How our tax system affects housing affordability

Rachel OngDeputy Director of Centre for Research in Applied EconomicsCurtin University

•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

Income tax on landlords

Negative gearing•Net rental income is tax assessable•Negative gearing - Net rental loss can be

deducted against tax assessable income

Rental income/deductions

2005–06 2006–07

No. $m No. $m

Gross rental income 1,545,310 19,160 1,592,636 20,911Rental 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

Individual Landlords’ Rental Income and Deductions, 2005–06 and 2006–07

ATO Taxation Statistics (2006-07), Personal Tax, Table 2.4

Negative gearing

•Attractive to investors – tax shelter benefitsbut

•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

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

0 1 2 3 4 5

Survival rate (%)

Not negatively geared

Negatively geared

Wood and Ong (2010)

Year

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

If 1 land plot worth $300,000, • land tax = $0If 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

Aggregate land value

Marginal tax rate

$0 - $300,000 Nil $300,000 - $1,000,000 0.09 cent for each $1 in excess of $300,000$1,000,000 – $2,200,000

$630 + 0.47 cent for each $1 in excess of $1,000,000

$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

WA 2011-12 land tax rates

Source: http://www.finance.wa.gov.au/cms/content.aspx?id=239

$0 - $300,000

$1,000,000 – $2,200,000

Nil

$630 + 0.47 cents for each $1 in excess of $1,000,000

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

D

S

Quantity of housing

House Price & rent ($)

Q0

P0

S1

P1

Q1

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

D

S

Quantity of housing

House price & rents ($)

P1

P0

S1

Q0

Q1

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

•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

Income Tax on Homeowners

Stamp duty• Stamp duties on conveyance – a transaction

cost that is payable upfront

• 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

Home purchase price

Stamp duty rate

$0 - $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 – $725,000

$11,115 + 4.75% on amount over $360,000

>$725,000 $28,453 + 5.15% on amount over $725,000

WA 2011-12 stamp duty rates

http://www.finance.wa.gov.au/cms/content.aspx?id=2071

$0 - $120,000

$360,000 – $725,000

1.90%

$11,115 + 4.75% on amount over $360,000

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 dutyRepaymen

t constraine

d 10%

Downpayment

constrained 27%

No constraint

11%

Downpayment &

repayment constrained

52%

Source: Population estimates reported in Table 15 of Wood and Ong (2008) http://www.ahuri.edu.au/publications/p30396/

P1

Stamp duty

Number of properties

Price $

TaxP0

P1+ Tax

Supply curve

Demand curve before tax

Demand curve after tax

Tax

Q0Q1

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-axe-negative-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.