Detailed Analysis of Tax Policy: Negative Gearing and CGT Reforms

This report analyzes the implications of Australia's tax policy on negative gearing, focusing on the Labor Party's proposal to limit negative gearing to new housing and halve the capital gains tax discount. The report examines the significance of the policy issue, key stakeholders (investors, homeowners, government, and the economy), and identifies winners (small-time investors, lower-income investors, and the government) and losers (landlords, high-earners). It further explores the implications for accounting and taxation, including changes to imputation credits and depreciation, and the impact on the Australian Taxation Office (ATO), particularly regarding the analysis of the effective limitations on negative gearing and communication with investors. The report references various sources to support its analysis and provides insights into the potential effects of the proposed tax reforms on the housing market, government revenue, and intergenerational equality.

TAX POLICY

Table of Contents
Task 1: Significance of the Tax Policy Issue...............................................................................................1
Task 2: Key Stakeholders of the Policy and Impact on them.......................................................................1
Task 3: Winner and Losers..........................................................................................................................2
Task 4: Implications for accounting and taxation........................................................................................3
Task 5: Impact on ATO...............................................................................................................................3
References...................................................................................................................................................5

Task 1: Significance of the Tax Policy Issue
This tax policy issue is significant because it is important to make sure that Australia’s tax
system is sustainable, just and aimed at growth and jobs. Negative gearing and Capital Gains Tax
(CGT) discount encourage real-estate investors (housing) to take debt. This reduces the stability
of the housing market and crowds out 1st house purchasers. Limiting the negative gearing
deductions on just purchased rental housing will place comparatively modest downward pressure
on prices of the house. These loopholes in taxation and concessions benefit the rich (Dixon,
2018). Hence this issue is critical in terms of greater fiscal repair in the country.
Task 2: Key Stakeholders of the Policy and Impact on them
Investors and homeowners – The main benefit of the tax reform would be for any
individual/group purchasing already-built properties. The proposal is probably to take some of
the heat from the competition for established houses as investors turn their focus toward off-the-
plan properties. Younger Australians are likely to get the greatest benefits. First home purchasers
will not have to contend with investors for established homes any more. Australians belonging to
the age group 45 and above will be the most negatively geared. Home builders and property
developers can also reap some benefits from the plan (Yardney, 2018). With investors removed
from the market for established homes, new stock will be in greater demand. This can lead to
higher investment in greenfield property development. Further, decreasing the discount on
capital gains tax will result in higher income people paying greater CGT. This will decrease the
variance between the tax paid by lower and higher income rental investors. Thus, this would
alleviate inequalities in the existing system. A steady and staged transition will have little effect
on average Australians, but it would enhance access to suitable, safe and affordable housing.
This will benefit the Australian community’s well-being (Grattan, 2016).
Government and the economy – A reduced CGT discount for investors implies more tax payable.
This means more tax revenue for the government, which can be re-employed toward education,
welfare and housing initiatives. Reform of negative gearing can save the government A$1.7bn
from the yearly AUS$3.04bn cost of negative gearing deductions, without damaging “mum and
dad investors.” The key is incremental transformation. Steady reform over 10 years or more
reduces the burden on government budgets (Tacadena, 2018). In the long-run, setting-up an
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extensive property tax is fairer and more effective than state governments relying on stamp duty
forever. Yearly tax rates in the 1st year of the change differ from AUS$47 in Tasmania to
AUS$129 in NSW which will finance a 10% reduction in stamp duties. To completely finance
the removal of stamp duty, the yearly property tax will need to rise to AUS$472 in Tasmania and
AUS$1,293 in NSW over ten years. For the government, this will be income neutral, but the
inclusive tax-burden will move from new home buyers to the ones who already have houses
(AHURI, 2018). This will not just enhance intergenerational equality but will offer a more stable
income for the state governments. However, real-estate is among the main sectors propelling the
Australian economy. Any apparent risk to profitability may witness investors fleeing the market.
this can have grave economic implications.
Task 3: Winner and Losers
Small-time and lower income investors plus the government will emerge as the winner of this
reformed policy. Around 3 quarters of the country’s families will be better off if negative gearing
is limited. Owner-occupiers and renters are winners, but landlords, particularly high-earners lose.
Improvements in the rate of home-ownership will largely be among middle-aged and young
families who are comparatively poor (Doherty, 2018).
There are worries that revising negative gearing will hamper the economic wellbeing of small-
time investors. However, employing data on the distribution of income and property renders it
plausible to differentiate between wealthy and poor investors, enabling the government to target
the restructurings to cushion the blow for low-income investors. Given this change will be less
likely to harm lower-income investors, they will be less likely to move away from the rental
market as opposed to if negative gearing was altogether removed. This will also alleviate the
effect of negative gearing changes on renters (Schlesinger, 2016).
The government will also surface as a winner of this policy. Modelling of a proposed scenario is
shown below:
Income percentile Existing tax savings Tax savings post
changes
% change in tax
savings
Highest 25% $3,150 $0 -100%
50-75% $2,360 $1,200 -.49.15%
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Lowest 50% $740 $740 0%
This modelling demonstrates that this will save the government AUS$1.7bn, or 57.3% of the
existing cost to the budget, per annum. If deductions on negative gearing were restricted on the
basis of property values, the government would save around AUS$1.5bn or 48.3% (Eccleston,
Verdouw and Flanagan, 2018).
Task 4: Implications for accounting and taxation
Till now, capital gains tax modifications were not retrospective, and current investors were safe
from the effect of changes. However, the if new tax reform becomes law then there would be
certain modifications for assessing tax payable and refund. In accordance with the provisions of
the reform, from July 1, 2019, imputation credits for individuals and superannuation funds will
not be regarded as refundable. This means that imputation credits could be used to reduce the tax
payable, but taxpayers cannot obtain refunds for additional imputation credits. Hence, tax
companies will need to re-evaluate the credit computations according to reformed rules (Cho, Li,
and Uren, 2017).
Moreover, as a replacement for decreasing the company tax rate, Labor proposes an Australian
Investment Guarantee which will be enforceable from July 1, 2020. This is a kind of accelerated
depreciation that will allow the firm to immediately expense 20% of the depreciated asset’s value
in the 1st year of all new investments, coupled with the balance depreciation with regular
depreciation from the 1st year. Besides this, the provision requires using a minimum of 30% tax
rate on discretionary reliance disbursements to adult beneficiaries beginning July 1, 2019
(Wargent, 2018). Currently, these disbursements are relative to tax in the hands of beneficiaries
at reasonable rates of income tax, which can lead to less effectual tax rates for such
disbursements. Labour provision also suggests that negative gearing will be conserved in its
existing form for existing assets and fresh housing. Besides this, negative gearing pertaining to
all other asset groups will be confined to being against other, i.e. capital gains but this will not
apply for salary and compensation.
Task 5: Impact on ATO
The Australian Taxation Office (ATO) is the chief revenue collection unit of the government. It
manages and shapes the superannuation, tax and excise systems and other related matters. As the
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chief revenue collection wing of the government, ATO levies an income tax, GST and other
federal taxes. The reformed tax policy will have a significant impact on the work of ATO. Its
liability will increase pertaining to analysis of the effectual limitation on negative gearing
(Pawson, 2018).
A decline in the CGT discount will affect rental investors of the high-income group to a great
extent as compared to low-income investors. This will bridge the gap in user cost pressures
which higher and lower income rental investors bear. Due to such variance between dollar value
effect and percentage, the new policy will have to be cautiously communicated to prevent
confusion that the effect of the CGT amendment is probable to be regressive in context of its
likely impact on rental investors’ incomes. Hence, the ATO will be accountable for
communicating to the investors about the changes in a manner that confine the threat of a shock
to the market, if investors decide to leave the housing market (AHURI, 2018). Till now,
policymakers have shown reluctance in modifying the core set of the tax system, but ATO will
have to do it in a manner that reduces the effect on lower-income investors.
The chief goal of the ATO is to help people comprehend their rights and duties, besides offering
ease of compliance and access to benefits pertaining to abidance of law. Hence, ATO will give
hands-on guidelines for taxpayers to help them take relevant decisions. Besides this, the agency
will also need to counsel about the administrative approach pertaining to specific changes. For
e.g., as in the current case, the explanation needs to be given that losses from new stock
investments and current properties can apply for adjustments against tax liabilities.
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References
AHURI. 2018. Modelling negative gearing and capital gains tax reforms. [pdf]. Available
through: <https://www.ahuri.edu.au/__data/assets/pdf_file/0027/16488/PES-004-Modelling-
negative-gearing-and-capital-gains-tax-reforms.pdf>. [Accessed on 11 September 2018].
Cho, Y., Li, S. and Uren, L., 2017. Negative Gearing and Welfare: A Quantitative Study for the
Australian Housing Market. Monash University.
Dixon, D., 2018. Prepare for changes to negative gearing and capital gains tax. The Sydney
Morning Herald. [Online]. Available through: <https://www.smh.com.au/money/prepare-for-
changes-to-negative-gearing-and-capital-gains-tax-20180126-h0otyp.html>. [Accessed on 11
September 2018].
Doherty, B., 2018. Home ownership would rise if negative gearing is scrapped, study says. The
Guardian. [Online]. Available through:
<https://www.theguardian.com/australia-news/2018/jan/13/australian-house-prices-will-fall-if-
negative-gearing-goes-study-says>. [Accessed on 11 September 2018].
Eccleston, R., Verdouw, J. and Flanagan, K., 2018. Gradual reform to capital gains, negative
gearing and stamp duty will make housing more affordable. [Online]. Available through:
<https://theconversation.com/gradual-reform-to-capital-gains-negative-gearing-and-stamp-duty-
will-make-housing-more-affordable-98933>. [Accessed on 11 September 2018].
Grattan, M., 2016. Shorten policy hits tax breaks for negative gearing and capital gains.
[Online]. Available through: <https://theconversation.com/shorten-policy-hits-tax-breaks-for-
negative-gearing-and-capital-gains-54700>. [Accessed on 11 September 2018].
Pawson, I., 2018. Reframing Australia's housing affordability problem: The politics and
economics of negative gearing. Journal of Australian Political Economy, The, (81), p.121.
Schlesinger, L., 2016. What negative gearing changes could mean to you. [Online]. Available
through: <https://www.afr.com/personal-finance/what-negative-gearing-changes-could-mean-to-
you-20160218-gmxe7v>. [Accessed on 11 September 2018].
Tacadena, G., 2018. Why the federal government needs to consider reforming negative gearing
policies. [Online]. Available through: <https://www.yourmortgage.com.au/mortgage-news/why-
the-federal-government-needs-to-consider-reforming-negative-gearing-policies/247472/>.
[Accessed on 11 September 2018].
Wargent, P., 2018. Impacts of Labor’s proposed negative gearing and CGT reforms. [Online].
Available through: <https://www.livewiremarkets.com/wires/impacts-of-labor-s-proposed-
negative-gearing-and-cgt-reforms>. [Accessed on 11 September 2018].
Yardney, M., 2018. The possible impacts of Labor’s proposed negative gearing and CGT
changes. [Online]. Available through:
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<https://www.smartcompany.com.au/industries/property/impacts-of-labors-proposed-negative-
gearing-and-cgt-changes/>. [Accessed on 11 September 2018].
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