How our tax system affects housing affordability

1
How our tax system affects housing affordability

• Rachel Ong
• Deputy Director of Centre for Research in Applied
  Economics
• Curtin University

2
Income tax on landlords

• Rental income is tax assessable income
• Deductions
• Capital works deduction 2.5 of the cost of
  construction and improvements to rental
  properties that commenced after July 1985
• Depreciation on fixtures and fittings
• Rental interest

3
Negative gearing

• Net rental income is tax assessable
• Negative gearing - Net rental loss can be
  deducted against tax assessable income

Individual Landlords Rental Income and
Deductions, 200506 and 200607
Rental income/deductions 200506 200506 200607 200607
Rental income/deductions No. m No. m
Gross rental income 1,545,310 19,160 1,592,636 20,911
Rental interest deductions 1,231,694 13,830 1,276,185 16,104
Capital works deductions 518,568 1,091 559,603 1,226
Other rental deductions 1,548,327 9,328 1,596,344 9,953
Net rental income 1,561,630 5,089 1,610,561 6,372
ATO Taxation Statistics (2006-07), Personal Tax,
Table 2.4
4
Negative gearing

• Attractive to investors tax shelter benefits
• but
• Refinancing and churning required to retain tax
  shelter benefits
• Detrimental to tenure security
• Encourages the accumulation of wealth through
  borrowing and speculation can lead to
  inflationary bias

5
Negative gearing
Year
Wood and Ong (2010)
6
Capital gains tax

• Landlords subject to CGT on sale of property
• Discount on CGT
• 50 discount for individual landlords
• 33.3 for superannuation funds that hold
  investment properties
• No discount for companies
• Individual landlords have incentives to debt
  finance to chase capital gains
• Properties with large capital gains tend to be in
  higher segments of the property market

7
Land tax

• Recurrent annual tax levied investors who own
  land used for private rental housing
• Progressive schedule with marginal rates that
  increase with the value of the land
• Tax base is on aggregate land holding
• Multiple property owners are taxed on the
  aggregate value of their land plots, pushing them
  into land tax brackets with high marginal rates

8
Land tax
WA 2011-12 land tax rates
Aggregate land value Marginal tax rate
0 - 300,000 Nil 
300,000 - 1,000,000 0.09 cent for each 1 in excess of 300,000
1,000,000 2,200,000 630 0.47 cent for each 1 in excess of 1,000,000
2,200,000 5,500,000 6,270 1.22 cents for each 1 in excess of 2,200,000
5,500,000 11,000,000 46,530 1.46 cents for each 1 in excess of 5,500,000
gt11,000,000 126,830 2.16 cents for each 1 in excess of 11,000,000
0 - 300,000
Nil
1,000,000 2,200,000
630 0.47 cents for each 1 in excess of
1,000,000
Source http//www.finance.wa.gov.au/cms/content.a
spx?id239

• If 1 land plot worth 300,000,
• land tax 0
• If 4 land plots worth 300,000 each,
• aggregate land value 1,200,000
• land tax 630 0.0047 x (1,200,000
  1,000,000) 1,570

9
Land tax
House Price rent ()

• Increase in taxes on housing suppliers shifts the
  supply curve to the left
• Quantity of housing supplied falls from Q0 to Q1
• Price of housing supplied rises from P0 to P1
• Adverse impact on affordability

S1
S
P1
P0
D
Q0
Q1
Quantity of housing
10
NRAS

• Introduced in 2008 to provide incentives to
  investors to build 50,000 affordable rental
  properties by 2012
• NRAS dwellings must be
• New or substantially renovated dwelling
• Rented to eligible low moderate income
  households for at least 20 below market rates
  for 10 years
• Federal State tax-transfer package
• Tax credits last for 10 years per dwelling

11
NRAS
House price rents ()

• Supply-side policy targets rental investors
• Shifts supply curve out

S
S1
P0
P1
D
Q0
Q1
Quantity of housing
12
NRAS

• Lack of institutional investment by companies and
  superannuation funds
• Superannuation funds cannot debt finance
  investments cannot take advantage of tax
  shelter benefits associated with negative gearing
• Deterred by land tax arrangements whereby tax
  rate is determined by cumulative value of land
• Barriers to supply of rental housing by
  institutions

13
Income Tax on Homeowners

• No deduction for expenses in relation to their
  own home as it is a private asset
• Exempt from Capital Gains Tax (CGT) on sale of
  their primary residence

14
Stamp duty

• Stamp duties on conveyance a transaction cost
  that is payable upfront
• If purchase price is 100,000,
• stamp duty 1.90 x 100,000 1,900
• If purchase price is 420,000,
• stamp duty 11,115 (4.75 x 420,000 -
  360,000) 11,115 2,850 13,965

WA 2011-12 stamp duty rates
Home purchase price Stamp duty rate
0 - 120,000 1.90
120,000 - 150,000 2,280 2.85 on amount over 120,000
150,000 360,000 3,135 3.80 on amount over 150,000
360,000 725,000 11,115 4.75 on amount over 360,000
gt725,000 28,453 5.15 on amount over 725,000
0 - 120,000
1.90
360,000 725,000
11,115 4.75 on amount over 360,000
http//www.finance.wa.gov.au/cms/content.aspx?id2
071
15
Stamp duty

• Creates housing affordability problems by
  deterring access to home ownership
• Concessions
• First home buyers whose home purchases are below
  500,000 are exempt from stamp duty
• Concessional rates apply for principal place of
  residence valued at lt 200,000

16
Stamp duty

• Impede access to home ownership lump sum
  upfront cost
• No strong efficiency rationale
• Does not achieve a redistribution goal
• Those who move more frequently pay relatively
  high amounts of duty
• Slows the adjustment of labour and housing
  markets to price signals
• Deters trading down

17
Stamp duty
Repayment constrained 10
No constraint 11
Downpayment repayment constrained 52
Downpayment constrained 27
Source Population estimates reported in Table
15 of Wood and Ong (2008) http//www.ahuri.edu.au/
publications/p30396/
18
Stamp duty
Price
Supply curve
P1 Tax
Tax
P0
P1
Tax
Demand curve before tax
Demand curve after tax
Q0
Q1
Number of properties
19
First Home Saver Account (FSHA)

• To assist first home buyers to save up to
  purchase a home
• Eligible recipients are
• Aged 18-65 years
• First home buyers and
• First time FHSA holders

20
FHSA

• Federal government contribution of 17 on the
  first 5,000 of personal contributions made to
  the account in every year
• Suppose a FHSA holder makes a contribution of
  5,000
• Federal transfer 17 x 5,000 850
• Federal government transfer is tax exempt
• Interest earned on a FHSA is taxed at 15 only

21
Summary

• Plethora of housing taxes or tax rebates
• Some work to promote housing affordability e.g.
  NRAS, but hindered by other taxes such as land
  tax
• Potential for reforms highlighted in the Henry
  Review, but not implemented by government

22
References

• Australian Tax Office (2007), Australian Tax
  Statistics 2006-07
• Department of Finance (2012), Land Tax Rates,
  http//www.finance.wa.gov.au/cms/content.aspx?id2
  39
• Eslake, S. (2011), Time to Axe Negative
  Gearing, The Age, 25 April, http//www.theage.com
  .au/business/time-to-axe-negative-gearing-20110424
  -1dsxs.htmlixzz1cicQLPLg
• Ham, S. (2009), NRAS Presentation for National
  Affordable Housing Summit Group Forums
• Wood, G. and Ong, R. (2008), Redesigning AHURIs
  Australian Housing Market Microsimulation Model,
  Report, November, Australian Housing and Urban
  Research Institute, Melbourne.
• Wood, G. and Ong, R. (2010), Factors Shaping the
  Decision to Become A Landlord and Retain Rental
  Investments, Final Report No. 142, Australian
  Housing and Urban Research Institute, Melbourne.