Negative Gearing Tax Policy: An Analysis of Reforms in Australia

This report provides a comprehensive analysis of the proposed negative gearing reforms in Australia. It begins by explaining the significance of the current negative gearing tax policy, which allows investors to deduct investment-related losses from their gross income. The report identifies key stakeholders, including low-income earners, property investors, and financing corporations, and examines how the proposed reforms would affect them. It discusses the potential winners and losers, highlighting arguments for and against the changes. Furthermore, the report explores the implications of the tax policy becoming law for an accounting/tax practice and the Australian Tax Office (ATO), focusing on compliance costs, complexity issues, and the need for updated guidelines and systems. The analysis considers the potential impacts on housing investments, house prices, homeownership, and the overall economy.

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NEGATIVE GEARING REFORMS
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Negative Gearing Reforms
1) Why is this tax policy significant?
The negative gearing tax policy allows investors to deduct any losses, loans or
expenses they incur in their investments from their gross income. This policy attracts more
investors into housing market but this is an inefficient way to do it. Although this is a tax
subsidy, it favours the rich people and it increases house prices since it results in an increase
in after-tax returns to home investors (Chung, 2017). This makes house prices higher than
they should be. The objective of any tax system is to ensure equity but this policy does not
promote that objective. Moreover, tax policies are implemented to promote development and
job opportunities. The federal government spends more time in housing which would have
been used to initiate other projects that will create more job opportunities.
2) Who are the key stakeholders and how does this policy affect them?
Reforming the negative gearing tax policy will have various impacts into the market
such as reduction in housing investments and house prices. Moreover, homeownership is
likely to increase. With the negative gearing policy in place, effective costs of housing
investments are higher decreasing the demand for houses resulting in higher house prices.
Decreasing house prices will increase the affordability of houses in the country since the
principle deposits for transaction costs associated with the purchase of a house will decrease
as well. This is likely to benefit the low-income earners who desires to own a home but are
constrained with the requirements (Chao, Li and Uren, 2017). Therefore, reforming this
policy will increase homeownership among low-income earning households. However,
making houses easily affordable will lead to a fall in the supply of rental properties increasing
the rents but only marginally due to a decrease in its demand. The marginal increase in rents
will make homeownership less expensive making it easy for the high income earning
households become homeowners as well. On the other hand, changing this policy will have

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significant impacts on landlords. Housing investors who rely on borrowings as the major
source of funds for their investments and benefit from the negative gearing policy will be
driven out of the market. Majority of these investors are young and rich to an extent that they
can afford the principle deposit requirement towards their investments. Moreover, a change in
this policy will contract mortgage holdings for the investors and a decrease in mortgage size
is higher for households belonging to the upper income bracket. Financing Corporations
who rely on borrowers from the housing investment market are likely to lose their clients as
they will be driven out. A decrease in client base is likely to lead to a decrease in interest
rates and requirements for mortgages in order to attract new customers.
3) Who are the winners and losers in relation to this tax policy, i.e. what are its
pros and cons from the point of view of the stakeholders identified in relation
to question 2?
As discussed above, changing the policy will have significant effects to the involved
stakeholders. However, the gainers (low income earning households who desire to become
owners) argue that this change will ensure balance exists in the federal government budget.
Decreasing tax subsidies to investors will ensure that the government collects more revenue
informs of tax since more tax will be paid. An increase in government revenue will ensure
that there are more funds to initiate development projects resulting in creation of more job
opportunities. Moreover, they claim that this will ensure houses are easily affordable.
Reducing the profits property investors get in the long-run will draw away investors leaving
fewer landlords in the market (Davidson and Evans, 2015). On the other hand, losers
(property investors and financing corporations) claim that this change will lead to an
economic downturn in the country. The real estate industry is considered as the backbone of
the Australian economy and drawing away investors from the market will have negative
impacts. Additionally, they argue that drawing away investors will lead to a decrease in

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housing supply due to fewer landlords. Investors who get out of the market will enter into
other markets increasing supply in those markets reducing profit gains. This will affect the
investors since they will not get maximum gains from their investments. Moreover, they
claim that changing this policy will affect their retirement decisions since the change is likely
to reduce their returns (Duncan et al., 2018).
4) Assuming that you work for an accounting/tax practice, what would be
implication for your firm and its clients if the tax policy becomes law?
Tax policy changes are likely to raise a number of complexity issues to both clients
and tax firms. The first issue that is likely to arise if this policy becomes law is an increase in
compliance costs as the firm and clients learn about this change in regard to new investments.
The change will also make the determination of eligible clients and activities complex.
Determining the exemptions and deductions for the clients will also be complex as well since
there are no clear guidelines on what will be considered as a new investment. Moreover, the
change is likely to affect the ability and willingness of the clients to avoid or evade the taxes.
The clients have a right to ensure that their taxes are reduced by any legal means possible
(Gale and Holtzblatt, 2002). The change will create issues with clients in determining
whether certain activities and expenses fall under the new regulations or not if they do not
understand how the policy works in regard to determining whether the investments are new
or old. This may lead to legal issues being addressed by the courts between the clients and the
firm. This will further increase compliance costs or damage the reputation of the firm. On the
other hand, if the clients feel that the policy is harming them, they may decide to evade the
taxes which will also lead to legal redresses. Although, this may be unintentional, it may be
due to the structural complexity of the policy. In general, this policy is likely to a number of
complexity issues between the firm and clients.

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5) Assuming that you work for the Australian Tax Office, what impact would
the tax policy have on compliance work of the ATO?
Changing the policy will have compliance issues with ATO. The compliance costs for
the agency will have to increase as it will be required to spend more in educating the
investors on how the policy works. Defining what constitutes a newly constructed house will
proof to be somehow difficult and explaining why the old ones are getting excluded. The
agency will incur additional costs in training its own staff in regard to the new provisions
under the tax policy. Additionally, it will have to change its system to ensure that they reflect
the current changes. In general, the agency will have to change its compliance guidelines in
regard to this policy. ATO will also be tasked with the responsibility of ensuring that the
policy achieves its objectives. This will only be achieved if ATO ensures that all the
requirements of this change are complied with by all the involved stakeholders. Moreover,
the complexity of the tax system will be affected as well (Gale and Holtzblatt, 2002). ATO
will be required to issue new guidance on the activities and details that investors must
disclose to be considered under the new policy. This might be difficult to explain to the
investors and may lead to court actions. Additionally, ATO will be required to include new or
additional details to its annual reports in regard to the new policy. It will also be required to
come up with new penalty policies for those who will not comply with the new policy.

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References
Cho, Y., Li, S.M. and Uren, L., 2017. Negative Gearing Tax And Welfare: A Quantitative
Study For The Australian Housing Market.
Chung, E., 2017. What you want to know about negative gearing but are too afraid to
ask. REIQ Journal, (Mar 2017), p.38.
Davidson, P. and Evans, R., 2015. Fuel on the fire: Negative gearing, capital gains tax &
housing affordability. ACOSS Papers, p.29.
Duncan, A., Hodgson, H., Minas, J., Ong, R. and Seymour, R.G., 2018. The income tax
treatment of housing assets: an assessment of proposed reform arrangements.
Gale, W.G. and Holtzblatt, J., 2002. The role of administrative issues in tax reform:
Simplicity, compliance, and administration. United States tax reform in the 21st
century, 179, pp.179-80.