Real estate and property groups in Australia have slammed what they say are ‘myths’ surrounding negative gearing and discounts on capital gains tax with regard to residential investment, saying that in fact the ability to both gain leverage through negative gearing and access the 50 per cent CGT discount is helping to boost the supply of new homes and keep house prices lower than would otherwise be the case.

Releasing an analysis surrounding the effects of negative gearing and the CGT discount on the residential property market conducted by ACIL Allen Consulting, the Real Estate Institute of Australia and the Property Council of Australia said both negative gearing and CGT help to boost housing supply, make home ownership more feasible and deliver lower rents than what would be the case were either measure not in place.

“The reality is that if negative gearing was abolished there would less investment and rents would go up,” Property Council chief executive officer Ken Morrison said.

According to the report, intense scrutiny on house prices has fuelled a number of what it says are misconceptions surrounding both negative gearing and the capital gains tax discount – a 50 per cent discount on the overall taxable value of gains which are made when assets are sold at a value which exceeds what is considered to be their ‘cost base’ under taxation law.

Such fallacies, it says, revolve around ideas about negative gearing being a special concession for property, about both negative gearing and CGT concessions being tax breaks which disproportionately benefit the wealthy and about use of negative gearing and the CGT discount enabling wealthy investors to price ordinary Australians out of the housing market whilst obtaining tax benefits.

Rather, the report said that:

  • Negative gearing represents a legitimate deduction of expenses in the course of earning income from investments across any asset class until the investment generates a positive income stream in the future.
  • Property is not the only asset class that attracts the CGT concession, which was introduced in 2000 as a replacement to a system of indexation of the cost base of assets for capital gains purposes. Indeed, almost 60 per cent of capital gains are from assets other than property (e.g.: shares, bonds etc.)
  • Two-thirds of investors who benefited from negative gearing in 2012/13 had a taxable income of $80,000 or lower.
  • Far from making housing less affordable, negative gearing contributes to the provision of new housing, with investor money counting for a third of all loans made to finance the construction of new dwellings.

The report also says removing negative gearing would reduce the volume of stock available for rental property and thus place upward pressure on rents.

Around Australia, the most recent surge in house prices is driving growing levels of debate about the taxation benefits which can be obtained through investment in residential property.

In April, the Australian Council of Social Service called for restrictions on deductions available through negatively geared properties as well as on the CGT discount, claiming these were costing the Budget $7 billion a year and fuelling a house price boom.

According to ACOSS, less than one-tenth of all negatively geared housing investments go toward the construction of new housing. The other 90-plus per cent, it says, merely serve to further inflate existing house prices.

But Real Estate Institute of Australia chief executive officer Amanda Lynch said the latest report indicated that those who primarily benefit from negative gearing policies are ‘mum and dad investors.’

“This isn’t some tax lurk for the wealthy, rather an incentive for people on low to average incomes,” Lynch said. “And it has benefits for the broader economy.”