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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.