Negative gearing and capital gains tax discount benefit wealthy by $4.3b: report

Negative gearing and capital gains tax discount benefit wealthy by $4.3b: report

Negative gearing and capital gains tax discount benefit wealthy by $4.3b: report

Updated 28 April 2015, 16:50 AEST

A new report estimates that more than half the benefits of negative gearing and capital gains tax discounts go to the top 10 per cent of income earners.

The report by GetUp and The Australia Institute, using economic modelling by NATSEM, finds that over a third of negative gearing tax benefits went to the top 10 per cent, while almost three quarters (73 per cent) of capital gains tax (CGT) discounts went to that top income bracket.

The report estimates that negative gearing is costing the Federal Government about $3.7 billion a year in lost revenue, while the 50 per cent capital gains tax discount wipes off $4 billion.

It finds that 56 per cent of this lost revenue, or $4.3 billion, goes to the top 10 per cent of income earners, with just over two-thirds going to the top fifth of households.

The Australia Institute's senior economist Matt Grudnoff told ABC News Online that the typical negatively geared property investor earns substantially more than the typical person who does not use the tax break.

"The median taxable income for those who don't negatively gear is $38,500 a year, whereas the median taxable income for people who do negatively gear is about 45 per cent higher than that," he said.

Negative gearing makes housing 'more subject to bubbles'

The Property Council of Australia has recently argued that 80 per cent of negatively geared property investors are on salaries of $80,000 or less, also releasing an analysis of Tax Office data showing that many negative gearers are nurses, teachers or other middle-class professionals.

However, as revealed in an ABC analysis last year, Matt Grudnoff argues that those numbers are skewed down by the very use of negative gearing.

"The amounts that the Property Council are talking about are amounts that have already been deducted down, or reduced down, with negative gearing," he explained.

"These people's gross income - the total amount of income that they earn - is going to be significantly higher than those who don't negatively gear, because they're able to reduce their taxable income."

Given that the two tax discounts are often used in conjunction to minimise tax bills by effectively converting fully-taxed wage or salary income into capital gains taxed at half the rate, Mr Grudnoff said it is not surprising they are more utilised by high income earners.

"People earning more than $180,000 a year have a marginal tax rate, including the Medicare levy and the debt reduction levy, of 49 per cent - that means for every dollar of [rental] loss they're able to write-off 49 per cent," he explained.

"But if we go back to somebody on, say, minimum wage of $37,000 a year they're only facing a marginal tax rate of about 21 per cent, so they're only able to write off 21 per cent of the loss."

The report warns that, aside from lost revenue, these two tax policies are together contributing to the steep inflation of Australian home prices, which have roughly trebled over the past two decades.

Mr Grudnoff explained that, because 94 per cent of negatively geared properties are bought second hand and only 6 per cent are newly built, the policy has added to demand for housing far more than it has boosted supply.

He argued this applies to renters as much as owner-occupiers, as would-be buyers are locked out of purchasing by investors utilising the tax breaks.

Mr Grudnoff is also concerned that this may make the housing market more susceptible to boom-bust cycles, as investors chase capital gains without regard to rental returns.

"When you see property prices begin to rise, then people are more likely to invest in negative gearing regardless of the returns and this makes the property market, particularly in Sydney at the moment, more unstable and more subject to bubbles," he warned.