Negative Gearing Deductions Cap In 2017 Budget Frame

Capping the size of negative ­gearing deductions and cuts to the capital gains tax discount are among options the Turnbull ­government is considering as it brings together a package of housing­ affordability measures for the May budget.

The government is consulting property, housing and community groups over its housing package and is emphasising its belief that the biggest issue is a bottleneck in the supply of housing, rather than excessive demand.

Scott Morrison says negative gearing is an important concession that helps the supply of rental accommodation and he believes there is political mileage in attacking Labor’s sweeping ban on fresh negative gearing. However, the government is not ruling out changes to the tax treatment of housing investment in its discussions with industry.

A limit on the number of properties a single investor can negatively gear, or a cap on the total size of interest deduction one taxpayer can claim, are the simplest ways to deal with “excesses”.

This approach, also considered a year ago when the Turnbull government was attempting to refine its election tax package, has the advantage of only targeting the most aggressive users of negative gearing, but has the drawback of introducing a special tax rule for investment in residential real estate, which Treasury would regard as a tax “distortion”.

Property and housing groups are strongly opposed to any change in negative gearing but say privately that they could live with such a move. Another option, more likely to draw support from Treasury, would be reducing the discount of capital gains for tax purposes from 50 per cent to 40 per cent, in line with the recommendation of the 2010 Henry tax review.

The tax review argued that the 50 per cent discount, introduced by the Howard government in its 1999 business tax package to compensate for inflation, was too generous given the Reserve Bank’s target of keeping price rises to between 2 and 3 per cent. It urged a rate of 40 per cent. The review tied this to reducing the tax on landlord rental income, saying switching the tax incentive from capital gains to rental income would encourage more high-density development.

The government is unlikely to impose limits on self-managed superannuation fund investments in the residential property market, having only last year rejected the Financial System Inquiry’s recommendation that non-recourse borrowing by these funds should be prohibited. The Treasurer said, in response to that inquiry, that he would revisit the issue in three years, following monitoring from the Council of Financial Regulators.

The most important constraints to the supply of housing are stamp duties and the restrictions imposed by planning authorities, both of which come under the jurisdiction of the state and territory governments and over which the federal government has almost no leverage.

Mr Morrison has been critical of the National Affordable Housing Agreement, through which it provides $1.3 billion a year to state governments to support low-cost housing, describing it as “an ATM with no accountability”, and adding that the supply of housing has fallen under this agreement. The federal government is expected to seek a renegotiated deal imposing much tighter conditions on what the states are required to do in return.

There is industry support for establishing a housing infrastructure fund, patterned on the Rudd government’s housing affordability fund, which helped to defray costs such as the laying of water and sewerage pipes, transport and parks for housing developments. Where the Rudd government’s fund was purely funded by the budget, the Turnbull government would be looking to leverage government underwriting with private-sector support.

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