Should wealthy and sophisticated property investors be excluded from negative gearing tax deductions while people in the bottom 50% of incomes be allowed to claim 100%? Yes, according to a new proposal seeking to change negative gearing.
Under the proposal, the Australian Housing & Urban Research Institute (AHURI) reported that about $1.7 billion could be saved from the $3 billion annual cost of negative gearing if the proposed laws are implemented.
The proposed laws would allow lower income investors to receive 100% rental tax deductions while middle income investors in the 51st to 75th percentile of incomes would receive only 50% of their rental deductions under negative gearing. If the changes, dubbed as a “reform pathway that is more politically accepted,” are adopted, those in the top 25% of incomes would not receive any rental deductions.
The government was said to be concerned that a radical change to negative gearing laws may result in unintended consequences but academics believe that the modelling could be an appropriate policy option that will aid less wealthy mum and dad investors from significant drops in tax breaks. According to them, the current negative gearing policies favor high income investors and exacerbate income and wealth inequality in Australia.
The proposed reform aims to start and gradually change other tax deductions policies such as capital gains tax discounts that are also said to be heavily skewed towards wealthy investors. According to the report, an average wealthy investor has $730,000 in his portfolio with a taxable income of $82,000 whereas renters who don’t own properties only earn $31,000. Academics want high income investors to pay more tax through reduced CGT discounts.
The Federal Government has dismissed previous proposals to change the negative gearing laws as doing so would be a sledgehammer to the property market. However, these tax deductions have been partly blamed for the surge in property prices in Sydney, Melbourne and Brisbane so we might have to wait and see how the government will decide this time around.
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