Taxation Law: Analysis of Housing Tax Reformations and Implications

This report provides a comprehensive analysis of housing tax reformations in Australia, focusing on the politics surrounding these reforms, the key stakeholders involved, and the potential pros and cons of proposed policy changes. It examines the impact of capital gains tax discounts and negative gearing on the housing market, government revenue, and inter-generational equality. The report also assesses the potential consequences of the Australian Labor Party's proposed reforms, including restrictions on negative gearing and reductions in capital gains tax discounts, considering their effects on investors, first-time home buyers, and the overall economy. Furthermore, the report discusses the ATO's model of tax compliance and how proposed policies might affect it.

Running head: TAXATION LAW
Taxation Law
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Table of Contents
Answer to question 1:.................................................................................................................2
Answer to question 2:.................................................................................................................2
Answer to question 3:.................................................................................................................3
Answer to question 4:.................................................................................................................6
Answer to question 5:.................................................................................................................8
References:...............................................................................................................................10

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Answer to question 1:
The politics surrounding the reformations of the housing tax continues to be
significant issue. However, reformations in the capital gains and negative gearing along with
the shift in the property tax would help in improving the affordability while simultaneously
increasing the revenue of the government (Blunden, 2016). The policy of capital gains and
negative gearing tax reformations takes into the account the combination of impact of tax
treatment of the income from the investment in housing together with the interaction amid the
housing and retirement savings. Gradually, over the decade reducing the effect of capital
gains tax discount from 50 t0 30 per cent would create a very minimal amount of effect on
the average investors.
Same is applicable on the negative gearing where implementing the cap on the
housing tax deductions can be phased over a period of ten years. The reformation policy is
significant because the federal government would be able to save more than A$ 1.7 billion
from the yearly A$ 3.04 billion cost of negative gearing deductions. The revenue can be
reinvested for community housing and social purpose (Grudnoff, 2015). The policy would
not only improve the inter-generational equality but would also be efficient and offer greater
stability to the state government revenue.
Answer to question 2:
The key stakeholders include the non-political experts and the people that are the mix
of investors. Presently around half of the tax revenue is obtained from the personal income
tax and the current reformation policy may create an effect on the higher effective marginal
tax rates on productivity (Pawson, 2018). The stakeholders agree on such challenges but
disagree on the priorities. As a general rule, an asymmetrical relation is prevalent between the
capital gains tax and negative gearing which witnesses full and immediate deduction in the

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interest expenses for the income earnings investment whereas simply 50% of the capital gains
are levied when the investments are sold. Even though the stakeholders agree to the
reformations but they are not always agreeing with the shape of the reformations. The
problematic part of the problem is that tax reformation is very likely to get accepted when the
revenues are neutral and the government is giving back the same of tax that it is taking. The
proposal of the labour for limiting the negative gearing would eventually create an impact on
the markets of property. According to the words of Davidson & Evans, (2015) the
unintentional significances would lead certain geographical areas particularly those that are
weak or fragile property markets to be adversely impacted than any other market.
According to the words of Long, (2016) the unintentional significances would impact
the Sydney market unit where the proposed changes might be equal to the unexpected decline
in 1.15% rise in the interest rate. A fall in price of dwelling or deceleration of price in certain
regions would result in reduction in dwelling and fall in the affordability of the rental
property in particular locations.
The analysis reflects that there might be some form of distortions in the markets of
investors, with the establishment of primary and secondary market for the stock of investors
if the subsidies were restricted to new housing prospectively the slimmer market of resale
would probably increase the risk of making investment in the new dwellings. The restrictions
on credit have created a direct effect on the investors in the Australian housing market
(Hellwig & McAllister, 2017). As the consequences of this the dwelling price in the
Melbourne and Sydney have reflected a decelerating growth rate. The bottom line is that the
land scape of residential property in Australia has been significantly changed and blanket
introduction of the reformation policy may result in unintentional consequences.

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Answer to question 3:
According to the words of Cho et al., (2017) the Australian property tax laws over the
years has never been so chaotic. The present policy on capital gains discounts and negative
gearing is expensive drains on budget which is enormously failing to boost the new stock of
housing. The Australian labor party has bought forward the proposal of changing the
Australia’s policy of negative gearing and capital gains if the government is elected in the
federal election. The study here would dispel the myths regarding the advantages and the
disadvantages of the policy.
Pros:
The policy can be regarded as the popular among the investors because the loss of tax
that originates might usually help in reducing the investors other assessable income. This
would lead to the reduction in the bill of yearly income tax. The savings that would be
generated from the applicable of policy would help in at least partially paying the
investment’s approach.
As stated by Rogers et al., (2017) there are large number of viewpoints regarding the
policy that is prevalent during the period of election. The viewpoint is that it helps the
investors to purchase the properties that is ultimately helps in increasing the supply of rental
and investment property all through the country. The increase in the supply of the rental
properties eventually lowers the possibility of sharp increase in the rents because of the
higher demand of the properties that are available for rent.
The stakeholders such as investors would be the winner from the labor proposal of
change. The demand for the investor’s property lends support in building the industry and
creating employment (Eccleston et al., 2018). The negatively geared investors would
ultimately support the market of private residential tenancy and would help those relevant

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stakeholders that are unable to afford to purchase the property. The tax benefit would
encourage the individuals to make investment in the rental property and save, particularly to
assist them in becoming self-sufficient when they attain the age of retirement.
On the other hand, the policy would also create a balance in the government budget.
A reduced amount of capital gains tax discount for investors would ultimately mean that
greater amount of tax is paid. This is equivalent to greater amount income for the government
that will be redeployed in the direction of benefit, education and housing creativities
(Blunden, 2016). The policy would also promote greater affordability of housing. By
lowering down the profitability of the property investment, it would help in promoting fewer
investors in the market. The anticipation is that would ultimately translate less demand and
hence result in reduced price of growth that may ultimately help in driving the affordability.
On critically assessing the proposal made by the labor it can be stated that there would
not be any hike in taxes. According the latest government warnings, if the senate chunks $6
billion budget savings then they might be forced to increase the income taxes (Valadkhani &
Smyth, 2017). Additionally the policies would assist in creating the level playing field for the
first home purchasers by competing with the investors and would ultimately help in restoring
the dream of having the house among the wider part of the working and middle income
groups that are priced out of the market from a long time.
Cons:
Despite the advantages there are certain disadvantages that this policy accompanies.
The investors may inflate market of the residential property which would ultimately make it
less affordable for the first home purchasers or the other occupiers of the property. As stated
by Chappell & Campbell, (2018) the overall benefits and deductions in tax would accrue to
those that have the higher income and would not assist those that are first time purchasers and

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lower income property owners. In pursuit of the negative tax benefit the investors may over
extend themselves that may ultimately result in negative.
Leigh, (2017) points out that the policy may result in economic downturn. The real
estate is regarded as the primary industries that is driving the economy of Australia. Any kind
of threat is perceived to the profitability would result the investors to leave the market that
may create an unforeseen economic consequence. Chardon et al., (2016) states that the land
lords would be ultimately losers. If only few number of landlords enter the market then it
may result in lesser supply of rental houses and reduced rate of vacancy in some of the
markets.
Critical assessment:
Critically assessing the policy, the overwhelming benefits would go to the lower and
middle income group is incorrect to say. The government generally makes the use of income
data following the application of tax deductions. The analysis states that the benefits is
overwhelmingly in the direction of higher income groups. The policy would however help in
encouraging the building of greater housing each year and would ultimately increase the
supply of house. It would reduce the cost for the renters would restore the commonwealth
budget to the sustainable foundations.
Answer to question 4:
An analysis has been conducted across the nation to understand whether the
Australian Labour Party is successful in the next federal election and application of the
proposed reformations. The labor party has earlier proposed to restrict the gearing of new
rental property and reduce the capital gains tax discount from the 50 per cent to 25 per cent
(Yates, 2016). The intention of the party is to introduce the level player field for the first time

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home purchasers and improving the affordability of the house by strengthening the position
of budget and restricting the subsidies.
Considering the implications of the policy for the investors there is higher amount of
risk associated to the rental property market across the nations. The credit restrictions and
tighter policy of reformation would result in greater effect on the investors in the Australian
market of housing (Keane & Xiangling, 2018). The two spend economy is largely driven by
the boom in construction resources and those that once prosperous and are now lagging. Such
kind of necessities with the help of modelling and effect analysis of the proposed tax
reformation package. One of the main findings that is obtained from the policy application is
the blanket introduction relating to the reformation across the nation that have unintended
outcomes.
Another unintentional outcome that would arise is the Sydney market where the
reformations that has been proposed would be equal to the unexpected fall of 1.15 per cent
rise in the rate of interest for the investors. The introduction of policy would result in
reduction in the dwelling and fall in the affordability of the rental property in some of the
location (Hulse & Burke, 2016). The implication of the policy demonstrates that there would
certain forms of distortions in the market of investors with the establishment of both the
primary and the secondary market for the investors given the subsidies of the new property is
restricted. There implication of labor policy might result in thinner resale with greater risk in
the investment of the new dwellings.
With the introduction of the labor policy there would be progressive deduction in the
rental model. The “mum and dad” investors are falling under the bottom half of the income or
property value distributions that would continue to enjoy all the deductions in the rental
property and hence may experience no reduction the saving of tax (Guest & Rohde, 2017).

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On the other hand, the investors that fall within the bracket of top 25 per cent will be
subjected to complete quarantine of negative gearing and hence would receive zero deduction
in rent leading to full loss of tax savings from the negative gearing.
Answer to question 5:
The ATO model of tax compliance is structured in the manner that it helps in
understanding and improving the compliance ion tax. Considering the proposed policies of
negative gearing and capital gains tax, the compliance model would ultimately help in
understanding the factors that would influence the behaviour of the taxpayer and
implementing the most appropriate strategy of compliance. The behaviour of the taxpayer in
tax compliance is influenced by numerous factors such as business or economic (Martin et
al., 2016). The model of compliance represents that the attitude of the taxpayer in respect to
the labor proposed policy changes. It can be stated based on the continuum of compliance
model that the taxpayers possess the attitude of doing the correct thing. On the other hand, the
taxpayer might choose not to comply and may even decide to opt out of the proposed policy.
The model of compliance summarizes different forms of support and intervention that
might be required to collect the necessary revenue. Therefore, the tax compliance model
provides suggestion that the ATO can create an influence in the behaviour of the taxpayer
with the help of its response and interaction.
The policy of tax towards tax compliance would help in dealing with the risk of
complexity, transparency and taxpayer’s behaviour. There may be instances where most of
the people would require minimum amount of interaction for meeting the capital gains tax
obligations (Freebairn, 2016). Majority of the people may need minimum amount of
interaction for meeting their capital gains tax obligations given that they are straightforward
in dealing with their tax affairs and make an attempt in doing their things in the right manner.

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The tax policy may however create an impact on the transparent tax affairs together with the
items such as employment and investment income that is shared by the third parties.
Whereas the tax policy may result in instances where taxpayers can report inconstant
tax obligations by under reporting their taxes. A more increased level of attention may be
paid towards the taxpayer that require advice or information that might help in better
understanding of the policy (Hulse & Burke, 2016). The tax compliance framework of ATO
would be willing to indulge with those taxpayers to have the reasonable amount of
transparent taxation related affairs. This includes including the relevant information relating
to the negative gearing and capital gains tax in the tax returns which has not been prefilled.
The tax compliance model would be addressing the taxpayer that would seek the
support and advice relating to the matters when they encounter anything new or complex or
those that require additional amount of assistance in understanding the negative gearing and
capital gains tax. The tax compliance program of ATO would certainly be impacted by the
increasing complex structure of the capital gains tax and negative gearing however a
proactive engagement with the taxpayer would help in understanding the taxpayer’s
arrangement of tax (Chappell & Campbell, 2018). The ATO compliance system would be
addressing the needs of taxpayer that require advice from the tax policy by helping the
taxpayer in navigating greater complex structure of negative gearing and issues relating to
capital gains tax.
Bearing in mind the policy changes the ATO compliance program would increase the
level of attention towards the taxpayers that has the complex tax affairs (Valadkhani &
Smyth, 2017). An attempt would be made to minimize the impact of tax by increasing the
attention on the position of law that are different to the ATO and would implement the

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increased attention in resolving the differences created by the policies related to capital gains
and negative gearing.

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References:
Blunden, H. (2016). Discourses around negative gearing of investment properties in
Australia. Housing Studies, 31(3), 340-357.
Blunden, H. (2016). Discourses around negative gearing of investment properties in
Australia. Housing Studies, 31(3), 340-357.
Chappell, J., & Campbell, N. (2018). The Housing Gap—Sydney, Australia. In Sustainable
Development Research in the Asia-Pacific Region (pp. 293-304). Springer, Cham.
Chardon, T., Freudenberg, B., & Brimble, M. (2016). Tax literacy in Australia: not knowing
your deduction from your offset. Austl. Tax F., 31, 321.
Cho, Y., Li, S. M., & Uren, L. (2017, November). Negative Gearing and Welfare: A
Quantitative Study for the Australian Housing Market. Reserve Bank of Australia
Quantitative Macroeconomics Research Workshop (13-15 December 2017).
Davidson, P., & Evans, R. (2015). Fuel on the fire: Negative gearing, capital gains tax &
housing affordability. ACOSS Papers, 29.
Eccleston, R., Verdouw, J., & Flanagan, K. (2018). Gradual reform to capital gains, negative
gearing and stamp duty will make housing more affordable.
Freebairn, J. (2016). Taxation of housing. Australian Economic Review, 49(3), 307-316.
Grudnoff, M. (2015). Top gears: How negative gearing and the capital gains tax discount
benefit the top 10 per cent and drive up house prices.
Guest, R., & Rohde, N. (2017). The Contribution of Foreign Real Estate Investment to
Housing Price Growth in Australian Capital Cities. Abacus, 53(3), 304-318.

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Hellwig, T., & McAllister, I. (2017). The impact of economic assets on party choice in
Australia. Journal of Elections, Public Opinion and Parties, 1-19.
Hulse, K., & Burke, T. (2016). Private rental housing in Australia: Political inertia and
market change. Housing in 21st-century Australia: People, practices and policies,
139-152.
Keane, M., & Xiangling, L. I. U. (2018). A Life Cycle Model On Optimal Housing Equity.
Leigh, A. (2017). How can we reduce inequality.
Long, B. (2016). A taxing issue: Reflections of Christian economists on tax reform in
Australia. St Mark's Review, (235), v.
Martin, C., Pawson, H., & van den Nouwelant, R. (2016). Housing policy and the housing
system in Australia: an overview.
Pawson, I. (2018). Reframing Australia's housing affordability problem: The politics and
economics of negative gearing. Journal of Australian Political Economy, The, (81),
121.
Rogers, D., Nelson, J., & Wong, A. (2017). Full House: how property pressures impact
intercultural relations. Disruptive Asia: Asia’s Rise and Australia’s Future, 47-50.
Valadkhani, A., & Smyth, R. (2017). Self-exciting effects of house prices on unit prices in
Australian capital cities. Urban Studies, 54(10), 2376-2394.
Yates, J. (2016). Why does Australia have an affordable housing problem and what can be
done about it?. Australian Economic Review, 49(3), 328-339.

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