Taxation & Housing

The Australian tax system significantly impacts the housing market in ways that might not be immediately obvious. Different policies affect: 

• the number of houses available; 
• people’s ability to afford a house; 
• investors capacity to buy stock for the short and long-term rental market; 
• people’s willingness to down and up size, and  
• people's investment behaviours, within and outside Australia.  

Although there are several Federal, State and Territory, and Local Government housing-related taxes, Negative Gearing, Capital Gains Tax concessions and Stamp Duty are most often referenced. This is because of their impact on house prices that contribute to affordability issues.

Negative Gearing 

Negative Gearing is available to anyone who owns a residential property as an investment. It's intended to incentivise people to invest their money in the 'asset' of housing.

Negative Gearing comes into play when the cost of owning a rental property outweighs the income it generates each year. This creates a taxable loss, which can normally be offset against other taxable income.  

Why does it matter for housing?  

• It treats housing as an investment, encouraging speculation that pushes housing prices higher.
• It supports wealth creation by reducing the risk and volatility and improving returns when compared with other assets.
• It is a tax break only available to those with investment properties, providing an incentive to be a housing investor rather than an owner occupier.
• It stimulates investment in the rental market. 
• It doesn’t generate more housing very often. Only 1 in 5 negatively geared housing investors purchase a new build; the rest are buying existing houses. 
• It reduces government revenue. In 2021-22, the government lost $2.1 billion, and this is expected to rise to $6.9 billion by 2024-25 and $14.5 billion by 2034-35.

Capital Gains Tax concessions (CGT) 

Capital Gains Tax (CGT) is a cut of the profit made when selling a house that has increased in value, paid to the Federal Government.

It's not applied in the same way to all houses when they are sold. Houses that have been lived in by the owners are exempt from the tax entirely, while houses that have had tenants in them (for more than a year) are subject to the tax on 50% of the increase in property value. The intention of CGT concessions are to incentivise investment in housing.

Why does it matter for housing?

• As for Negative Gearing, it treats housing as an investment, encouraging speculation that pushes house prices higher.
• It supports wealth creation by reducing the risk and volatility, improving returns when compared with other assets. 
• The Capital Gains Tax Discount, alongside Negative Gearing, allows taxpayers with investment properties to defer and reduce taxation.  
• It stimulates investment in the rental market, including housing improvements. 
• The CGT discount reduces government revenue. In 2021-22, the government lost $9.24 billion. This is expected to fall to $5.4 billion by 2024-25 and rise to $8.35 billion by 2034-35. The exemption of capital gains on the family home cost the Federal Government around $19.1 billion in revenue forgone 2023-24 (individuals and trusts, including shares, housing and other assets). 

Stamp Duty  

Stamp Duty imposes a cost on moving house. It's collected by State and Territory Governments when purchasing a property and is set at different rates around Australia (except the ACT).  

Why does it matter for housing? 

• It adds to the cost of an already expensive purchase, making homeownership more difficult. Stamp Duty payments are now double the share of income that they were in the early 2000s and five times that of the 1980s 
• The additional cost might dissuade people from selling and buying and instead live in houses that don’t suit them, whether too big or too small or far from work.  
• Young people are disproportionately penalised as the age group likely to move most frequently.  
• Stamp Duty is an important revenue stream. Across Australia, Local and State governments collected more than a fifth of their tax revenue in the 2020-21 financial year from stamp duty. The $23.9 billion collected represented a 25% year-on-year increase, a new historic high.

The Change Effect 

The tax treatment of housing in Australia significantly favours owner-occupiers and investors. This contributes to housing affordability challenges and wealth inequality. 

There are many sides to taxation and housing and making it fair and efficient for all is a delicate balance. Pulling one lever one way, may help one side, but hurt another. 

Changes to taxation on property would have several flow-on effects that could have significant impacts for homeowners, investors, renters or people wanting to get into the housing market. The magnitude of those effects, and on whose shoulders they fall, is one of the most hotly disputed housing topics.  

Most experts agree removal of the tax concessions would reduce pressure on house prices but few experts argue that the impact would be large. Negative gearing and the capital gains discount are estimated to boost house prices between 1 and 4%, while having a smaller negative effect on rents.

Policy Personified 

Rob and Jane own a couple of investment properties with mortgages that they rent out. They can afford to keep doing this by negatively gearing those properties and claiming the loss made on them as a tax deduction. 

Emily rents one of those properties. Her rent is not cheap, but not over the top. She is hearing talk online about the possible scrapping of negative gearing to create more opportunities for first-time home buyers due to reduced competition from investors. 

If negative gearing was no longer an option, Rob and Jane may have to sell their property or raise rents to make a profit. The impact could be exacerbated if the CGT discount was reduced or removed.  

For Emily, this means that her rent could go up in the short term or she could be evicted if the owners decide to sell. However, if many investors put their properties on the market because of the tax changes above, it could become cheaper for her to purchase her first home.