If voters bless super reforms, negative gearing is the next logical shift
The easiest decision for Anthony Albanese this week would have been to play it safe and stick to the spirit of his assurance to Australians last May when he said he had no intention of making any changes to superannuation. The prime minister could have totally buried the idea of a small increase in super taxes.
The extreme caution would have won the day in federal cabinet on Tuesday morning for a simple reason: like him, many of his ministers are rightly anxious about any breach of faith with voters.
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Yet, the prime minister crossed the Rubicon, with Treasurer Jim Chalmers racing ahead of him, because a hard decision on super had to be made. A government has to be able to govern. And a government too scared to adjust super tax breaks worth $50 billion a year would not be much of a government.
Albanese and Chalmers now stand with the river behind them and dozens of pathways ahead – some leading to more ambitious tax reform if they believe Australians would endorse tough choices at the next election.
The most obvious path leads to an overhaul of negative gearing and capital gains tax. There are wise voices on both sides of politics: Liberal MP Russell Broadbent and Labor MP Mike Freelander say this path is worth exploring. They will have their say later in this column. First, however, come the political and policy hurdles.
Opposition Leader Peter Dutton says Labor already has a “hit list” in mind. That is overblown rhetoric, of course. The truth is that Labor cannot be sure about what to do next. Everything depends on the government’s success with super, which means not only getting the tax increase through the Senate but doing so with the least brand damage to Albanese and Labor.
Yes, the new tax is at odds with the assurances from Albanese and Chalmers before the election. But it is a good move to scale back benefits to wealthier Australians while still giving them a tax concession. And it is a political wedge that appeals to the middle ground while leaving Dutton to fight for his conservative base, as I wrote earlier this week. It is all three at once. That is why it is also proof that good policy is good politics.
A similar debate over negative gearing is inevitable. A key point this week was the fact that 39 per cent of the super tax concessions by value go to the top 10 per cent of people by taxable income. The same argument about fairness, equity and sustainability applies to the tax breaks on investment properties, where 35 per cent of the concessions go to the top 10 per cent.
Political leaders know this but are wary of attempting change. To go after negative gearing seems more like a march on Moscow than a triumph in Rome. Sooner or later, politicians retreat. As treasurer in 2016, Scott Morrison dropped his concerns about “excesses” in negative gearing soon after potential changes were leaked; as Labor leader four years ago, Bill Shorten lost an election when Labor became too bold on tax.
The politics will change, however, because the government has to consider the burden on the budget from letting people with investment properties claim tax deductions with no cap. The Treasury analysis this week showed the deductions will cost $24.4 billion this financial year and $26.6 billion next year. The revenue foregone is about the same size as federal funding for state hospitals.
At the same time, more than 70 per cent of younger Australians believe they will never own their own homes. Experts dispute whether a change to negative gearing would help with this, but this is a source of huge frustration – perhaps, one day, political fury – among younger voters.
This is an immense challenge because the Treasury analysis reveals how many people buy investment properties to build up their savings. It shows that 8 per cent of the claims are made by people aged 30 to 34 and that 12 per cent are made by those aged 35 to 39, so this tax concession is incredibly widespread. About 2.4 million taxpayers claim it.
In many cases, the rental income is greater than expenses such as mortgage payments and maintenance. But about half the claims involve a rental loss – that is, negative gearing. People lose money, claim the deduction, and hope to make a profit when the property increases in value.
All these taxpayers also get the benefit of a 50 per cent discount on capital gains tax when they sell their properties. This concession on capital gains tax, across all assets, is expected to cost $23.7 billion this year.
This makes a severe cap on negative gearing politically untenable. Labor would not risk repeating its 2016 policy to limit negative gearing to newly built homes and halve the discount on capital gains, but there are other ways to attempt change. The debate seven years ago included Coalition ideas such as capping the amount that could be deducted at $30,000 or capping the number of properties someone could claim.
Now, after another seven years of budget deficits and even bigger concerns about housing affordability, some MPs believe the time is right to consider change. And one of them sits in Dutton’s party room.
“The overall cost of the $24 billion in tax deductions on negative gearing may be something the nation can’t afford, and, therefore, the nation should be having a debate about that,” says Broadbent, who represents the regional Victorian electorate of Monash. Broadbent has seen house auctions near his electorate office in Warragul, south-east of Melbourne, where first-home buyers cannot compete with investors. He is not advocating a halt to rental deductions but believes there has to be a discussion about changing the system.
“The nation needs to make changes,” he says. “It needs to address what it can afford and what it can’t afford in all policies when those policies were introduced in very good times, like the commodities boom during the Howard government. We no longer live in those times. If you’re still living in those times, you’re living in a fool’s paradise.”
Freelander, a doctor who represents Macarthur in western Sydney, is worried about the pressure on emergency departments and the need to repair Medicare.
“We’re not going to do that without money,” he says. “I think the whole tax system should be something we consider – and negative gearing and capital gains tax are part of that. My kids just can’t get into the housing market, so we do have to look at the generational issues here. You can’t just look at super; you have to look at the whole tax system.”
Freelander is not calling for an end to negative gearing. He says a good option would be to limit the deductions to one or two properties and to cap the benefits on capital gains tax. Australians could still gain the concessions, but only up to a reasonable level.
Albanese and Chalmers have found a way to propose change without a breach of faith: announce it early, legislate it this term but make sure it takes effect after the next election. They are attempting reform with the permission of the Australian people.
And they have a chance to ask permission to go further.
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