Tax and Property

Gearing up to budget time (well, on the long side anyway), tax rates and associated wleftare and minimisation schemes have again begun being discussed in the media. Of course, the Government is unlikely to do anything about it - their view is more that low income earners should work harder to be more like the people who put all the their effort in avoiding tax.

Most of the problem arises from the poorly designed taxation brackets which encourage people to reduce their taxable income as they earn more. One of the best proposals I have heard is to reduce the top tax rate to the company tax rate. The Coalition for Independent Studies has recently proposed scrapping negative gearing and reduce tax rates (The Australian, March 15):

NEGATIVE gearing should be scrapped, but only in return for significant cuts to the top rates of income tax.

The new push to abolish the popular tax advantage from investment properties comes from the Centre for Independent Studies, which blames negative gearing for the high cost of housing.

"Like the first-home owner grant, tax savings from negative gearing tend to be capitalised into the value of property prices," the centre's social policy analyst Peter Saunders said.

"Seen in this light, taxpayers forfeit over $1billion of revenue every year to make houses more expensive than they otherwise would be."

Professor Saunders said an influx of small investors was one reason why average house prices had risen 310 per cent since 1986, far outstripping wages growth of 128 per cent.

"You wouldn't want to encourage the Government to scrap negative gearing unless there's the quid pro quo to take down income tax rates."

He said that with lower, simpler tax rates, negative gearing would lose its rationale.

Today Professor Saunders publishes a CIS paper, "After the House Price Boom", warning "it is unlikely the housing market has ever looked quite so vulnerable".

He said big mortgages had made borrowers vulnerable to even slight rises in interest rates, and unlike previous generations they could not rely on inflation reducing their debt.

Although the recent housing boom was global, Australia had a "unique combination" of policies – including the first-home owner grant, capital gains tax breaks and negative gearing – likely to have fuelled price inflation, he said.

Professor Saunders said policies restricting land release had also made housing less affordable.

He also criticised the tendency to charge urban fringe developers the full cost of infrastructure such as roads, sewerage and parks, which could make home ownership harder for low-income families.

Food for thought.