By Hal Pawson. The story was originally published on John Menadue’s Pearls and Irritations site. Read the original article here. 

Extra revenue from winding back currently available tax breaks should be designated for social housing investment and increased Rent Assistance -a housing policy virtuous circle.

For all readers aware that our flagging housing system cannot be fixed without decisive policy change, the avalanche of support for the possible reform of private landlord tax concessions this past week is something to celebrate. Especially now that a significant number of Labor MPs have broken cover in support of change, this may be an escaped genie, hard to re-capture.

Yes, the PM might still very easily get cold feet before policy options take shape. Yes, a ferocious real estate industry and NewsCorp media pile-on in defence of the status quo is a certainty and has already begun. And yes, the second of these (the naysayer push-back) could very well bring about the first (the Albo back-down).

But let’s optimistically assume that, recognising the slam-dunk case for meaningful property tax reform as well as the significant popular support for such change, the Government holds its nerve and allows Treasury scenario modelling to proceed.

What should be in scope?

Exactly what should be in scope here, and what precisely should government be proposing? As for the first part of this question, there has been some suggestion that any change should be restricted to the negative gearing rules for ‘investment housing’, rather than also including the Capital Gains Tax discount on the proceeds of rental property sales.

As noted by Saul Eslake and by many other renowned economists, it has been the confluence of these two settings that has fuelled inflationary landlord property investment for the past quarter century. So perhaps scaling back only one part of this arrangement would be impactful. On this logic, a risk averse government might look to make a virtue of focusing solely on modest changes to negative gearing while leaving CGT discount untouched.

Yet, if a major part of the reform case is the inequity of current arrangements, that would be illogical. PBO modelling has shown that whereas 39% of negative gearing tax deductions go to the top 10% of income earners, 85% of CGT discount proceeds accrue to this group.

Moreover, if the reform case also rests to a significant extent on concern about the sheer scale of lost government revenue under these lax arrangements, the exclusion of CGT from any reform package would also defy logic. As shown by that same PBO modelling, it is this tax component that is the larger hole in the tax collection bucket.

Beyond this, while it might be politically naïve to demand an expansion of the Treasury review along the lines of the comprehensive Henry Tax Review, there’s a case for the current exercise to also encompass the even more generous tax breaks for rental dwelling investment via Self Managed Super Funds.

Current settings not only allow SMSFs to acquire and negatively gear rental properties but, having entered the pension phase, proceeds of fund-held rental dwelling sales are entirely CGT-exempt. At the very least, the government’s annual Tax Expenditures and Insights Statement should include statistics on the (currently unknown) scale of SMSF rental property ownership and the associated revenue losses.

How should landlord property tax settings be reshaped?

Despite the gigantic amount of debate on landlord property tax settings over the past decade, and while possible reform permutations are legion, very few precise proposals have gained any traction. The shining exception to this, in my personal opinion, was Bill Shorten’s 2016 and 2019 election platform formula for restricting negative gearing to purchasers of newly-built housing, with CGT discount being halved to 25 per cent for all newly-purchased rental properties. And all existing rental property ownership was to be rendered exempt from the changes.

Now in 2024 it seems that if, indeed, the ALP is to advocate any such future change it must be – for electoral symbolism purposes – clearly ‘more moderate’ than the (already moderate) Shorten package. Spurred by this expectation, new reform formulae are now emerging thick and fast. A particularly well-worked example has come from the Grattan Institute.

And, triggering all of this activity, was last week’s suggestion that Treasury may have been asked to develop its own reform options. Crucially, of course, each of these will come with its own revenue gain projection. But, thanks to PBO estimates recently commissioned by Senators David Pocock and Jacqui Lambie, we already have a sense of the potential budget windfalls that could result from some of the more straightforward reform permutations.

For example, where CGT discount is grandfathered for existing rentals and halved for newly-built homes, with negative gearing retained for a landlord’s first rental property, the federal budget saves $16 billion over the next decade. More far-reaching changes could net up to $60 billion.

How should revenue gains be treated?

As yet, though, there have been relatively few proposals on the crucial question of how any such revenue gains should be treated. This is critical because popular resonance will demand consistency with the stated justification for change. If that justification is (rightly) couched largely in terms of a better-functioning housing system, the package should be treated as primarily a housing policy reform.

This framing would be contrary to the Grattan position that such measures should be regarded as simply ‘good tax reform’ and also conflicts with Bill Shorten’s recently expressed suggestion that, presumably for electoral saleability, resulting revenue gains should be pre-committed to income tax reductions.

All of this matters because if a landlord property tax reform package is instead designated as a housing policy measure, it should be shaped accordingly. Not just in terms of its scope and proposed new tax obligation rules, but also in relation to the other ways that the package could contribute to a more balanced housing policy.

Greens housing lead, Max Chandler-Mather, is therefore on the money in arguing that extra revenue from winding back currently available tax breaks should be designated for social housing investment and increased Rent Assistance (not banked or designated for tax cuts).

The house price reduction resulting from any meaningful reform package (even if modest, as estimated by Grattan) would benefit first home buyers. The extra funds for social housing would benefit disadvantaged people in greatest need, while a decent-sized social housebuilding program would also advantage lower income private tenants by moderating rents at the lower end of the market.

A win-win-win virtuous circle at no cost to government.