Current Policy Initiatives

Taxation

Capital Gains Tax

As per other investments, capital gains are taxed at the investor's marginal tax rate if they have been held for less than 12 months, and at a 50% discount to this rate if held for longer than 12 months.

Negative Gearing

In Australia, the net costs of holding an investment property can be offset against ordinary income for the purpose of income tax assessment. That is, an investor who has an annual loss will generally receive a refund from the Australian Taxation Office. While this may seem like a poor investment to some - after all, a loss is a loss - if an investor expects to receive capital gains exceeding their final net loss (after the tax refund is considered), they will find such a deduction attractive.

For more on Negative Gearing, see: NegativeGearing

Depreciation

First Home Owner's Grant

The First Home Owner Grant (FHOG) scheme was introduced on 1 July 2000 to offset the effect of the GST on home ownership.¹

First Home Saver Account

The Federal Labor opposition announced during its 2007 election campaign that it intended to introduce First Home Saver Accounts to assist people in the purchase of their first home. These accounts are expected to begin operating during the second half of 2008. Details so far:

• Contributions made into First Home Saver Accounts will not be taxed.²
• Earnings on First Home Saver Accounts will be taxed at the statutory rate of 15 per cent rather than the individual’s marginal income tax rate.²
• Withdrawals to purchase a first home will not be taxed.²
• Individuals can contribute a maximum of $10,000 each year (indexed).³
• The Government will pay a contribution to a First Home Saver Account where contributions are made to the account during the financial year and the individual lodges a tax return. For individuals who are not required to lodge an income tax return, separate administrative arrangements will be developed to facilitate payment.²
• The Government contribution will be applied to up to $5,000 of individual contributions made annually. It will be at least 15 per cent but range up to 30 per cent of contributions, depending on the individual’s marginal income tax rate.²

Stamp Duty

Criticism

Capital Gains Tax

Capital gains tax is a tax on the gains from investment or speculation. Lately, it's been listing dangerously to the latter. This should concern anybody who is interested in achieving a stable economy. We have created a system which effectively encourages speculation by taxing it at half the rate of productive work.

• Thinking...

Negative Gearing

Negative gearing no doubt allows some people to become landlords when costs would otherwise be prohibitive. In this way, it would seem to add to the rental stock. However, this may be to the detriment to renters who wish to make the move to ownership. Because negative gearing is available to the landlord but not the prospective home-owner, the landlord can afford to pay a higher price for the property. They can also benefit financially from ownership at a greatly reduced rate of capital gain than can the home-owner.

Because of this, negative gearing is often a target when housing affordability is considered an issue.

• Refer to RBA's submission to Inquiry into First Home Ownership
• Productivity Commission Report

Supporters of Negative Gearing invariably cite the brief period when it was quarantined in the mid 1980s as evidence that tinkering with the rules will inevitably result in sky-rocketing rents as landlords leave the business. However, economist Ross Gittins claims the problem with this view is that "it's not true".⁵ The facts just don't support the story.

Depreciation

General Criticisms

Current policy adding to demand side, upward pressure on prices.

Costly but ineffective (if affordable housing is the goal! It's effective and keeping prices higher than they would otherwise be!)

Alternative Policy Options

Capital Gains Tax

Negative Gearing

Negative gearing should be available only for newly constructed dwellings, not for the purchase of existing dwellings.

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<sub>1. http://www.firsthome.gov.au/

2. http://homesaver.treasury.gov.au/content/consultation_paper/FHSA_Consult-04.asp#P337_37683

3. http://homesaver.treasury.gov.au/

5. Pollies tell fibs about negative gearing; http://www.smh.com.au/articles/2003/08/24/1061663676588.html</sub>