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Housing and tax: why is reform so hard?

There will be a myriad of issues debated at this week’s Tax Forum but top of the wishlist for many experts is reforming housing taxation. Housing makes up the lion’s share of household wealth in Australia…

Australia’s policies around housing taxation need reform. AAP

There will be a myriad of issues debated at this week’s Tax Forum but top of the wishlist for many experts is reforming housing taxation.

Housing makes up the lion’s share of household wealth in Australia. The Australian Bureau of Statistics estimated in 2007 that about 45% of household wealth is in home ownership, and another 15% is in investment housing.

People access housing in different capacities: as home owners, landlords and renters. Australia has a fairly high and stable rate of home ownership by global standards.

About 70% of Australian households (individuals or families) own or are purchasing their own home; 22% rent in the private rental market and 5% rent in public or social housing.

However, these averages mask some worrying trends, as younger people find it more difficult to access home ownership, our cities sprawl and services become more expensive, and older people carry mortgage debt for longer than ever before.

This year, the National Centre for Social and Economic Modelling (NATSEM) confirmed previous findings that Australia has one of the least affordable housing markets in the OECD. We have severely unaffordable areas in most cities and in regional and rural areas.

A complex mess

Housing is affected by many different taxes in Australia, leading to a complex mess of federal, state and local taxes, exemptions and concessions.

Home owners benefit from many tax exemptions. Most home owners pay rates to local councils, but home owners do not pay any land tax, or any capital gains tax on the sale of their home.

Ken Henry: retain capital gains exemption. AAP

Home owners also do not pay tax on what is called “imputed” rent – this is the benefit of living in your own home instead of having to pay rent out of after-tax income, like renters do.

For most of us, who must purchase a home with mortgage debt, the benefit of not being taxed on imputed rent is offset to some degree, because the interest on our home mortgage is not deductible.

The tax rules for landlords of private rental housing are inconsistent. Landlords pay some taxes but benefit from some subsidies as well.

The combination of our capital gains tax 50% discount, the ability to negatively gear investment in rental property as a deduction in the income tax, state stamp duties and poorly designed land taxes causes a biased investment housing market that contributes to Australia’s lack of affordable housing.

All home owners and landlords pay stamp duty on house purchases. Tax and housing policy experts, including the Henry Tax Review, agree that stamp duty is a poor tax.

It is inefficient, feeds into house prices (contributing to lack of affordability) and taxes more heavily those people who purchase new housing more often, than those people who don’t.

Stamp duty is an extra cost that impedes people from buying and selling their homes, both within our major cities and across the country, for work reasons, or to “upsize” or “downsize” their home as needed.

Stamp duties are an important revenue source for state government, and this is a crucial factor in any tax reform.

However, stamp duties are a volatile revenue source - as housing markets soften in many places, state governments struggle to meet revenue requirements because their stamp duty collections are down.

So what do we need to do?

As recommended by the Henry Tax Review, we should retain the capital gains tax exemption for the home.

Australians support home ownership and seeking to tax it will add significant complexity to the income tax system for many people.

But we should go ahead and reform the income tax rules for investments, including rental real estate.

One approach is to adopt the recommendation of a 40% discount on net savings income. Investors would net off their income and gains on investments, against expenses and losses on those investments.

A 40% discount would apply to net savings income, so that only 60% of this net savings income would be subject to tax at the individual rate.

This would be simpler, fairer and cause less distortion than our current income tax system.

To assist in increasing the supply of affordable housing, the government should consider retaining the 50% capital gains discount, and the ability to “negative gear” interest, for rental housing investments that are developed in the National Rental Affordability Scheme.

State governments should eliminate stamp duties, as in Recommendation 51 of the Henry Tax Review.

AAP

States should also reform land taxes to improve valuation rules and rate structures. Land taxes would usually be lower on apartments than on houses, supporting city planning goals and affordable rental housing.

A key issue will be the design of fair rules for transition to the new system. These can be designed so that home owners are not “double taxed” by paying both stamp duty and the new land tax on their home.

For example, the stamp duty on people’s last home purchase, within a reasonable time, could be credited against land tax owed for a period of years into the future.

We can also design tax concessions in the new land tax, so that people without sufficient cash flow, such as pensioners, can delay payment until sale of their house.

Hard but necessary reform

Tax reform for housing is hard, because it affects so many of us and because it involves both the federal income tax and many state taxes.

That is also why it is important. A “package” approach is needed, in which the federal government will support state governments to reform their systems.

Reforms to improve the taxation of housing would fix some of the worst problems in our state tax systems, and would make our income tax fairer and more neutral in its treatment of different kinds of income and investment.

A tax reform that rebalances the system to tax housing assets more neutrally and fairly can make a significant contribution to improving housing fairness, efficiency and affordability.

Read more of our Tax Forum coverage:

Critical reform is worth the effort - and the wait

Should nannies for high income women be subsidised?

Reforming how property is taxed means we’ll tackle affordability

The overlooked role of local government in tax reform

The GST exemption should come off food

The GST needs changing, so lets debate it

The EU’s adopting a financial transactions tax, so why don’t the rest of us?

Join the conversation

9 Comments sorted by

  1. Marc Hendrickx

    Geologist

    The image accompanying this article is a shot of a dilapidated white fence, probably taken in New York, based on the photographer (Flickr/Neoliminal). It was certainly not taken in Australia. Perhaps in a story about Australian housing problems The Conversation could find an appropriate lead image from Australia.

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    1. Helen Westerman

      Deputy Managing Editor at The Conversation

      In reply to Marc Hendrickx

      The picture was an attempt at an analogy; but it has been replaced.

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  2. Kevin Cox
    Kevin Cox is a Friend of The Conversation.

    logged in via LinkedIn

    As Stewart points out there is a major problem with tax reform in housing and that is the dependence of state and local governments on land and dwelling taxes. The traditional way to address this problem is for the Federal Government to offer an alternative source of income.

    One alternative - which was used in the early days of the Commonwealth Bank under Denison, is for the Federal Government to allow States to borrow money from Banks at zero interest for capital works infrastructure. Thus land…

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  3. Bryan Kavanagh

    Research Associate, Land Values Research Group

    Good piece, Miranda, although I'm still not sure whether you want a land tax on the family home or not. I think we're building mega-mansions at the moment because we use them as tax shelters.

    We also continue to shy away from one incredibly significant fact. In 2010, Australia’s publicly-generated land rent (residential, comm/ind and rural) was $370 billion, but we chose to fine labour and capital $300 billion for working, and captured only $32 billion of this NATURAL revenue source.

    No prizes…

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  4. Ian Donald Lowe

    Seeker of Truth

    The property bubble will burst soon and as far as tax goes, 83% of all corporate profits made in Australia go offshore untaxed. As far as I am concerned the only two questions for the tax forum are (1) how much tax could be collected if we had an equitable tax system that actually taxed those offshore corporations and (2) what would we do with all of that money?
    Or the top 10% of Australian income earners could start paying some tax?
    That might help don't you think?

    Obviously the real agenda is to drive the average Australian into poverty whilst allowing large corporations and banks to steal our national wealth for little or no return.

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  5. Bryan Kavanagh

    Research Associate, Land Values Research Group

    The best argument in favour of land and natural resource taxes is exactly that the tax base cannot flee overseas, as capital tends to do to avoid taxation, Ian. And as the wealthy own both more land and the most valuable land, an all-in land tax would pick up the most wealthy quite nicely.

    Unfortunately, those least affected by a land tax tend to be the most vociferous against it.

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  6. Ian Donald Lowe

    Seeker of Truth

    The whole article is about taxing home owners.
    Beyond the sales tax, stamp duty and local government rates, home owners aren't taxed enough? What kind of doublespeak is "imputed rent"? A person who buys a home and lives in it has no reason to pay rent and good on them for that. That is why people buy houses to live in. As far as I am concerned, if you can buy or build your own home it is not right for government to collect taxes on that, just because you did so. After all, people are taxed on their…

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    1. Gavin R. Putland

      logged in via Twitter

      In reply to Ian Donald Lowe

      Yep, home owners are taxed too much - especially by income tax on their hard-earned wages and salaries. Am I crazy or is this just a ridiculous tax burden and dis-incentive to work?

      And home owners are taxed too much by stamp duty on their home acquisition costs. And by GST on new homes, which restricts supply and raises prices of ALL homes. And by stamp duty when they sell and re-buy. And by rates on the combined value of land and buildings.

      But not by rates on land values alone, because those…

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  7. Bill Billy

    logged in via Facebook

    Amazing that arrogant socialist academics would imagine that private wealth is increasing when in fact the public sector is growing enormously and pays no normal Land taxes or Council rates or Stamp duties or Payroll Taxes. It has taken over the Inner Cities. About time we put a Fat Tax as well as Land Taxes on the Med Edu Industry and made it leaner and fitter for the Tax Revenue that exists rather than trying to increase Taxes on the Private Sector. The Greedy Government wants a Monster Carbon Tax as well. Not satisfied with spending Other Peoples Money, the Government would double the MPs salaries too and attempt a Monster Scare Campaign on the sky falling in to raise a Huge Socialist Tax base that would drive Investing people out of this Country.

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