How our tax system affects
housing affordability
Rachel Ong
Deputy Director of Centre for Research in Applied Economics
Curtin University
Income tax on landlords
• Rental income is tax assessable income
• Deductions
▫ Capital works deduction = 2.5% of the cost of
construction and improvements to rental
properties that commenced after July 1985
▫ Depreciation on fixtures and fittings
▫ Rental interest
Negative gearing
• Net rental income is tax assessable
• Negative gearing - Net rental loss can be deducted
against tax assessable income
Individual Landlords’ Rental Income and Deductions, 2005–06 and 2006–07
2005–06
2006–07
Rental
income/deductions
No.
$m
No.
$m
Gross rental income
1,545,310
19,160
1,592,636
20,911
Rental interest deductions
1,231,694
13,830
1,276,185
16,104
Capital works deductions
518,568
1,091
559,603
1,226
Other rental deductions
1,548,327
9,328
1,596,344
9,953
Net rental income
1,561,630
–5,089
1,610,561
–6,372
ATO Taxation Statistics (2006-07), Personal Tax, Table 2.4
Negative gearing
• Attractive to investors – tax shelter benefits
but
• Refinancing and churning required to retain
tax shelter benefits
▫ Detrimental to tenure security
▫ Encourages the accumulation of wealth through
borrowing and speculation – can lead to
inflationary bias
Negative gearing
Survival rate (%)
1
0.9
0.8
0.7
0.6
Not negatively geared
0.5
0.4
0.3
Negatively geared
0.2
0
1
2
3
Year
Wood and Ong (2010)
4
5
Capital gains tax
• Landlords subject to CGT on sale of property
• Discount on CGT
▫ 50% discount for individual landlords
▫ 33.3% for superannuation funds that hold
investment properties
▫ No discount for companies
• Individual landlords have incentives to debt
finance to chase capital gains
▫ Properties with large capital gains tend to be in
higher segments of the property market
Land tax
• Recurrent annual tax levied investors who
own land used for private rental housing
• Progressive schedule with marginal rates
that increase with the value of the land
• Tax base is on aggregate land holding
▫ Multiple property owners are taxed on the
aggregate value of their land plots, pushing
them into land tax brackets with high
marginal rates
Land tax
WA 2011-12 land tax rates
Aggregate land value
$0
$0 -- $300,000
$300,000
$300,000 - $1,000,000
$1,000,000
$1,000,000 –– $2,200,000
$2,200,000
Marginal tax rate
Nil
Nil
0.09 cent for each $1 in excess of $300,000
$630 ++ 0.47
0.47 cent
centsfor
foreach
each$1
$1ininexcess
excessofof$1,000,000
$1,000,000
$630
$2,200,000 – $5,500,000 $6,270 + 1.22 cents for each $1 in excess of $2,200,000
$5,500,000 – $11,000,000 $46,530 + 1.46 cents for each $1 in excess of
$5,500,000
>$11,000,000
$126,830 + 2.16 cents for each $1 in excess of
$11,000,000
Source: http://www.finance.wa.gov.au/cms/content.aspx?id=239
If 1 land plot worth $300,000,
• land tax = $0
If 4 land plots worth $300,000 each,
• aggregate land value = $1,200,000
• land tax = $630 + 0.0047 x (1,200,000 – 1,000,000)
= $1,570
Land tax
• Increase in taxes on
housing suppliers
shifts the supply
curve to the left
• Quantity of housing
supplied falls from Q0
to Q1
• Price of housing
supplied rises from P0
to P1
• Adverse impact on
affordability
House Price & rent
($)
S1
S
P1
P0
D
Q1
Q0
Quantity of
housing
NRAS
• Introduced in 2008 to provide incentives to
investors to build 50,000 affordable rental
properties by 2012
• NRAS dwellings must be:
▫ New or substantially renovated dwelling
▫ Rented to eligible low & moderate income
households for at least 20% below market
rates for 10 years
• Federal & State tax-transfer package
• Tax credits last for 10 years per dwelling
NRAS
• Supply-side policy –
targets rental
investors
• Shifts supply curve
out
House price & rents
($)
S
S1
P0
P1
D
Q0
Q1
Quantity of
housing
NRAS
• Lack of institutional investment by companies
and superannuation funds
• Superannuation funds cannot debt finance
investments – cannot take advantage of tax
shelter benefits associated with negative
gearing
• Deterred by land tax arrangements whereby
tax rate is determined by cumulative value of
land
• Barriers to supply of rental housing by
institutions
Income Tax on Homeowners
• No deduction for expenses in relation to
their own home as it is a private asset
• Exempt from Capital Gains Tax (CGT) on
sale of their primary residence
Stamp duty
• Stamp duties on conveyance – a transaction cost
that is payable upfront
WA 2011-12 stamp duty rates
Home purchase price Stamp duty rate
$0
1.90%
$0 --$120,000
$120,000
1.90%
$120,000 - $150,000
$2,280 + 2.85% on amount over $120,000
$150,000 – $360,000
$3,135 + 3.80% on amount over $150,000
$360,000
$11,115
onon
amount
overover
$360,000
$360,000– –$725,000
$725,000
$11,115+ +4.75%
4.75%
amount
$360,000
>$725,000
$28,453 + 5.15% on amount over $725,000
http://www.finance.wa.gov.au/cms/content.aspx?id=2071
• If purchase price is $100,000,
stamp duty = 1.90% x $100,000 = $1,900
• If purchase price is $420,000,
stamp duty
= $11,115 + (4.75% x $420,000 - $360,000)
= $11,115 + $2,850 = $13,965
Stamp duty
• Creates housing affordability problems by
deterring access to home ownership
• Concessions :
▫ First home buyers whose home purchases are
below $500,000 are exempt from stamp duty
• Concessional rates apply for principal place
of residence valued at < $200,000
Stamp duty
• Impede access to home ownership – lump sum
upfront cost
• No strong efficiency rationale
• Does not achieve a redistribution goal
• Those who move more frequently pay relatively
high amounts of duty:
▫ Slows the adjustment of labour and housing
markets to price signals
▫ Deters trading down
Stamp duty
No
constraint
11%
Downpayment
& repayment
constrained
52%
Repayment
constrained
10%
Downpayment
constrained
27%
Source: Population estimates reported in Table 15 of Wood and Ong (2008)
http://www.ahuri.edu.au/publications/p30396/
Stamp duty
Price $
Supply curve
P1+ Tax
P0
Tax
P1
Tax
Demand curve before tax
Demand curve after tax
Q1
Q0
Number of properties
First Home Saver Account
(FSHA)
• To assist first home buyers to save up to
purchase a home
• Eligible recipients are:
▫ Aged 18-65 years
▫ First home buyers and
▫ First time FHSA holders
FHSA
• Federal government contribution of 17% on the
first $5,000 of personal contributions made to the
account in every year
▫ Suppose a FHSA holder makes a contribution of
$5,000
▫ Federal transfer = 17% x $5,000 = $850
• Federal government transfer is tax exempt
• Interest earned on a FHSA is taxed at 15% only
Summary
• Plethora of housing taxes or tax rebates
• Some work to promote housing affordability
e.g. NRAS, but hindered by other taxes such as
land tax
• Potential for reforms highlighted in the Henry
Review, but not implemented by government
References
• Australian Tax Office (2007), Australian Tax Statistics 2006-07
• Department of Finance (2012), Land Tax Rates,
http://www.finance.wa.gov.au/cms/content.aspx?id=239
• Eslake, S. (2011), ‘Time to Axe Negative Gearing’, The Age, 25
April, http://www.theage.com.au/business/time-to-axenegative-gearing-20110424-1dsxs.html#ixzz1cicQLPLg
• Ham, S. (2009), NRAS Presentation for National Affordable
Housing Summit Group Forums
• Wood, G. and Ong, R. (2008), Redesigning AHURI’s Australian
Housing Market Microsimulation Model, Report, November,
Australian Housing and Urban Research Institute, Melbourne.
• Wood, G. and Ong, R. (2010), Factors Shaping the Decision to
Become A Landlord and Retain Rental Investments, Final Report
No. 142, Australian Housing and Urban Research Institute,
Melbourne.