Tax Policy Issue In Australia: Significance, Stakeholders, Winners And Losers, Implications, And ATO Impact

Importance of the Tax Policy Issue in Australia

This tax policy issue is significant because it is important to make sure that Australia’s tax system is sustainable, just and aimed at growth and jobs. Negative gearing and Capital Gains Tax (CGT) discount encourage real-estate investors (housing) to take debt. This reduces the stability of the housing market and crowds out 1^st house purchasers. Limiting the negative gearing deductions on just purchased rental housing will place comparatively modest downward pressure on prices of the house. These loopholes in taxation and concessions benefit the rich (Dixon, 2018). Hence this issue is critical in terms of greater fiscal repair in the country.

Investors and homeowners – The main benefit of the tax reform would be for any individual/group purchasing already-built properties. The proposal is probably to take some of the heat from the competition for established houses as investors turn their focus toward off-the-plan properties. Younger Australians are likely to get the greatest benefits. First home purchasers will not have to contend with investors for established homes any more. Australians belonging to the age group 45 and above will be the most negatively geared. Home builders and property developers can also reap some benefits from the plan (Yardney, 2018). With investors removed from the market for established homes, new stock will be in greater demand. This can lead to higher investment in greenfield property development. Further, decreasing the discount on capital gains tax will result in higher income people paying greater CGT. This will decrease the variance between the tax paid by lower and higher income rental investors. Thus, this would alleviate inequalities in the existing system. A steady and staged transition will have little effect on average Australians, but it would enhance access to suitable, safe and affordable housing. This will benefit the Australian community’s well-being (Grattan, 2016).

Government and the economy – A reduced CGT discount for investors implies more tax payable. This means more tax revenue for the government, which can be re-employed toward education, welfare and housing initiatives. Reform of negative gearing can save the government A$1.7bn from the yearly AUS$3.04bn cost of negative gearing deductions, without damaging “mum and dad investors.” The key is incremental transformation. Steady reform over 10 years or more reduces the burden on government budgets (Tacadena, 2018). In the long-run, setting-up an extensive property tax is fairer and more effective than state governments relying on stamp duty forever. Yearly tax rates in the 1^st year of the change differ from AUS$47 in Tasmania to AUS$129 in NSW which will finance a 10% reduction in stamp duties. To completely finance the removal of stamp duty, the yearly property tax will need to rise to AUS$472 in Tasmania and AUS$1,293 in NSW over ten years. For the government, this will be income neutral, but the inclusive tax-burden will move from new home buyers to the ones who already have houses (AHURI, 2018). This will not just enhance intergenerational equality but will offer a more stable income for the state governments. However, real-estate is among the main sectors propelling the Australian economy. Any apparent risk to profitability may witness investors fleeing the market. this can have grave economic implications.

Key Stakeholders and their Impact

Small-time and lower income investors plus the government will emerge as the winner of this reformed policy. Around 3 quarters of the country’s families will be better off if negative gearing is limited. Owner-occupiers and renters are winners, but landlords, particularly high-earners lose. Improvements in the rate of home-ownership will largely be among middle-aged and young families who are comparatively poor (Doherty, 2018).

There are worries that revising negative gearing will hamper the economic wellbeing of small-time investors. However, employing data on the distribution of income and property renders it plausible to differentiate between wealthy and poor investors, enabling the government to target the restructurings to cushion the blow for low-income investors. Given this change will be less likely to harm lower-income investors, they will be less likely to move away from the rental market as opposed to if negative gearing was altogether removed. This will also alleviate the effect of negative gearing changes on renters (Schlesinger, 2016).

The government will also surface as a winner of this policy. Modelling of a proposed scenario is shown below:

This modelling demonstrates that this will save the government AUS$1.7bn, or 57.3% of the existing cost to the budget, per annum. If deductions on negative gearing were restricted on the basis of property values, the government would save around AUS$1.5bn or 48.3% (Eccleston, Verdouw and Flanagan, 2018).

Till now, capital gains tax modifications were not retrospective, and current investors were safe from the effect of changes. However, the if new tax reform becomes law then there would be certain modifications for assessing tax payable and refund. In accordance with the provisions of the reform, from July 1, 2019, imputation credits for individuals and superannuation funds will not be regarded as refundable. This means that imputation credits could be used to reduce the tax payable, but taxpayers cannot obtain refunds for additional imputation credits. Hence, tax companies will need to re-evaluate the credit computations according to reformed rules (Cho, Li, and Uren, 2017).

Moreover, as a replacement for decreasing the company tax rate, Labor proposes an Australian Investment Guarantee which will be enforceable from July 1, 2020. This is a kind of accelerated depreciation that will allow the firm to immediately expense 20% of the depreciated asset’s value in the 1^st year of all new investments, coupled with the balance depreciation with regular depreciation from the 1^st year. Besides this, the provision requires using a minimum of 30% tax rate on discretionary reliance disbursements to adult beneficiaries beginning July 1, 2019 (Wargent, 2018). Currently, these disbursements are relative to tax in the hands of beneficiaries at reasonable rates of income tax, which can lead to less effectual tax rates for such disbursements. Labour provision also suggests that negative gearing will be conserved in its existing form for existing assets and fresh housing. Besides this, negative gearing pertaining to all other asset groups will be confined to being against other, i.e. capital gains but this will not apply for salary and compensation.

The Australian Taxation Office (ATO) is the chief revenue collection unit of the government. It manages and shapes the superannuation, tax and excise systems and other related matters. As the chief revenue collection wing of the government, ATO levies an income tax, GST and other federal taxes. The reformed tax policy will have a significant impact on the work of ATO. Its liability will increase pertaining to analysis of the effectual limitation on negative gearing (Pawson, 2018).

A decline in the CGT discount will affect rental investors of the high-income group to a great extent as compared to low-income investors. This will bridge the gap in user cost pressures which higher and lower income rental investors bear. Due to such variance between dollar value effect and percentage, the new policy will have to be cautiously communicated to prevent confusion that the effect of the CGT amendment is probable to be regressive in context of its likely impact on rental investors’ incomes. Hence, the ATO will be accountable for communicating to the investors about the changes in a manner that confine the threat of a shock to the market, if investors decide to leave the housing market (AHURI, 2018). Till now, policymakers have shown reluctance in modifying the core set of the tax system, but ATO will have to do it in a manner that reduces the effect on lower-income investors.

The chief goal of the ATO is to help people comprehend their rights and duties, besides offering ease of compliance and access to benefits pertaining to abidance of law. Hence, ATO will give hands-on guidelines for taxpayers to help them take relevant decisions. Besides this, the agency will also need to counsel about the administrative approach pertaining to specific changes. For e.g., as in the current case, the explanation needs to be given that losses from new stock investments and current properties can apply for adjustments against tax liabilities.

References:

AHURI. 2018. Modelling negative gearing and capital gains tax reforms. [pdf]. Available through: <https://www.ahuri.edu.au/__data/assets/pdf_file/0027/16488/PES-004-Modelling-negative-gearing-and-capital-gains-tax-reforms.pdf>. [Accessed on 11 September 2018].

Cho, Y., Li, S. and Uren, L., 2017. Negative Gearing and Welfare: A Quantitative Study for the Australian Housing Market. Monash University.

Dixon, D., 2018. Prepare for changes to negative gearing and capital gains tax. The Sydney Morning Herald. [Online]. Available through: <https://www.smh.com.au/money/prepare-for-changes-to-negative-gearing-and-capital-gains-tax-20180126-h0otyp.html>. [Accessed on 11 September 2018].

Doherty, B., 2018. Home ownership would rise if negative gearing is scrapped, study says. The Guardian. [Online]. Available through: <https://www.theguardian.com/australia-news/2018/jan/13/australian-house-prices-will-fall-if-negative-gearing-goes-study-says>. [Accessed on 11 September 2018].

Eccleston, R., Verdouw, J. and Flanagan, K., 2018. Gradual reform to capital gains, negative gearing and stamp duty will make housing more affordable. [Online]. Available through: <https://theconversation.com/gradual-reform-to-capital-gains-negative-gearing-and-stamp-duty-will-make-housing-more-affordable-98933>. [Accessed on 11 September 2018].

Grattan, M., 2016. Shorten policy hits tax breaks for negative gearing and capital gains.  [Online]. Available through: <https://theconversation.com/shorten-policy-hits-tax-breaks-for-negative-gearing-and-capital-gains-54700>. [Accessed on 11 September 2018].

Pawson, I., 2018. Reframing Australia’s housing affordability problem: The politics and economics of negative gearing. Journal of Australian Political Economy, The, (81), p.121.

Schlesinger, L., 2016. What negative gearing changes could mean to you. [Online]. Available through: <https://www.afr.com/personal-finance/what-negative-gearing-changes-could-mean-to-you-20160218-gmxe7v>. [Accessed on 11 September 2018].

Tacadena, G., 2018. Why the federal government needs to consider reforming negative gearing policies. [Online]. Available through: <https://www.yourmortgage.com.au/mortgage-news/why-the-federal-government-needs-to-consider-reforming-negative-gearing-policies/247472/>. [Accessed on 11 September 2018].

Wargent, P., 2018. Impacts of Labor’s proposed negative gearing and CGT reforms. [Online]. Available through: <https://www.livewiremarkets.com/wires/impacts-of-labor-s-proposed-negative-gearing-and-cgt-reforms>. [Accessed on 11 September 2018].

Yardney, M., 2018. The possible impacts of Labor’s proposed negative gearing and CGT changes. [Online]. Available through: <https://www.smartcompany.com.au/industries/property/impacts-of-labors-proposed-negative-gearing-and-cgt-changes/>. [Accessed on 11 September 2018].