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How our tax system affects housing affordability Rachel Ong Deputy Director of Centre for Research in Applied Economics Curtin University.

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Presentation on theme: "How our tax system affects housing affordability Rachel Ong Deputy Director of Centre for Research in Applied Economics Curtin University."— Presentation transcript:

1 How our tax system affects housing affordability Rachel Ong Deputy Director of Centre for Research in Applied Economics Curtin University

2 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

3 Negative gearing Net rental income is tax assessable Negative gearing - Net rental loss can be deducted against tax assessable income Rental income/deductions 2005–062006–07 No.$mNo.$m Gross rental income1,545,31019,1601,592,63620,911 Rental interest deductions1,231,69413,8301,276,18516,104 Capital works deductions518,5681,091559,6031,226 Other rental deductions1,548,3279,3281,596,3449,953 Net rental income 1,561,630–5,0891,610,561–6,372 Individual Landlords’ Rental Income and Deductions, 2005–06 and 2006–07 ATO Taxation Statistics (2006-07), Personal Tax, Table 2.4

4 Negative gearing Attractive to investors – tax shelter benefits but 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

5 Negative gearing 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 012345 Survival rate (%) Not negatively geared Negatively geared Wood and Ong (2010) Year

6 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

7 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

8 Land tax If 1 land plot worth $300,000, land tax = $0 If 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 valueMarginal 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: $0 - $300,000 $1,000,000 – $2,200,000 Nil $630 + 0.47 cents for each $1 in excess of $1,000,000

9 Land tax Increase in taxes on housing suppliers shifts the supply curve to the left Quantity of housing supplied falls from Q 0 to Q 1 Price of housing supplied rises from P 0 to P 1 Adverse impact on affordability D S Quantity of housing House Price & rent ($) Q0Q0 P0P0 S1S1 P1P1 Q1Q1

10 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

11 NRAS Supply-side policy – targets rental investors Shifts supply curve out D S Quantity of housing House price & rents ($) P1P1 P0P0 S1 Q0Q0 Q1Q1

12 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

13 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

14 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 priceStamp duty rate $0 - $120,0001.90% $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 $0 - $120,000 $360,000 – $725,000 1.90% $11,115 + 4.75% on amount over $360,000

15 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

16 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

17 Stamp duty Repayment constrained 10% Downpayment constrained 27% No constraint 11% Downpayment & repayment constrained 52% Source: Population estimates reported in Table 15 of Wood and Ong (2008)

18 P1P1 Stamp duty Number of properties Price $ Tax P0P0 P 1 + Tax Supply curve Demand curve before tax Demand curve after tax Tax Q0Q0 Q1Q1

19 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

20 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

21 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

22 References Australian Tax Office (2007), Australian Tax Statistics 2006-07 Department of Finance (2012), Land Tax Rates, http://w http://w Eslake, S. (2011), ‘Time to Axe Negative Gearing’, The Age, 25 April, negative-gearing-20110424-1dsxs.html#ixzz1cicQLPLg 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.

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