House prices in Australia's big cities are among the most expensive in the world, with the average house price to household income in Sydney hitting 8.5 in 2016. As a result, many Australians are finding it incredibly difficult to buy their first home, with home ownership among persons aged 25-34 dropping from 60% to 48% in recent years (Australian Labor Party, 2017), while existing homeowners are benefiting from growing home equity. The current economic policies affecting housing, notably the capital gains tax and negative gearing, heavily favors property investors over homeowners. The current policy creates an ideal environment for people to utilise housing to store their wealth, reduce their tax burden, and make a profit while not contributing anything to the economy (Yates, 2016). Many investors in Australia have opted to go for housing as the most profitable as well as secure investment that has minimum chances to incur losses. On the other hand, this has made the cost of housing to be overly expensive for the residents in cities such as Sydney, Brisbane, and Perth among others areas of resident (Shorten, 2016). The overall cost of housing has is rested on the prospective homeowners and the taxpayers on whom the cost of investment property under the negative gearing. In this light, the Australian government has recently settled on implementing strategies that will impose checks on negative gearing benefits and also capital gains discount. These strategies will prevent the extreme rate in the current cost of housing while protecting the investors from suffering huge losses in their investment properties. Honourable Bill Shorten MP recommended the changes in the tax reform to enhance regulating of the cost of housing by the Labor government.
The Policy: Objectives and Methodology
The current fiscal policy that is in place was last updated in 1999 by the Howard Government in a bid to promote investment in Australia (Fane & Richardso, 2005). This housing policy was implemented to ensure that the investors’ taxation is fair depending on their gains. The fiscal policy currently involves the concept of negative gearing which allows property investors to treat their house like a business and reduce their taxable income if they incur a loss on their investment property (Yates, 2016). This concept alone is not the cause of such an increase in the real prices of property in Australian capital cities. The policy combines with the introduced capital gains discount which allows for the reduction of the capital gains for tax purpose. At the same time, it provides property investors with an overall tax scheme that will enable them to improve their overall position at the expense of taxpayers and the prospective homeowners.
To combat this extraordinary increase in the prices of housing, many parties and speculators have suggested different methods of correcting the problem. These methods involve changing fiscal policy on investments to restrict negative gearing benefits to new properties, as well as reducing or scrapping the capital gains discount (Wood et al., 2016). As a result, only owners of properties that they built or bought brand new would be able to offset their taxable income by any losses they may incur from their housing interests. On the other hand, the purchasers of existing properties would have to pay for any losses they suffer from their investment properties after they taxation at their normal income tax rate (Blunden, 2016). If the capital gains tax were to reduce, the amount of tax they would pay on their nominal gains from investments would increase significantly (Gurran & Bramley, 2017). Previously, investors enjoyed low taxation if their investment property turned out into losses.
The point of this public policy is to put downward pressure on house prices in Australia, especially in capital cities by making the property a less attractive investment to investors and consequently to reduce the demand for property in large urban centres. By restricting negative gearing benefits to new property only, investors would be much more reluctant to purchase an existing house if rent would not cover the cost of ownership, as they would have to pay the entire shortfall out of pocket rather than with pre-tax income. This would significantly reduce the demand and increase the supply of existing properties in capital cities as investors offload them onto homeowners (Wood et al., 2016). If capital gains discounts were to be reduced, investors would not keep as much of their gains from investment property and as a result, the investment would be less attractive, further reducing the demand for property. Through reducing the demand, the existing properties will do well in the market. At the same time, the burden of the increased cost of housing and high taxation on the taxpayers to restrain the negative gearing will be free from the public. This will take place through the entitlement of the investors to the cost of the investment in case of negative gearing rather than having the responsibility rested on the homeowners and the income taxes.
A new public policy designed to improve housing affordability in Australia would most likely have to be non-retrospective meaning that properties held as of now would not be affected by the change (Taylor, S 2014). As a result, the existing property investors would not see any impact on their investments and would still be able to claim their losses against their taxable income. Additionally, the scrapping of negative gearing would most likely encourage these existing property owners to keep a hold of their property as they will not be able to purchase other properties and receive the same benefits, this would further reduce supply. This new policy to be implemented would likely take place at the start of a new financial year (Sawrey K, 2016). This means that upon the announcement that a new policy will be put in place, many investors would likely seek to purchase even more property before the end of the financial year to secure property with the benefits of negative gearing. Although losses on investment property would not be able to reduce an investor’s taxable income, they will still be able to utilise the losses on future property profits or capital gains under the new policy (Sampson, 2016).
The Policy Issue: Economic Tools and Techniques
The recent trend of housing in the Australian economy constitute of outrageous prices as well as the imposition of taxes on the income earners to cater for the negative gearing costs on investment. This policy was set earlier by the government in a bid to reduce losses among the investors and increase the ability to invest more in the development of the major cities (Blunden, 2016). However, the policy has turned out to be exploitative on the prospective homeowners and taxpayers by putting them on the payment edge. The incoming fiscal policy aimed at restricting the negative gearing benefits to new properties as well as reducing the capital gains discount aims at reducing the burden of taxation on the income earners and extreme of housing among the homeowners and tenants. The government also aims at having the investors taking care of the eventual losses in the case where negative gearing records in the investment properties. This fiscal policy has several key features that make it suitable for the establishment in the tax system.
Firstly, the policy allows for elasticity in taxation after a long period of investment at the expense of the tenants and homeowners as well as the taxpayers(Daley & Wood, 2016). Since the housing policy emerged in 1999 by the Howard government, many Australian investors have benefitted a lot from the expensive rate of housing imposed on tenants and homeowners (Fane & Richardso, 2005). The housing investors have also benefitted from the taxes paid by income earners to cater for the negative gearing and the capital gains discounts that they enjoy. As a result of the policy, lot investment properties are currently in the market. However, the rate of investment in housing remains at a high level with many investors still attracted to the low investment costs enhanced by the fiscal policy (Shorten, 2016). With the incoming policy, many investors will seek to deal with the available properties rather than establishing new ones. Investors will fear taking care of the losses that may arise as a result of the elimination of negative gearing benefits and the reduction of capital gains discounts (Daley & Wood, 2016). Eventually, this would reduce the cost of housing as well as the burden of heavy taxation that was on the public. According to Bill Shorten, regulating the negative gearing and capital gearing in investment properties will lead to the government of Australia saving up to A$32.1 billion in ten years (The Conversation, 2016). Whereas this helps in reducing the rate of taxation on the public members, the Australian Labor Party seeks to utilise the savings from taxes in other sectors such as health and education for the overall benefit of the citizens (The Conversation, 2016).
Secondly, the policy aims at ensuring that home ownership is a matter of every citizen in Australia. Previously, the old policy empowered the investors to establish investment policies at the expense of homeowners and the taxpayers. At the same time, the policy allowed the investors to benefit from the capital gains discount offered in case of negative gearing on their properties (Stilwell, 2016). However, with the elimination of these privileges, home ownership will be affordable to the working-class and the middle-class members in Australia. According to Bill Shorten, high taxation and the high cost of housing in Australia is the major threat to home ownership among many citizens (The Australian, 2017). Therefore, as the Labor government intends to favour both sides of politics, changing the previous tax policy will ensure that both the investors and the buyers will suit in the Australian economy without extreme strains (The Australian, 2017). The Australian Labor Party government plans to impose 100% capital gains tax-free on family homes (The Conversation, 2016). Also, the investments purchased in the new financial year will be open to the capital gains discount reduction from 50% to 25% (The Conversation, 2016). With these changes, the working-class and middle-class members will enjoy fewer strains in their attempts to purchase new homes. The confinement of the negative gearing will ease the burden of investment losses that was on the taxpayers. Instead, as the investors attempt to avoid losses in their investment plans, the members of public will be working to own homes while they are lightly taxed (Gurran & Bramley, 2017). Therefore, this will lead to a more balanced economy which favours both ends than it was the case before.
Lastly, the fiscal policy on income tax changes allows for flexibility in the tax system regarding the dynamic Australian economy. Previously, the tax system enhanced the support of the investment properties at the expense of the homeowners and the taxpayers in case of negative gearing (Burnett, 2016). This has changed to a situation where the capital gains for property investors have reduced while also offloading the taxpayers the burden of tax to enhance negative gearing. However, the tax system of the entire nation will remain at the same level as it was previously. The previous properties under the negative gearing will not be affected by the new policy (Blunden, 2016). Also, through eliminating negative gearing and reducing capital gains, investors will first settle with the current properties rather than re-investing with new ones (Stilwell, 2016). Therefore, this will ensure that the tax system remains unaffected by the current changes after the tax reforms. The Labor government proposes that the low and middle-income earners will utilise their income for consumption in the property market while the high-income earners will accumulate income to sustain their investment (The Conversation, 2016). With the high current supply in housing that is in Australia, the Labor government aims at focusing on the sale of the current properties and not on the re-investment.
Suggestions: Alternatives and Modifications
The policy has introduced several changes in the Australian housing sector through changing the previous laws that were implemented to enhance more investment in the country (Blunden, 2016). The policy focuses more on the ability of the working class and the middle-class members to own homes through using their income for consumption on the available investment properties. On the other hand, the policy has laid focus on having investors dealing with the current properties rather than aiming at establishing more investments.
Mainly, the policy aims at bringing a balance between the rate of investment and consumption of the investment properties. However, the policy should not outdo the need for more investment as planned by the previous policy on housing. In this light, the policy should encourage high-income earners to engage in establishing investment properties through minimizing their rate of taxation (Burnett, 2016). The previous elimination of the negative gearing and capital gains policy has already cleared the burden from the taxpayers and homeowners. Therefore, the new policy may have modifications by reducing the rate of taxation to the individuals who are investing in housing. As a result, this will not halt the rate of development in the major cities but it will encourage investors to establish more properties. At the same time, the policy will cater for the low and middle-income earners through eliminating the burden of taxes.
References
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