Negative gearing reform could lead to lost decade: BIS Shrapnel

Property ObserverMarch 2, 20160 min read

The consequences of limiting the tax deductibility of negatively geared residential properties would impact any expected tax savings, according to a new report from BIS Shrapnel.

BIS Shrapnel's report, Economic Impact of Limiting the Tax Deductibility of Negatively Geared Residential Investment Properties, said changes to the current negative gearing setup would go well beyond any saving of the income tax concession, to a multitude of unintended consequences.

It added limiting the tax deductibility of negatively geared residential investment properties would have consequences that go well beyond any tax saving to the Federal budget and suggested new home building will shrink by around 4% nationally, or 7,200 dwellings a year and GDP would shrink by around $19 billion per annum on average, or 1 percent of Australia’s $190 trillion annual income.

The report suggested:

•  Rents will rise by up to 10% ($2,600) per annum

•  New home building will shrink by around 4% nationally, or 7,200 dwellings a year

•  GDP would shrink by around $19 billion per annum on average, equating to some 1% of Australia’s $190 billion annual income

•  175,000 fewer jobs would be created over the next 10 years, resulting in the unemployment rate rising from 5.8% to 5.9%

•  Government revenue across a range of taxes would shrink by $1.65 billion per annum

•  70,000 extra households would be pushed into housing rental stress

•  If the government were to compensate these stressed households, it would require an additional subsidy outlay of $650 million per annum.

"Government revenue across a range of taxes would shrink by $1.65 billion per annum... 70,000 extra households would be pushed into housing rental stress," it noted.

"If the government were to compensate these stressed households, it would require an additional subsidy outlay of $650 million per annum. In other words, the impact would go well beyond any saving of the income tax concession, to a multitude of unintended consequences. 

"The Federal government will save $2.1 billion per annum as fewer individuals deduct losses from property, but will incur an income tax loss from lower home building of $1.8 billion. Stamp duty revenue will fall by around $1.1 billion per annum; GST collections will drop by $0.2 billion a year.

"Altogether, total tax revenue is likely to fall by $1.65 billion per year... at the end of a 10-year horizon the market would find a new normal, but the legacy will be a ‘lost decade’. Rents will sit 2-10% higher depending on the city."

Estimated price of units in 2026

 
Full negative gearing
Limited negative gearing
Difference
Sydney873,000820,000-6.1%
Melbourne602,000585,000-2.9%
Brisbane590,000565,000-4.2%
Adelaide425,000420,000-1.2%
Perth590,000580,000-1.6%
Canberra540,000535,000-1.0%
Hobart358,000350,000-2.4%
Source: BIS Shrapnel

 

Estimated unit rent in 2026

 
Full negative gearing
Limited negative gearing
Difference
Sydney$695$7355.8%
Melbourne$470$5159.6%
Brisbane$490$5155.1%
Adelaide$350$38510.0%
Perth$535$5655.6%
Canberra$475$5056.3%
Hobart$350$3654.3%
Source: BIS Shrapnel

Property Observer

Tags:
Negative gearing
Tax Reform
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