The income tax treatment of housing assets: an assessment of proposed reform arrangements

How do existing elements of the Federal income tax system (in particular the availability of deductions and CGT provisions) potentially impact on housing ownership and affordability?

Currently, the Australian tax system offers preferential income tax treatment to both owner- occupied and own-to-invest properties. Owner-occupied properties are exempt from many taxes, including CGT. There is no imputed rent applied to claw back the exemption. In respect of own-to-invest properties, the report’s policy audit has shown that the income tax treatment of investment property provides an annual tax deduction to the owners of negatively geared property that subsidises the holding cost of property. This deduction is made up of a combination of cash outgoings, of which the most significant is loan interest, and capital allowances that are non-cash expenses. In contrast, when the property is sold the gain is included on the capital account. The amount is included on realisation and is subject to a CGT discount of 50 per cent when derived by an individual or a trustee, or 33 per cent when derived by a superannuation fund.

This research models several politically acceptable pathways to reform negative gearing and CGT so as to reduce impacts on less sophisticated property investors. Two reform models— a rental deduction cap of $5,000 and a progressive rental deduction based on income—could lead to savings of over $1.7 billion each. Both are progressive in nature, reducing tax savings from negative gearing as tax assessable income increases.

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