THE Reserve Bank said Australia’s treatment of property investors is more generous than other industrialised economies and there is case to review negative gearing in order to discourage over‐leveraging into property.

In its submission to the Inquiry into Home Ownership, the RBA said it believes that there is a case for reviewing negative gearing, but not in isolation.

“Its interaction with other aspects of the tax system should be taken into account.

“A major tax change since 2003 is that the threshold for the top marginal rate has increased significantly relative to the overall income distribution. This has reduced the proportion of taxpayers with the strongest incentive to minimise tax through negative gearing.

“To the extent that negative gearing induces landlords to accept a lower rental yield than otherwise (at least while continued capital gains are expected), it may be helpful for housing affordability for tenants.

“It is worth noting, however, that the interaction of negative gearing with other parts of the taxation system may have the effect of encouraging leveraged investment in property,” the RBA said.

The central bank said the switch in 1999 from calculating CGT at the full marginal rate on the real gain to calculating it as half the taxpayer’s marginal rate on the nominal gain resulted in capital gain producing assets being more attractive than income producing assets for some combinations of tax rates, gross returns and inflation.

“This effect is amplified if the asset can be purchased with leverage, because the interest deductions are calculated at the full marginal rate while the subsequent capital gains are taxed at half the marginal rate.

“Since property can usually be purchased using higher leverage than other assets that produce capital gains, property is especially affected by this feature of the tax system,”

The RBA said tax data shows investment property has grown steadily through the 1990s and early 2000s, before broadly stabilising in the late 2000s at around 10%.

Over the same period, the share of these investments that were geared increased steadily before levelling off at a little over 80% and the share of investors that declared a net rental loss was just under two thirds in 2012/13, up from around half in the late 1990s.

“The Bank has previously discussed the tax treatment of housing in Australia at length. Australia’s treatment of property investors is at the more generous end of the range of practice in other industrialised economies, but not overwhelmingly so.

“In particular, a wider range of expenses, including some non-cash expenses, may be deducted against non-property income than is possible in some other jurisdictions. Capital gains tax (CGT) is also calculated at a concessional rate, although unlike in countries such as New Zealand, it applies to all sales of investment properties, not just those sold relatively soon after purchase,”

The RBA said another change since 2003 is that superannuation funds are now able to borrow and some self-managed superannuation funds have taken advantage of this by adding geared property into the fund portfolio, both residential and, in particular, commercial property.

“At the margin, this has increased the population of potential investors. Although the share of the housing stock owned by these funds is small, it has grown quickly. The Bank has previously observed that leverage in superannuation funds may increase vulnerabilities in the financial system and therefore supports limiting the scope for leverage in these funds.

“Given the value Australian (and other) households place on home ownership, policy should not unduly advantage property investors at the expense of prospective owner-occupier home buyers. Financial stability considerations would suggest that tax and regulatory frameworks should avoid encouraging over‐leveraging into property, whether by owner-¬‐occupiers or investors,” the RBA concluded.

ANZ chief executive Mike Smith also recently supported calls for a review of negative gearing, as long as it is part of longer-term reform.

Property Review Australia