Question: To Gear or not to Gear?

May 9 2016

RBA concerned Negative Gearing affects Financial Stability
The Reserve Bank of Australia has expressed concern about negative gearing and the tax concession for capital gains, saying any change that discouraged negative gearing might be "a good thing" from a financial stability perspective.  Labor has come under sustained attack from the Coalition for promising sweeping changes to Australia's negative gearing and capital gains tax regime to save $32 billion over 10 years.


But an internal RBA memo released under freedom of information laws runs counter to Prime Minister Malcolm Turnbull's warnings that Labor's proposal to ban negative gearing except for new properties would deliver "a massive shock" to the property market.  Mr Turnbull repeated those warnings on day one of the campaign, saying that Labor's policy would hold back the Australian economy.  The Reserve Bank memo says negative gearing and capital gains tax rules affect property more significantly than other investments "as it can be purchased with higher leverage than shares".  A move against negative gearing, the memo says, would trigger a large-scale sale of negatively-geared properties "only if the changes were not grandfathered".

Labor Says It Would :Grandfather" Changes
Labor's policy plan would grandfather its changes, meaning properties that are negatively geared would remain so until they were sold, preventing a rush of sales as negative gearers offload homes.  The memo is a "Q&A" brief dated December 2014, meaning it was written before Labor announced its policy to wind back negative gearing and before the government pledged to continue it.  Since the December 2014 memo, Sydney house prices have climbed a further 11 per cent. Loans to investors account for 46 per cent of all money lent for housing.  The Coalition has positioned itself as the protector of Australia's existing negative gearing and capital gains tax regime, which it argues is largely used by average "mum and dad" wage earners, and signalled its willingness to launch a scare campaign over the issue.

But Labor argues its proposed changes will improve housing affordability, particularly for first homebuyers, while also improving the budget bottom line.  In Brisbane on Monday, Mr Turnbull stepped up pressure over Labor's capital gains tax policy as he described it as an attack on all investments and said it would make Australians invest and employ less.  "Bill Shorten wants to have less investment in Australia, can you believe that? He wants Australians to invest less and if they invest less, they'll employ less," he said.  "That's why he is putting up the tax on capital gains. That's why he is seeking to ban negative gearing, standing in the road of entrepreneurship."  Last week, Mr Shorten said he could not understand why the Turnbull government "was happy to give a tax cut to a millionaire, happy to give a tax cut to a billion-dollar company, happy to die in the ditch over the ability of property speculators to get paid by the taxpayer to subsidise their property investment. But there is no plan for housing affordability."

In Cairns on Monday, Mr Shorten hammered the government for wanting to hand business a $50 billion tax cut over 10 years - a key promise in the budget it released last Tuesday - and argued that more money should instead be spent on education funding.  The Opposition Leader was on the back foot, however, after his candidate in the seat of Melbourne contradicted party policy on turning back asylum-seeker boats and offshore detention, insisting five times that the ALP's policy was clear and would not change.  The Labor policy would restrict future negative gearing to investment income, meaning new investors would still be able to write off losses on properties and other investments, but only against investment income rather than wages.  Investors in new properties would be exempt and the discount on capital gains tax would be cut from 50 to 25 per cent, but only for new investors.

RBA memo a "Briefing Document"
In a boost for the ALP, the bank says in the memo it isn't concerned about negative gearing in its own right, but about its interaction with the capital gains tax discount introduced by the Howard government in 1999.  The change meant "only half of any capital gains are taxed at your marginal rate, however the loss on the investment initially is 100 per cent tax deductible".  The lopsided arrangement "may encourage chasing of capital gains" and "investors bidding up housing prices".  The memo says negative gearers are more of a threat to the stability of the financial system than owner-occupiers because they are more likely to have interest-only loans and so won't have "as much of an equity buffer in the situation where prices fall".

The bank has made its views known previously in submissions to the financial system inquiry and House of Representatives home ownership inquiry, although not in such blunt terms. Q&A briefs are prepared by senior officers to arm officials such as Governor Glenn Stevens with answers to questions likely to be asked in parliamentary hearings or public functions.

negative 1 gearing 1 grandfathered 1 rba 1 memo 1 capital 1 gains 1 policy 1