If voters bless super reforms, negative gearing is the next logical shift

Political leaders know this but are wary of attempting change. To go after negative gearing seems more like a march on Moscow than a triumph in Rome. Sooner or later, politicians retreat. As treasurer in 2016, Scott Morrison dropped his concerns about “excesses” in negative gearing soon after potential changes were leaked; as Labor leader four years ago, Bill Shorten lost an election when Labor became too bold on tax.

Loading

The politics will change, however, because the government has to consider the burden on the budget from letting people with investment properties claim tax deductions with no cap. The Treasury analysis this week showed the deductions will cost $24.4 billion this financial year and $26.6 billion next year. The revenue foregone is about the same size as federal funding for state hospitals.

At the same time, more than 70 per cent of younger Australians believe they will never own their own homes. Experts dispute whether a change to negative gearing would help with this, but this is a source of huge frustration – perhaps, one day, political fury – among younger voters.

This is an immense challenge because the Treasury analysis reveals how many people buy investment properties to build up their savings. It shows that 8 per cent of the claims are made by people aged 30 to 34 and that 12 per cent are made by those aged 35 to 39, so this tax concession is incredibly widespread. About 2.4 million taxpayers claim it.

In many cases, the rental income is greater than expenses such as mortgage payments and maintenance. But about half the claims involve a rental loss – that is, negative gearing. People lose money, claim the deduction, and hope to make a profit when the property increases in value.

Loading

All these taxpayers also get the benefit of a 50 per cent discount on capital gains tax when they sell their properties. This concession on capital gains tax, across all assets, is expected to cost $23.7 billion this year.

This makes a severe cap on negative gearing politically untenable. Labor would not risk repeating its 2016 policy to limit negative gearing to newly built homes and halve the discount on capital gains, but there are other ways to attempt change. The debate seven years ago included Coalition ideas such as capping the amount that could be deducted at $30,000 or capping the number of properties someone could claim.

Now, after another seven years of budget deficits and even bigger concerns about housing affordability, some MPs believe the time is right to consider change. And one of them sits in Dutton’s party room.

“The overall cost of the $24 billion in tax deductions on negative gearing may be something the nation can’t afford, and, therefore, the nation should be having a debate about that,” says Broadbent, who represents the regional Victorian electorate of Monash. Broadbent has seen house auctions near his electorate office in Warragul, south-east of Melbourne, where first-home buyers cannot compete with investors. He is not advocating a halt to rental deductions but believes there has to be a discussion about changing the system.

Loading

“The nation needs to make changes,” he says. “It needs to address what it can afford and what it can’t afford in all policies when those policies were introduced in very good times, like the commodities boom during the Howard government. We no longer live in those times. If you’re still living in those times, you’re living in a fool’s paradise.”

Freelander, a doctor who represents Macarthur in western Sydney, is worried about the pressure on emergency departments and the need to repair Medicare.

“We’re not going to do that without money,” he says. “I think the whole tax system should be something we consider – and negative gearing and capital gains tax are part of that. My kids just can’t get into the housing market, so we do have to look at the generational issues here. You can’t just look at super; you have to look at the whole tax system.”

Freelander is not calling for an end to negative gearing. He says a good option would be to limit the deductions to one or two properties and to cap the benefits on capital gains tax. Australians could still gain the concessions, but only up to a reasonable level.

Albanese and Chalmers have found a way to propose change without a breach of faith: announce it early, legislate it this term but make sure it takes effect after the next election. They are attempting reform with the permission of the Australian people.

And they have a chance to ask permission to go further.

The Opinion newsletter is a weekly wrap of views that will challenge, champion and inform your own. Sign up here.