FHBA Petition Explained: Point 1. Reduce Interest Tax Deduction for Investment Properties
The Great Australian Dream of home ownership is now under more threat now than ever before, due to current house prices in many markets rising at a rate that is faster than an aspiring first home buyers abilities to save for their first home deposit.
Low wage increases and low savings interest rates don’t help first home savers get into a property market that is being dominated by local and overseas investors.
Many tax policies are too generous for investors, disadvantaging first home buyers. We don’t suggest they be completely removed (to maintain economic stability), but we do suggest they be renovated in order to create a greater balance in the system so that first home buyers aren’t increasingly priced out of the property market.
As per our 5 Point Plan petition that we launched late last year, our first recommendation to the Australian Government relates to tax deductions (negative gearing).
Reduce interest tax deduction for property investment purpose, from 100% deductible to 50% deductible on purchases of existing dwellings. This means negative gearing will still exist, but there will be a higher incentive for investors to reduce debt if they are able to do so, as interest costs will no longer be 100% deductible. Encouragement of new property developments will also remain. This additionally helps the federal Government bottom line.
Since our proposal, the Labor party recently announced their own negative gearing reduction plan, which involves restricting negative gearing to new dwellings only. While we are happy to see a major party paying attention to the issue of housing affordability, FHBA sees the following benefits arising if our recommendations were implemented rather than the Labor’s party’s plan to only apply negative gearing to new dwellings:
- Of the approximate 1.9mil Landlords in Australia around 60-70% have negatively geared properties. With a shortfall of approximately $5.4b in the 2014/15 financial year from Net Rent – negative gearing has a significant impact on the Government budget, with tax revenue significantly down. Our recommendation eases the strain on the Government budget by halving the interest tax deductions available to investors.
- According to RBA figures as at 31 December 2015, the ratio of housing debt and housing debt to disposable incomes both currently sit at record highs of 186% and 134% respectively. These levels can have significant economic impacts if interest rates rose in the future. Our policy recommendation encourages investors to pay down debt quicker which could lead to an improvement in the worrying trends of the housing debt figures. Under Labor’s plans, it just redirects the debt (without significantly reducing the overall debt figures)
- Encouragement for new dwellings will remain strong as investors will likely look for other property deductions such as capital work deductions, which are typically higher with new dwellings. However, this should be a more healthy balance then negative gearing being only allowed on investment properties only.
- An increase in supply of properties (by encouraging more new developments) will inevitably alleviate some of the supply side issues some of the states in Australia currently face. Investor demand should also cool a bit, as some investors are driven to buy investment properties by the current negative gearing benefits.
In summary, reducing interest costs as an allowable tax deduction will:
- Improve the Government budget position without effecting the overall tax position for non-investors
- See a curb in the level of investor activity which is currently pricing out first home buyers
- Encourage new development
- Achieve a fairer mix in policy outcome
- Help make housing more affordable by discouraging big speculative property price jumps
Stay tuned for our discussion of point No.2 (tier scaled CGT discount system) of our 5 Point Plan.