funds brought to Australia are being invested in the residential property market, then this doubly affects housing affordability. 

"Finally, investment in existing residential property does little to improve the economic position of Australia. 

"Effectively what is happening is Australia is repricing its existing assets, no real wealth is being created. Wealth is simply being transferred from one generation to the other. 

"The funds invested in property could be better applied to other areas. Although State Governments improve their budgets positions through increased stamp duty and lending organisations make greater profits as housing prices rise, but this is not wealth creation."