Should owner-occupiers be taxed like investors?

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A leading property academic believes housing affordability in Australia could be improved by the government moving to tax owner occupiers in a similar manner to property investors.

Speaking to Your Investment Property Magazine’s sister publication, Australian Broker, Associate Professor Dr Jamie Alcock from the University of Sydney Business School said the government’s aversion to taxing owner-occupiers is responsible for worsening affordability.

“When people have to pay more tax for something, that doesn’t drive house prices up it drives house prices down,” Dr Alcock said.

“The driver of price is because we all want housing and a big reason for that is that owner-occupiers get such a sweet tax deal. We are one of the very few countries where owner occupiers are almost completely untaxed as an investment,” he said.

“When you are looking at a universe of possible investments for an individual to make where all of them are heavily taxed except for one – where is everyone going to put their money? They are going to put their money in the most tax efficient vehicle and that is owner occupied housing, driving the price up.”

The latest Housing Affordability Report from the Housing Industry Association claimed that affordability in Australia reached a three-year low over the December 2015 quarter.

In Alcock’s opinion, an increased tax obligation should be coupled with a cut in income taxes, in the hope that it would encourage people to invest money into productive areas of the economy.

“Contrary to popular belief, income tax doesn’t tax wealth, it taxes aspirations. Whereas property is wealth, so property taxes are actually taxes on wealth rather than aspirations… My suggestion is to move right away from taxing income – and the expensive administration of taxing income and policing it – and moving to a much more simplistic and egalitarian taxation on property,” Dr Alcock told Australian Broker.

“The OECD put out a report a few years ago where they empirically explored the link between different classes of tax – property taxes, consumption taxes and income taxes – and GDP growth and they found that property taxes were the most GDP growth friendly of the lot and income taxes were the least GDP friendly of the lot,” he said.

 Dr Alcock believes in a system similar to that in the United States, where home-owners are hit with an annual tax bill of around 2% of the market value of their property each year.

“However, you also get an offsetting tax deduction for a complying mortgage. That helps first home owners because if you don’t have a lot of equity in the house and you don’t have a lot of wealth then you don’t pay much tax,” he said.

“But once you have built up equity and you’ve built wealth up, that is when you pay the tax.”

While he believes such a system would help affordability in Australia, Dr Alcock conceded it’s unlikely that it would ever be introduced.

“In Australia we have a history of taxing property, and as a result, the first politician that introduces tax on property at the same time as reducing income taxes would find themselves very unpopular.

“So I don’t think it is politically going to ever work but it is where we should be moving if we want growth and prosperity for our future and our children’s future.”
 

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