Leading tax advisory firm BDO has called for a holistic approach to tax reform in relation to housing affordability rather than ‘tinkering at the edges’ and changing negative gearing incentives or capital gains tax concessions.
Marcus Leonard, National Leader, Tax at BDO, said ahead of delivering the budget in May, Treasurer Morrison is under increased pressure to make changes to solve the housing affordability crisis.
“The temptation is certainly there to tinker with the tax system and try and put downward pressure on rising housing costs,” Mr Leonard said.
“However tax is too blunt an instrument on its own and shouldn’t be the used as the main tool to enact change,” Mr Leonard said
“Tax shouldn’t drive incentives for the investment criteria for residential property and removing or changing taxes and levies charged on housing and development doesn’t solve the problem.”
Mr Leonard said BDO had surveyed clients on their expectations for this year’s budget and the need for tax reform had come through strongly in the poll.
“Close to 85% said the Government should reintroduce a broad tax reform process that covers both Federal and State taxes.
“Over 70% of respondents want tax changes to relieve the pressure of housing affordability but generally speaking don’t want those tax changes to be in the form of negative gearing or capital gains discount changes.
“This apparent inconsistency points to the complexity of the factors that contribute to housing affordability. These factors are very broad and, although there may be tax aspects involved, they may be ancillary to the major economic factors of supply and demand.
“On the demand side the factors that restrict housing availability include:
- The increase in numbers of double income households in Australia provides more funding resulting in increased demand which means some Australians can afford to pay more for housing.
- Since the Global Financial Crisis (GFC) people are looking for safer investments like property, which may be contributing to pushing up the cost of housing.
- Long term low interest rates encourage people to take on more debt, or at least until interest rates start to rise again.
“There have been a number of suggestions for tax and superannuation changes to relieve housing affordability, including:
- Stamp duty reductions for first home buyers;
- Withdrawal from superannuation funds for first home buyers; and
- GST concessions for new residential housing.
“The concern with these suggestions is that without corresponding increases in supply of housing, the effect of these suggested changes would be to push prices up by the amount of the concessions. Therefore, on their own they may not have any substantial effect on housing affordability.
“However, if you look at the issue in a more holistic manner there are some tax concessions that may have an effect on the supply of housing and thus relieve some of the housing affordability issues.
“Australia’s housing affordability problems are mainly concentrated in the large cities on the east coast particularly Sydney, Melbourne and Brisbane where job opportunities are greater. If governments were to encourage decentralisation of workplaces to less populated cities and towns the demand for housing in these large cities may be reduced. There may be tax incentives that Federal and/or State Governments could provide to encourage this, such as reductions in payroll tax, land tax, stamp duty and CGT rollover relief for businesses and workers to relocate to such decentralised areas.
“The other major factor restricting supply is the disincentive for home owners to downsize when family members move out. The stamp duty on changing residences is now so high that many people are discouraged from moving to more appropriate accommodation even though their family situation has changed. While the best option would be to remove stamp duty completely from residential housing, the provision of stamp duty concessions for older persons when they downsize their houses may have some effect in providing some more supply to the system.
“It is interesting to note that, while negative gearing changes and a reduction in the CGT discount have been rejected by a large majority of poll respondents, these two tax changes would potentially increase the supply of housing for home owners by restricting the demand from investors, and therefore may have some effect on housing affordability. However, there is the argument that a reduced demand from investors could reduce the availability of rental accommodation. The counter argument to this is that the number of renters will be reduced as some of them will become home purchasers and thus offset the reduced supply of rental accommodation.”