Labor Party’s Policy Proposal On Negative Gearing And Capital Gains Tax

The Proposal

Below is the Australian Labor Party’s policy proposal taken from their website https://www.alp.org.au/negativegearing.

The questions that you must address in relation to this policy proposal are shown at the end of this document.

Labor’s Proposal Labor will reform negative gearing and the capital gains tax discount to ensure that our tax system is fair, sustainable and targets jobs and growth. Negative gearing Labor will limit negative gearing to new housing from a yet-to-be-determined date after the next election. All investments made before this date will not be affected by this change and will be fully grandfathered. This will mean that taxpayers will continue to be able to deduct net rental losses against their wage income, providing the losses come from newly constructed housing. From a yet-to-be-determined date after the next election losses from new investments in shares and existing properties can still be used to offset investment income tax liabilities. These losses can also continue to be carried forward to offset the final capital gain on the investment. Capital gains tax Labor will halve the capital gains discount for all assets purchased after a yet-to-be-determined date after the next election. This will reduce the capital gains tax discount for assets that are held longer than 12 months from the current 50 per cent to 25 per cent. All investments made before this date will not be affected by this change and will be fully grandfathered. This policy change will also not affect investments made by superannuation funds. The CGT discount will not change for small business assets.

This will ensure that no small businesses are worse off under these changes. Labor will consult with industry, relevant stakeholders and State governments on further design and implementation details ahead of the start date for both these proposals.

In relation to the tax policy issue shown above, answer the following questions:

1. Why is this tax policy issue significant? 

2. Who are the key stakeholders and how does this policy affect them?

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?

4. Assuming that you work for an accounting/tax practice, what would be implicationfor your firm and its clients if the tax policy becomes law?

5. Assuming that you work for the Australian Tax Office, what impact would the tax policy have on compliance work of the ATO?

The Proposal

1. The politics surrounding the reformations of the housing tax continues to be significant issue. However, reformations in the capital gains and negative gearing along with the shift in the property tax would help in improving the affordability while simultaneously increasing the revenue of the government (Blunden, 2016). The policy of capital gains and negative gearing tax reformations takes into the account the combination of impact of tax treatment of the income from the investment in housing together with the interaction amid the housing and retirement savings. Gradually, over the decade reducing the effect of capital gains tax discount from 50 t0 30 per cent would create a very minimal amount of effect on the average investors.

Same is applicable on the negative gearing where implementing the cap on the housing tax deductions can be phased over a period of ten years. The reformation policy is significant because the federal government would be able to save more than A$ 1.7 billion from the yearly A$ 3.04 billion cost of negative gearing deductions. The revenue can be reinvested for community housing and social purpose (Grudnoff, 2015). The policy would not only improve the inter-generational equality but would also be efficient and offer greater stability to the state government revenue.

2. The key stakeholders include the non-political experts and the people that are the mix of investors. Presently around half of the tax revenue is obtained from the personal income tax and the current reformation policy may create an effect on the higher effective marginal tax rates on productivity (Pawson, 2018). The stakeholders agree on such challenges but disagree on the priorities. As a general rule, an asymmetrical relation is prevalent between the capital gains tax and negative gearing which witnesses full and immediate deduction in the interest expenses for the income earnings investment whereas simply 50% of the capital gains are levied when the investments are sold. Even though the stakeholders agree to the reformations but they are not always agreeing with the shape of the reformations. The problematic part of the problem is that tax reformation is very likely to get accepted when the revenues are neutral and the government is giving back the same of tax that it is taking. The proposal of the labour for limiting the negative gearing would eventually create an impact on the markets of property. According to the words of Davidson & Evans, (2015) the unintentional significances would lead certain geographical areas particularly those that are weak or fragile property markets to be adversely impacted than any other market.

Potential Impact on Housing Markets

According to the words of Long, (2016) the unintentional significances would impact the Sydney market unit where the proposed changes might be equal to the unexpected decline in 1.15% rise in the interest rate. A fall in price of dwelling or deceleration of price in certain regions would result in reduction in dwelling and fall in the affordability of the rental property in particular locations.

The analysis reflects that there might be some form of distortions in the markets of investors, with the establishment of primary and secondary market for the stock of investors if the subsidies were restricted to new housing prospectively the slimmer market of resale would probably increase the risk of making investment in the new dwellings. The restrictions on credit have created a direct effect on the investors in the Australian housing market (Hellwig & McAllister, 2017). As the consequences of this the dwelling price in the Melbourne and Sydney have reflected a decelerating growth rate. The bottom line is that the land scape of residential property in Australia has been significantly changed and blanket introduction of the reformation policy may result in unintentional consequences.

3. According to the words of Cho et al., (2017) the Australian property tax laws over the years has never been so chaotic. The present policy on capital gains discounts and negative gearing is expensive drains on budget which is enormously failing to boost the new stock of housing. The Australian labor party has bought forward the proposal of changing the Australia’s policy of negative gearing and capital gains if the government is elected in the federal election. The study here would dispel the myths regarding the advantages and the disadvantages of the policy.

Pros:

The policy can be regarded as the popular among the investors because the loss of tax that originates might usually help in reducing the investors other assessable income. This would lead to the reduction in the bill of yearly income tax. The savings that would be generated from the applicable of policy would help in at least partially paying the investment’s approach.

As stated by Rogers et al., (2017) there are large number of viewpoints regarding the policy that is prevalent during the period of election. The viewpoint is that it helps the investors to purchase the properties that is ultimately helps in increasing the supply of rental and investment property all through the country. The increase in the supply of the rental properties eventually lowers the possibility of sharp increase in the rents because of the higher demand of the properties that are available for rent.

Stakeholder Perspectives

The stakeholders such as investors would be the winner from the labor proposal of change. The demand for the investor’s property lends support in building the industry and creating employment (Eccleston et al., 2018). The negatively geared investors would ultimately support the market of private residential tenancy and would help those relevant stakeholders that are unable to afford to purchase the property. The tax benefit would encourage the individuals to make investment in the rental property and save, particularly to assist them in becoming self-sufficient when they attain the age of retirement.

On the other hand, the policy would also create a balance in the government budget. A reduced amount of capital gains tax discount for investors would ultimately mean that greater amount of tax is paid. This is equivalent to greater amount income for the government that will be redeployed in the direction of benefit, education and housing creativities (Blunden, 2016). The policy would also promote greater affordability of housing. By lowering down the profitability of the property investment, it would help in promoting fewer investors in the market. The anticipation is that would ultimately translate less demand and hence result in reduced price of growth that may ultimately help in driving the affordability.

On critically assessing the proposal made by the labor it can be stated that there would not be any hike in taxes. According the latest government warnings, if the senate chunks $6 billion budget savings then they might be forced to increase the income taxes (Valadkhani & Smyth, 2017). Additionally the policies would assist in creating the level playing field for the first home purchasers by competing with the investors and would ultimately help in restoring the dream of having the house among the wider part of the working and middle income groups that are priced out of the market from a long time.

Cons:

Despite the advantages there are certain disadvantages that this policy accompanies. The investors may inflate market of the residential property which would ultimately make it less affordable for the first home purchasers or the other occupiers of the property. As stated by Chappell & Campbell, (2018) the overall benefits and deductions in tax would accrue to those that have the higher income and would not assist those that are first time purchasers and lower income property owners. In pursuit of the negative tax benefit the investors may over extend themselves that may ultimately result in negative.

Pros of the Proposal

Leigh, (2017) points out that the policy may result in economic downturn. The real estate is regarded as the primary industries that is driving the economy of Australia. Any kind of threat is perceived to the profitability would result the investors to leave the market that may create an unforeseen economic consequence. Chardon et al., (2016) states that the land lords would be ultimately losers. If only few number of landlords enter the market then it may result in lesser supply of rental houses and reduced rate of vacancy in some of the markets.   

Critically assessing the policy, the overwhelming benefits would go to the lower and middle income group is incorrect to say. The government generally makes the use of income data following the application of tax deductions. The analysis states that the benefits is overwhelmingly in the direction of higher income groups. The policy would however help in encouraging the building of greater housing each year and would ultimately increase the supply of house. It would reduce the cost for the renters would restore the commonwealth budget to the sustainable foundations.

4. An analysis has been conducted across the nation to understand whether the Australian Labour Party is successful in the next federal election and application of the proposed reformations. The labor party has earlier proposed to restrict the gearing of new rental property and reduce the capital gains tax discount from the 50 per cent to 25 per cent (Yates, 2016). The intention of the party is to introduce the level player field for the first time home purchasers and improving the affordability of the house by strengthening the position of budget and restricting the subsidies.

Considering the implications of the policy for the investors there is higher amount of risk associated to the rental property market across the nations. The credit restrictions and tighter policy of reformation would result in greater effect on the investors in the Australian market of housing (Keane & Xiangling, 2018). The two spend economy is largely driven by the boom in construction resources and those that once prosperous and are now lagging. Such kind of necessities with the help of modelling and effect analysis of the proposed tax reformation package. One of the main findings that is obtained from the policy application is the blanket introduction relating to the reformation across the nation that have unintended outcomes.

Another unintentional outcome that would arise is the Sydney market where the reformations that has been proposed would be equal to the unexpected fall of 1.15 per cent rise in the rate of interest for the investors. The introduction of policy would result in reduction in the dwelling and fall in the affordability of the rental property in some of the location (Hulse & Burke, 2016). The implication of the policy demonstrates that there would certain forms of distortions in the market of investors with the establishment of both the primary and the secondary market for the investors given the subsidies of the new property is restricted. There implication of labor policy might result in thinner resale with greater risk in the investment of the new dwellings.

Cons of the Proposal

With the introduction of the labor policy there would be progressive deduction in the rental model. The “mum and dad” investors are falling under the bottom half of the income or property value distributions that would continue to enjoy all the deductions in the rental property and hence may experience no reduction the saving of tax (Guest & Rohde, 2017). On the other hand, the investors that fall within the bracket of top 25 per cent will be subjected to complete quarantine of negative gearing and hence would receive zero deduction in rent leading to full loss of tax savings from the negative gearing.      

5. The ATO model of tax compliance is structured in the manner that it helps in understanding and improving the compliance ion tax. Considering the proposed policies of negative gearing and capital gains tax, the compliance model would ultimately help in understanding the factors that would influence the behaviour of the taxpayer and implementing the most appropriate strategy of compliance. The behaviour of the taxpayer in tax compliance is influenced by numerous factors such as business or economic (Martin et al., 2016). The model of compliance represents that the attitude of the taxpayer in respect to the labor proposed policy changes. It can be stated based on the continuum of compliance model that the taxpayers possess the attitude of doing the correct thing. On the other hand, the taxpayer might choose not to comply and may even decide to opt out of the proposed policy.

The model of compliance summarizes different forms of support and intervention that might be required to collect the necessary revenue. Therefore, the tax compliance model provides suggestion that the ATO can create an influence in the behaviour of the taxpayer with the help of its response and interaction.

The policy of tax towards tax compliance would help in dealing with the risk of complexity, transparency and taxpayer’s behaviour. There may be instances where most of the people would require minimum amount of interaction for meeting the capital gains tax obligations (Freebairn, 2016). Majority of the people may need minimum amount of interaction for meeting their capital gains tax obligations given that they are straightforward in dealing with their tax affairs and make an attempt in doing their things in the right manner. The tax policy may however create an impact on the transparent tax affairs together with the items such as employment and investment income that is shared by the third parties.

Whereas the tax policy may result in instances where taxpayers can report inconstant tax obligations by under reporting their taxes. A more increased level of attention may be paid towards the taxpayer that require advice or information that might help in better understanding of the policy (Hulse & Burke, 2016). The tax compliance framework of ATO would be willing to indulge with those taxpayers to have the reasonable amount of transparent taxation related affairs. This includes including the relevant information relating to the negative gearing and capital gains tax in the tax returns which has not been prefilled.

The tax compliance model would be addressing the taxpayer that would seek the support and advice relating to the matters when they encounter anything new or complex or those that require additional amount of assistance in understanding the negative gearing and capital gains tax. The tax compliance program of ATO would certainly be impacted by the increasing complex structure of the capital gains tax and negative gearing however a proactive engagement with the taxpayer would help in understanding the taxpayer’s arrangement of tax (Chappell & Campbell, 2018). The ATO compliance system would be addressing the needs of taxpayer that require advice from the tax policy by helping the taxpayer in navigating greater complex structure of negative gearing and issues relating to capital gains tax.

Bearing in mind the policy changes the ATO compliance program would increase the level of attention towards the taxpayers that has the complex tax affairs (Valadkhani & Smyth, 2017). An attempt would be made to minimize the impact of tax by increasing the attention on the position of law that are different to the ATO and would implement the increased attention in resolving the differences created by the policies related to capital gains and negative gearing.

References:

Blunden, H. (2016). Discourses around negative gearing of investment properties in Australia. Housing Studies, 31(3), 340-357.

Blunden, H. (2016). Discourses around negative gearing of investment properties in Australia. Housing Studies, 31(3), 340-357.

Chappell, J., & Campbell, N. (2018). The Housing Gap—Sydney, Australia. In Sustainable Development Research in the Asia-Pacific Region (pp. 293-304). Springer, Cham.

Chardon, T., Freudenberg, B., & Brimble, M. (2016). Tax literacy in Australia: not knowing your deduction from your offset. Austl. Tax F., 31, 321.

Cho, Y., Li, S. M., & Uren, L. (2017, November). Negative Gearing and Welfare: A Quantitative Study for the Australian Housing Market. Reserve Bank of Australia Quantitative Macroeconomics Research Workshop (13-15 December 2017).

Davidson, P., & Evans, R. (2015). Fuel on the fire: Negative gearing, capital gains tax & housing affordability. ACOSS Papers, 29.

Eccleston, R., Verdouw, J., & Flanagan, K. (2018). Gradual reform to capital gains, negative gearing and stamp duty will make housing more affordable.

Freebairn, J. (2016). Taxation of housing. Australian Economic Review, 49(3), 307-316.

Grudnoff, M. (2015). Top gears: How negative gearing and the capital gains tax discount benefit the top 10 per cent and drive up house prices.

Guest, R., & Rohde, N. (2017). The Contribution of Foreign Real Estate Investment to Housing Price Growth in Australian Capital Cities. Abacus, 53(3), 304-318.

Hellwig, T., & McAllister, I. (2017). The impact of economic assets on party choice in Australia. Journal of Elections, Public Opinion and Parties, 1-19.

Hulse, K., & Burke, T. (2016). Private rental housing in Australia: Political inertia and market change. Housing in 21st-century Australia: People, practices and policies, 139-152.

Keane, M., & Xiangling, L. I. U. (2018). A Life Cycle Model On Optimal Housing Equity.

Leigh, A. (2017). How can we reduce inequality.

Long, B. (2016). A taxing issue: Reflections of Christian economists on tax reform in Australia. St Mark's Review, (235), v.

Martin, C., Pawson, H., & van den Nouwelant, R. (2016). Housing policy and the housing system in Australia: an overview.

Pawson, I. (2018). Reframing Australia's housing affordability problem: The politics and economics of negative gearing. Journal of Australian Political Economy, The, (81), 121.

Rogers, D., Nelson, J., & Wong, A. (2017). Full House: how property pressures impact intercultural relations. Disruptive Asia: Asia’s Rise and Australia’s Future, 47-50.

Valadkhani, A., & Smyth, R. (2017). Self-exciting effects of house prices on unit prices in Australian capital cities. Urban Studies, 54(10), 2376-2394.

Yates, J. (2016). Why does Australia have an affordable housing problem and what can be done about it?. Australian Economic Review, 49(3), 328-339.