Labor's negative gearing will impact more in a weakened property market: Treasury

Federal Labor's negative gearing policy would likely have a modest downturn impact on home values, official Treasury documents have revealed.

Contradicting Turnbull Government claims the policy would "smash" Australia's housing market, the previously confidential advice to Treasurer Scott Morrison from his department has been obtained by the ABC under Freedom of Information.

The ALP's plan to restrict the tax deduction, along with halving the capital gains tax (CGT) discount, was an policy difference issue at the 2016 election campaign.

The documents suggest "in the long term, increases in taxation on rental property could have a relatively modest downward impact on property prices."

It also noted as the after-tax returns for Australian investors in shares and property would fall due to the reduction in the CGT discount, households may increase their investment in owner-occupied housing which remains exempt from CGT which "would tend to counter any downward pressure on prices."

After winning a two-year FOI fight, the ABC revealed Treasury officials in early 2016 gave advice to Scott Morrison.

"The ALP policies could introduce some downward pressure on property prices in the short term, particularly if the commencement of the policy coincides with a weaker housing market," they wrote.

The department warned the price impact would be greatest if "uncertainty arising from the policy change itself" compounded any housing market "downturn that may be underway at the time".

The documents also noted Labor's proposal "runs the risk that more wealthy investors will continue to enjoy the same tax incentive benefits they get now, while more modest mums and dads will have to look elsewhere."

The papers advised previous changes to negative gearing (1985-1987) and the introduction of the CGT discount (1999) had little discernible impact on the market, though the housing market itself has historically been highly cyclical and it is "possible that uncertainty arising from the policy change itself could compound upon a cyclical downturn that may be underway at the time."

"Overall, price changes are likely to be small, though the composition of ownership may shift away from domestic investors."

"In the longterm, increases in taxation on rental property could have a relatively modest downward impact on property prices" and "returns for Australian resident investors will fall under the policy," Treasury advised. 

There were 18 pages in the FOI release obtained by ABC political reporter Dan Conifer and ABC FOI editor Michael McKinnon.

Senior bureaucrats threatened to stop giving honest advice to the Federal Treasurer if negative gearing documents were not kept secret from the ABC.