Tax concessions for housing investors will cost the budget more than $20bn a year within a decade and will overwhelmingly benefit high income earners, new analysis from the parliamentary budget office (PBO) shows.
The dramatic increase in the cost of the tax concessions comes alongside the rapid rise in interest rates, which will increase the amount landlords can deduct for negatively geared properties.
In 2021-22 the amount of forgone revenue for negative gearing and capital gains tax concessions totalled just $8.5bn.
After the treasurer, Jim Chalmers, suggested he was prepared to take a “fresh look” at how to balance the budget to make it sustainable into the future, the Greens have used new modelling commissioned from the PBO to call for the government to scrap the “unfair” tax breaks.
Winding back these tax perks was Labor policy ahead of the 2019 election, but the proposal was dumped after Bill Shorten’s election loss was partly blamed on the party’s ambitious tax reform agenda.
According to the PBO analysis, the combined amount of forgone revenue of both measures over the next decade will be $157bn, with the cost of negative gearing to reach $97bn as interest rates rise, and capital gains tax discounts to total $60bn.
A distributional analysis also undertaken by the PBO showed that more than half (56%) of the value of the two tax concessions will go to the top 10% of income earners, or those earning more than $189,000 a year.
In 2032-33, the forgone revenue of negative gearing tax deductions will be worth $12.7bn based on the official cash rate staying at 2.85% from the end of this year, and rising to $13.8bn a year if the cash rate climbs to 3.35%. At the same time, the value of the capital gains tax discount would be worth $7.7bn in forgone revenue.
Of this combined $20.4bn, $11.4bn would flow to those earning more than $189,000 a year.
The PBO analysis found that regardless of the interest rate, the amount flowing to high income earners from negative gearing concessions remained stable, with 39% for the top 10% of income earners, and 65% for the top 30% of income earners.
This amounted to the average property investor claiming about $4,640 by the end of the decade.
For capital gains tax, the modelling finds that 85% of the forgone revenue comes from the top 10% of income earners, with the average impact of the capital gains tax discount for landlords selling an investment property in 2032-33 estimated to be $2,810.
The modelling assumed stable rents and house prices, and did not account for any behavioural change that could arise from policy or economic changes.
The Greens’ housing spokesperson, Max Chandler-Mather, said the two tax concessions were unfairly benefiting higher income earners and should be scrapped.
“The higher interest rates go, the more negative gearing will cost the budget, which means right at the time when the government needs extra revenue to help alleviate the cost-of-living crisis they are instead handing it over in the form of tax concessions to wealthy property investors,” he said.
“Negative gearing and capital gains tax discounts work together to artificially inflate house prices, and turbo charge inequality, funnelling tens of billions of dollars into the pockets of the top 10% of income earners in Australia.
“These tax concessions alone mean it is often easier for a property investor to buy their fifth house, rather than someone to buy their first home, and that’s deeply unfair.”
On Sunday, speaking on the ABC’s Insiders program, Chalmers was asked if the government would consider making changes to the housing taxes, to which he said: “I wouldn’t have thought so.”
But when pressed on whether the “politically problematic” taxes were worth a fresh look, he appeared to leave open the possibility.
“I think we need a fresh look at the budget in its entirety because what we’ve got is a structural problem in the budget,” he said.
“We’ve shown that you can move sensibly on all fronts – restraint, trimming spending, sensible tax reform, you can make the budget more sustainable, and that will be the task of the two or three budgets remaining in this parliamentary term as well.”
