Tax Forum: Push to replace negative gearing with land tax

Replacing negative gearing with a new land tax as recommended in the Henry tax review is one idea to come out of the second day of the Tax Forum.

Property bodies, academics and welfare groups traded blows on whether tax concessions for property investment helps to boost housing supply, skews investments in property and costs the government more than it delivers.

Former ANZ chief economist Saul Eslake, now with the Grattan Institute, says Australia’s negative gearing system is the world’s most generous.

“When you talk to foreigners about this you have to explain what negative gearing is,” Eslake told the forum.

Responding to commentary that negative gearing helps housing supply and puts downward pressure on rents Eslake said most people who use negative gearing buy established housing, not new supply.

“The problem is with 1.7 million taxpayers doing it, that’s why both sides of politics were in a race to rule it out after the Henry review,” he says.?

“And you can only achieve reform of this nature with bipartisan support.”?

Nicola Ballenden from of the Brotherhood of St Laurence said the charity supports the recommendations in the Henry review in equalising the tax treatment of investment income.?

“And in that absence ... we should talk about limiting it,” she says, describing the practice as inequitable in two ways – people on lower incomes are not only unable to use the tax concessions but they have further competition for housing.

Shane Goodwin of the Housing Industry Association said removing negative gearing “doesn’t necessarily improve the way we treat other forms of investment".?

“Before we start tackling things like negative gearing and capital gains tax, we need to fix the supply constraints,” Goodwin says.

He also says negative gearing adds to new housing supply, is largely illiquid, comes with large transactions costs and receives similar treatment to other forms of investment.

“If we going to remove negative gearing, it can’t be in isolation,” Goodwin says.

Judith Sloan of National Seniors Australia cautioned against “Pollyanna” solutions and warned that changing the taxation of property investments would provide complications for investors, who by and large are not rich and who have made their investments in good faith based on parameters set at the time".

“There would be very significant consequences for people who have average incomes and are trying to make arrangements for their retirements,” Sloan says.?

Eleri Morgan-Thomas from Mission Australia saysthe charity is seeing “long-term structural problems with the rental market” notwithstanding the recent flattening of prices and expects supply to continue to be a problem.

Pointing to revenue foregone from negative gearing Morgan-Thomas proposed a public/private partnership where some of the income foregone in income tax is put into a social investment bond.

This article originally appeared on SmartCompany.