By Lee Capocchi
Plenty has been written about the cost of tax breaks for investors and the impact it has on the market. Less has been written about “incentives” like 5% deposits and first homeowners’ schemes. And very little has been written about the poor use of statistics around these matters and how they cloud the true facts.
So let’s start with the basic costs. We already know that tax breaks cost the country:
“Treasury estimates the revenue forgone from CGT [capital gains tax] discounts in 2025-26 will grow to $21 billion, according to tax expenditure figures released in December.
The figure soars to $80 billion over the forward estimates, which offer budget predictions until 2028-29.”
This does not include the cost of negative gearing, which is exploited more by those with higher incomes than anyone else. Basically, the higher your income, the more you can afford to pay the difference between rental income and therefore, the more tax on that income you save. But it doesn’t mean you rent under market value. It means you benefit from the taxpayer funding the higher cost of the house that you caused by outbidding the homeowner, who would get no rental income and gets no tax breaks from the house they live in.
In the same financial year, 2025 to 2026, social housing, homelessness services and rent assistance only get $9.6 billion. Keeping in mind that rent assistance is basically a transfer of money from the government (taxpayer) to landlords. Current amounts are between $143/fortnight and $203/fortnight for most people. The increases over the last few years are less than the rent increases, meaning those receiving rent assistance through Centrelink are going backwards in a big way. Also remember, in the case of social housing, the government holds the assets which, in and of itself, means they benefit like any landlord.
The combination of the two sets of numbers means that it costs the government around $30 billion per year to maintain the status quo. That is well over $1,100 for every person, adult and child, in Australia going to investors and supporting those that cannot invest or own.
Now let us look at some other numbers:
The government and businesses always abuse the statistics. Without fail.
They quote the Median house price as about $1 million in most capital cities and their greater metropolitan areas.
But they quote the average income as $104,000 annually, implying that a house costs about 10 times the annual wages.
First, we need some definitions:
Average is the total value of all elements divided by the number of elements. (Mean)
Median is the point where half of all components (workers or houses in this discussion) are less than and half are more than these figures. Not counting outlier prices below $500k and above $5 million, median is the figure where half of all dwellings cost between $500k and $1 million, and the other half are between $1 million and, say $5 million.
An example is warranted here. Inside a pub is 100 minimum wage, full time workers. They earn approximately $50000 each. The average wage is $50k and the median wage is $50k. Elon Musk walks into the room and suddenly the average wage is over $10 billion, but the median wage has not changed!
Average wages mean the total of all wages divided by the number of working age people, but there is a floor figure underwritten by Social Security and the top figure is effectively open. So we get the average wage of over $100,000/pa. Typically, the wage of a well-paid middle to upper manager! Meanwhile Median wages are around $58,000, meaning half the working age population get between $18,000 and $58,000. Median also only counts full time wages, yet many people in this bracket work part time and the best figure we can come up with is about $50,000 as the real median wage. So, for 50% of the population, a Median house price is 20 times their salary. Or more.
If average house prices were quoted the situation is worse than the above scenario, as there is also a floor price of houses. There is little below $500,000, but there is a lot over $1 million.
So the obvious takeaway from all this is the “ordinary worker” cannot afford to buy a house in Australia anymore. So they rent. But the combined median rent in Australia is about $680/week or $35,000 per year, meaning that rental costs are between 65% to 80% of a median wage earner’s income, or about half of a family income. Well above the recommended rental affordability costs which are about 1/3 of income. For a person receiving a pension rent is above their income, but for the unemployed that the only way to pay for any housing is to share with others. At least 3 people are needed to pay rent in a house and owners and agents are extremely reluctant to rent to the unemployed.
Removing tax breaks of all kinds for investment properties will only go a little way to improving the lot of these people – Australian citizens – as redirecting more money to home deposits, rent assistance and lower deposit rates simply transfers money to the investor and drives up process even more.
The government is finally looking at removing the tax breaks, or some of them, and maybe only partly removing them for investment housing. The figures bandied about suggest it will only have a 4% impact on house prices. Yet is must be done. Money so saved means more is available for investment in better and more social housing and social security benefits.
Here is a proposed way of unwinding the tax breaks to make it fair and equitable to investors who, in good faith, made their investment decisions based on the rules in place at the time. This incorporates a variant of grandfathering to keep it fair, but still winds it back:
Capital Gains Discount: Reduce by one fifth per year over 5 years. So, 12 months after legislation is passed, it reduces from 50% to 40%. The following year it reduces to 30%, then 20%, then 10% till the end of the final year when it becomes zero discount.
Negative gearing is treated the same way over 5 years:
So, at the end of year 1, the claimable amount is 80% of the difference. After year 2, 60%, etc till the last year (the end of year 5) when negative gearing reduces to Zero.
We can make one exemption to the new rules. New Greenfields, Brownfields and existing site redevelopment builds (with the proviso that any existing house is beyond reasonable prospects of renovation and it will be replaced with 2 houses or 3 units – this will be self-limiting as many sites will not be able to support further levels of development). All new builds must conform to 7-star energy efficiency standards and must include energy efficient heating/cooling, cooking and hot water, pre-wired for NBN and a minimum of 6kw solar and 10kwh battery. The renewable energy system must be able to provide blackout protection for at least refrigeration, NBN and lighting, or better.
In either case the entire property must be developed as build-to-rent with the first 5 years supported by negative gearing and CGT discounts and the subsequent 5 years subject to the incremental reduction of tax benefits outlined above. If the original lessee is still resident after the first 5 years, the tax breaks will extend indefinitely till the original tenant leaves, regardless of the reason, barring a criminal act by the tenant, after which the tax breaks will wind down over the subsequent 5 years. This will encourage long-term tenancies and reduce any incentive for the owner to churn tenants to get higher rental returns. With the proviso that the developer or builder owns the site from the outset and is renting out the houses or units. If any house or unit on the site is sold outright and not initially rented out by the original owner, it is ineligible for tax concessions and is subject to standard taxes on the profits. Once sold, the house or unit is ineligible for future tax concessions. This will encourage development of slightly higher density living in limited locations without creating long-term tax breaks for investors.
One proviso. From the day after proclamation, no contract signed for an existing house or unit will be eligible for any tax benefits. Any existing investment property sold after the proclamation date will automatically be ineligible for tax deductions for a new owner.
This will give property investors time to off-load their investments at a controlled rate, rather than a fire sale. Many will do it in the first couple of years. Some will wait till later, with the consideration that some gain is better than none. Any investment property that is part of a deceased estate automatically loses any tax benefits from the time probate is granted, which matches the tax arrangements for owner-occupied houses left in a will.
These procedures will stabilise house prices and prevent any significant housing costs inflation over the next 5 to 6 years. There may only be a 1% drop in price if investors leave the market in an orderly fashion, but we expect prices to remain static for the next 5 or 6 years, as first home owner-occupiers will not be outbid by investors.
One other change should be made. Just like tax thresholds are routinely adjusted to avoid bracket creep, so should state based stamp duty. Decades ago, most people paid stamp duty at the lowest rate, but price rises have pushed everyone into higher brackets and typical stamp duty is now very high, discouraging owner-occupiers from buying or selling to adjust to changes in lifestyles and household sizes. A significant disincentive, particularly for retirees who wish to downsize or move to areas more suited to their aging bodies.
Replacing stamp duty with an annual “property tax” is fraught because many households remain in the same family for life, which means such a tax would be a bigger long term burden than stamp duty, again, particularly for elderly retirees who may have purchased their house and remain in it till they either die or move to a nursing home. At the very least, property taxes must be waved when the person is unable to work, be it for reasons or health, unemployment or retirement. If not waived, then the annual property tax bill must be added to any social security payments so as not to be an imposition.
These articles will provide further food for thought:
- Millionaire Gary Stevenson’s dire warning for Australian property market losing the ‘fair go’, The ABC
- Australian government spends more on tax breaks for landlords than social housing, homelessness and rent assistance combined, The Guardian
Part 2 will discuss the supply of housing and how to make it work better for all.
Part 2:
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As this debate ‘hots up’, there will no doubt be an argument raised to increase the GST, a consumption test which is felt the greatest by those with the least.
As we saw in the 2019 election, any attempt to raise taxes or to remove tax deductabilities can lose an unlosable election.
how about looking at the impact of the GST on house prices? they skyrocketted after the GST was introduced in 2000 because there were no taxes on labor or materials before then, now up to 1/3 of the price of a new house is government taxes and charges!it is the one no one wants to talk about!the government wants us all to have a house so they can extort high property taxes from us silently!
I have no concern with how a person invests their money, I do have a concern with the tax breaks and incentives provide to them by our government. But, the real issue here is our taxation system itself. This old, decrepit and tinkered with system, is now more about control, than it is about revenue raising.
What is required is a totally new taxation system, a system where all those who have an income pay tax, as I continue to point out. The more people who pay tax, the less each one has to pay to reach the same bottom line. For every person/organisation who fails to pay tax, those that do have to pay more.
The current senate Enquiry is confirming much of what this article has noted.
Independent contributor and economist Saul Eslake pointed out on ABC RN this morning that some 80% of investment in housing was going into existing housing stocks and very little into growing our housing stocks by way of new housing for rental.
He noted that Negative Gearing by definition mostly benefits those with high incomes who seek to offset their losses on home investments against tax payable on their other sources of income.
Similarly concessions on Capital Gains encourage investors to churn existing housing pushing up the cost of housing generally and not assisting prospective homeowners who would normally not be flipping their houses after twelve months.
The government is conscious of the intergenerational unfairness of the existing concessions which almost exclusively benefit investors and multiple property owners. This unfairness alone should influence the government to move on CGT and Negative Gearing concessions: failure to act now would undoubtedly have an adverse impact on how younger generations view this government, something One Notion would pounce on.
An interesting article with suitably informative comments. Thank you all.
The only way to increase residential housing availability is to reduce the incentive for high income individuals and corporations to invest in this particular sector. This requires changing current legislation, especially Negative Gearing (NG) and the too generous CGT allowances.
After 35 years as a landlord in regional Australia who avoided the CGT and benefited from the Howard induced decades of price surge, my thoughts are a little different.
NECATIVE GEARING (NG)
a) Limit NG to new builds, greenfield or otherwise, so that housing stocks are increased ….. surely the current need for residential housing.
b) Limit NG to natural persons or, corporations building to rent and hold for a minimum of ten (10) years, with a deemed percentage investment return used to determine the necessary level of taxation on those rent proceeds.
c) Natural persons may own one (1) only NG residential investment property that shows an annual rental return; any other rental properties to be taxed on their individual merits WITHOUT THE BENEFIT OF OFF-SETTING HOUSING INVESTMENT LOSSES AGAINST OTHER EARNED INCOME, BUT allowing offset against other investment income.
d) Introduce the new NG legislation by grandfathering it to new purchases.
e) Encourage an orderly reduction of residential housing portfolios by a suitable means; there are only about 24,000 high income beneficiaries for the present NG tax provisions, including several politicians of major parties.
f) Recuse residential property owning Parliamentarians from any & all voting on changes to NG and CGT legislation.
CAPITAL GAINS TAX (CGT)
a) CGT was introduced in the 80s by the Hawke Keating LABOR government and minimised by Little Johnnie Howard after 1996 elections.
b) Return CGT to the pre-Howard levels as proposed in the 2019 Shorten Reforms.
yes NEC, been saying that for years. Negative gearing is a legal tax minimising scheme, it should never have been allowed to get to this stage. ONE HOUSE invested only, and then you’re a property developer !!! “Mu and dad” investors that the Coalition banged on about will still be ok.
Useful, like media, politicians and the public need education on all things data, finance and demography.
Our RW MSM misrepresents and avoids data often for a dog whistle and a psychological base below house values (separating apartment market) by claims about immigration and/or population.
Most ‘immigrants’ cannot participate in the house market, except to rent as they are students, backpackers or temp workers who can neither buy nor access financing.
Backgrounded by stagnant house values as evidenced by 2014-24 no capital city doubled in price, required under the basic 7% pa. value test.
On demography, everyone shouts at borders or the NOM net OS migration border movements, but ignore the elephant in the room, the mass boomer ‘bomb’ of about 5.5 million, oldest are hitting 80 years.
One has never seen any analysis and impacts of increased longevity for silents gens and boomers on holding houses longer compared to the past?
We are soon to start with the mother lode of demographic change with silent gens and boomers departing over next 25 years, for a rebalance of our demographic profile or ‘the great replacement’…..
Thoughtful article well elucidated.
Good ideas. As well as some interesting and thoughtful comments.
For Oz govts, it’s the ‘elephant in the room’, and they must act sooner rather than later. Albo et al ought get over the LNP’s smashing of Shorten’s proposals – the LNP is now gutted (Angus T & Tim W are useless, but TW can do damage by foghorn), the ALP has a huge mandate, is wiser, and ought not waste the opportunity.
For clarification, the CGT Discounts and negative gearing apply to a property investor’s alternative source of income. For “mum and dad” investors it is their wages earned from being a manager or hairdressing business, hospital orderly, or whatever.
This is the anomaly
If you have a business manufacturing some product and another business as a landscape gardener, you cannot use either tax break instruments from one business to another. Tax breaks in businesses only apply to the business in which the investment is made.
Likewise, in your landscaping business, you purchased a Chinese made machine to enable the work to be done more efficiently. You keep it for more than a year – maybe five years – and then decide to sell the machine. But a glitch in the supply chain for John Deere means your (used) machine is now worth double what you paid for it. You can’t get a CGT discount against a booming profit (and therefore tax bill) in your manufacturing business.
Same with negative gearing, yet we allow wealthy people to reduce their tax on their wages, which is a separate enterprise to the property investment.
This clearly favours those with higher incomes over those with lower incomes.