Grattan Institute Reports Top Earners Use Negative Gearing Far More Than Average Australians

26/04/2016 10:22 AM AEST | Updated 15/07/2016 12:52 PM AEST
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Fairfax Media

It's the graph Malcolm Turnbull and Scott Morrison wouldn't want you to see.

Housing and negative gearing are shaping up to be one of the key issues for the coming July election, with both the Liberal and Labor parties getting in early to spruik their policies. Labor wants to reduce the tax breaks for investors who negatively gear their properties, while the government wants to keep the current generous dispensations. The Prime Minister and treasurer have been out in recent weeks claiming "mum and dad investors" are the biggest winners from negative gearing, depicting the policy as a win for ordinary, average families.

The release of a negative gearing and capital gains tax report from the Grattan Institute takes that to task, reporting nearly fifty percent of the benefits go to the top ten percent of earners, and that "long overdue changes" to negative gearing and capital gains tax would save Australia about $5.3 billion a year.

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Negative gearing is the practice where a property owner can claim tax concessions when the cost of maintaining their investment property exceeds the rental income they gain from that property.

Analysis of 2012 earnings for Australians, released in 2015, found that an income of $89,685 would put someone in the top 10 percent of earners. That number would certainly be higher today, but no more updated data seems to be available.

Morrison and Turnbull have been defending their negative gearing policy by citing the numbers of 'ordinary' workers -- nurses, teachers, train drivers -- who use the tax loophole, but it may not be so cut and dry as the Treasurer would have you believe,

"Two-thirds of Australians who use negative gearing are on $80,000 taxable income, or less," Morrison said in response to the Grattan report on Tuesday, with a line he has used often. But the report takes that number apart.

"A lot of the public debate has centered on claims that most taxpayers negatively gearing have taxable incomes below $80,000. This is not surprising given that only 20 per cent of taxpayers have taxable incomes this high," the report stated.

Grattan said the median income for taxpayers who use negative gearing is $61,533, while those not negatively gearing are on a median wage of $40,791. It said less than 10 percent of nurses, and less than five percent of hairdressers, sales assistants and cleaners use negative gearing; while almost 30 percent of surgeons and anaesthetists, and more than 20 percent of finance managers, lawyers and mining engineers use the concession.

Turnbull hit back at the Grattan report in a blog posted to his website on Tuesday.

"I have a great deal of respect for John Daley and the Grattan Institute, but on this occasion they have it wrong. Unfortunately, the paper is littered with factually incorrect statements, claims that are unsupported by evidence and direct contradictions. And its economic analysis in many places leaves a lot to be desired," he wrote.

Over the weekend, Turnbull and Morrison announced there would be no changes to negative gearing in the foreseeable future, despite Labor pressing hard with claims the generous concessions for negative gearing are hindering the ability of young people and first homebuyers to enter the market. Turnbull and Morrison have started calling Labor's plan a "housing tax".

To announce the news, the pair visited a home in the Sydney suburb of Penshurst, where a family was negatively hearing a home "to buy a place for [their] little daughter Adison who we just met who is nearly one."

"[Labor] are going to drive down home values, drive up rents and discourage investment. That’s why we won’t have a bar of it."

However, the Grattan Institute said such rhetoric is not based in fact.

"Contrary to urban myth, rents won’t change much, nor will housing markets collapse. The effects on property prices would be small compared to factors such as interest rates and the supply of land," the report stated.

"The interaction of a fifty per cent capital gains tax discount with negative gearing distorts investment decisions, makes housing markets more volatile and reduces home ownership."

Grattan outlines two changes to the system it claims will save more than $5 billion a year and reduce property prices by two percent, to "provide relief to the Budget in tough times and slightly improve housing affordability with little impact on how much people save".

Grattan believes the capital gains tax discount should be reduced from 50 to 25 per cent -- a policy supported by the Labor Party -- while investors who negatively gear their properties should not be able to deduct losses on their investments from labour income.

"A smaller discount would save about $3.7 billion a year, while the change to negative gearing would raise $2 billion a year in the short term, falling to $1.6 billion as losses start to be written off against positive investment income," Grattan said.

Read the full report here.

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