RBA recommends negative gearing review

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The debate over negative gearing continues after a submission from the Reserve Bank of Australia to a government inquiry suggested the scheme be looked at.

The RBA became the latest voice to join the debate on the issue after the Labor Party and the Greens both called for alterations to the scheme.

In a submission to the federal government’s Home Ownership Inquiry, the RBA said negative gearing’s role in the Australian taxation system should be analysed.

"The Bank believes that there is a case for reviewing negative gearing, but not in isolation. Its interaction with other aspects of the tax system should be taken in to account," the submission read.

The RBA said negative gearing should be reviewed to ascertain whether it is encouraging people to over-leverage themselves through investing in property

“The switch in 1999 from calculating CGT at the full marginal rate on the real gain to calculating it as half the taxpayer’s marginal rate on the nominal gain resulted in capital gain-producing assets being more attractive than income-producing assets,” the submission
reads.

“This effect is amplified if the asset can be purchased with leverage, because the interest deductions are calculated at the full marginal rate while the subsequent capital gains are taxed at half the marginal rate.

“Since property can usually be purchased using higher leverage than other assets that produce capital gains, property is especially affected by this feature of the tax system.”

While the bank has called for negative gearing to be reviewed, that doesn’t neccesarily mean it believes the scheme doesn’t have any positives.

“To the extent that negative gearing induces landlords to accept a lower rental yield than otherwise (at least while continued capital gains are expected), it may be helpful for housing affordability for tenants,” the RBA said.

Federal Treasurer Joe Hockey told the Sydney Morning Herald that the government would be unlikely to alter the scheme, a position that has support from those in the property industry.

Last month Chief executive officer of Multifocus Properties and Finance, Philippe Brach, said changing negative gearing would be disastrous.

“Changing negative gearing would be a complete disaster,” he said.

“You only need to look at what happened when the Hawke Government changed it, the economy collapsed and in 18 months they admitted they made a mistake and undid the changes.

“When a politician admits they did the wrong thing then that’s all you really need to know.”
 

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