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How our tax system affects housing affordability

How our tax system affects housing affordability. Rachel Ong Deputy Director of Centre for Research in Applied Economics Curtin University . Income tax on landlords. Rental income is tax assessable income Deductions

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How our tax system affects housing affordability

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  1. How our tax system affects housing affordability Rachel Ong Deputy Director of Centre for Research in Applied Economics Curtin University

  2. Income tax on landlords • Rental income is tax assessable income • Deductions • Capital works deduction = 2.5% of the cost of construction and improvements to rental properties that commenced after July 1985 • Depreciation on fixtures and fittings • Rental interest

  3. Negative gearing • Net rental income is tax assessable • Negative gearing - Net rental loss can be deducted against tax assessable income Individual Landlords’ Rental Income and Deductions, 2005–06 and 2006–07 ATO Taxation Statistics (2006-07), Personal Tax, Table 2.4

  4. Negative gearing • Attractive to investors – tax shelter benefits but • Refinancing and churning required to retain tax shelter benefits • Detrimental to tenure security • Encourages the accumulation of wealth through borrowing and speculation – can lead to inflationary bias

  5. Survival rate (%) 1 0.9 0.8 0.7 0.6 Not negatively geared 0.5 0.4 0.3 Negatively geared 0.2 0 1 2 3 4 5 Negative gearing Year Wood and Ong (2010)

  6. Capital gains tax • Landlords subject to CGT on sale of property • Discount on CGT • 50% discount for individual landlords • 33.3% for superannuation funds that hold investment properties • No discount for companies • Individual landlords have incentives to debt finance to chase capital gains • Properties with large capital gains tend to be in higher segments of the property market

  7. Land tax • Recurrent annual tax levied investors who own land used for private rental housing • Progressive schedule with marginal rates that increase with the value of the land • Tax base is on aggregate land holding • Multiple property owners are taxed on the aggregate value of their land plots, pushing them into land tax brackets with high marginal rates

  8. WA 2011-12 land tax rates Land tax $0 - $300,000 Nil If 1 land plot worth $300,000, • land tax = $0 If 4 land plots worth $300,000 each, • aggregate land value = $1,200,000 • land tax = $630 + 0.0047 x (1,200,000 – 1,000,000) = $1,570 $630 + 0.47 cents for each $1 in excess of $1,000,000 $1,000,000 – $2,200,000 Source: http://www.finance.wa.gov.au/cms/content.aspx?id=239

  9. Land tax House Price & rent ($) S1 • Increase in taxes on housing suppliers shifts the supply curve to the left • Quantity of housing supplied falls from Q0 to Q1 • Price of housing supplied rises from P0 to P1 • Adverse impact on affordability S P1 P0 D Q0 Q1 Quantity of housing

  10. NRAS • Introduced in 2008 to provide incentives to investors to build 50,000 affordable rental properties by 2012 • NRAS dwellings must be: • New or substantially renovated dwelling • Rented to eligible low & moderate income households for at least 20% below market rates for 10 years • Federal & State tax-transfer package • Tax credits last for 10 years per dwelling

  11. NRAS House price & rents ($) S • Supply-side policy – targets rental investors • Shifts supply curve out S1 P0 P1 D Q0 Q1 Quantity of housing

  12. NRAS • Lack of institutional investment by companies and superannuation funds • Superannuation funds cannot debt finance investments – cannot take advantage of tax shelter benefits associated with negative gearing • Deterred by land tax arrangements whereby tax rate is determined by cumulative value of land • Barriers to supply of rental housing by institutions

  13. Income Tax on Homeowners • No deduction for expenses in relation to their own home as it is a private asset • Exempt from Capital Gains Tax (CGT) on sale of their primary residence

  14. Stamp duty WA 2011-12 stamp duty rates • Stamp duties on conveyance – a transaction cost that is payable upfront • If purchase price is $100,000, stamp duty = 1.90% x $100,000 = $1,900 • If purchase price is $420,000, stamp duty = $11,115 + (4.75% x $420,000 - $360,000) = $11,115 + $2,850 = $13,965 $0 - $120,000 1.90% $360,000 – $725,000 $11,115 + 4.75% on amount over $360,000 http://www.finance.wa.gov.au/cms/content.aspx?id=2071

  15. Stamp duty • Creates housing affordability problems by deterring access to home ownership • Concessions : • First home buyers whose home purchases are below $500,000 are exempt from stamp duty • Concessional rates apply for principal place of residence valued at < $200,000

  16. Stamp duty • Impede access to home ownership – lump sum upfront cost • No strong efficiency rationale • Does not achieve a redistribution goal • Those who move more frequently pay relatively high amounts of duty: • Slows the adjustment of labour and housing markets to price signals • Deters trading down

  17. Stamp duty No constraint 11% Repayment constrained 10% Downpayment & repayment constrained 52% Downpayment constrained 27% Source: Population estimates reported in Table 15 of Wood and Ong (2008) http://www.ahuri.edu.au/publications/p30396/

  18. Stamp duty Price $ Supply curve P1+ Tax Tax P0 P1 Tax Demand curve before tax Demand curve after tax Q1 Q0 Number of properties

  19. First Home Saver Account (FSHA) • To assist first home buyers to save up to purchase a home • Eligible recipients are: • Aged 18-65 years • First home buyers and • First time FHSA holders

  20. FHSA • Federal government contribution of 17% on the first $5,000 of personal contributions made to the account in every year • Suppose a FHSA holder makes a contribution of $5,000 • Federal transfer = 17% x $5,000 = $850 • Federal government transfer is tax exempt • Interest earned on a FHSA is taxed at 15% only

  21. Summary • Plethora of housing taxes or tax rebates • Some work to promote housing affordability e.g. NRAS, but hindered by other taxes such as land tax • Potential for reforms highlighted in the Henry Review, but not implemented by government

  22. References • Australian Tax Office (2007), Australian Tax Statistics 2006-07 • Department of Finance (2012), Land Tax Rates, http://www.finance.wa.gov.au/cms/content.aspx?id=239 • Eslake, S. (2011), ‘Time to Axe Negative Gearing’, The Age, 25 April, http://www.theage.com.au/business/time-to-axe-negative-gearing-20110424-1dsxs.html#ixzz1cicQLPLg • Ham, S. (2009), NRAS Presentation for National Affordable Housing Summit Group Forums • Wood, G. and Ong, R. (2008), Redesigning AHURI’s Australian Housing Market Microsimulation Model, Report, November, Australian Housing and Urban Research Institute, Melbourne. • Wood, G. and Ong, R. (2010), Factors Shaping the Decision to Become A Landlord and Retain Rental Investments, Final Report No. 142, Australian Housing and Urban Research Institute, Melbourne.

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