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A possible Labour plan to scrap negative gearing tax breaks for investor landlords could also end up hurting the people they are supposed to help: renters.
Anthony Albanese, in opposition, abandoned the policies of his Labor predecessor Bill Shorten in 2019 after the party lost its second consecutive election.
But now Nine Papers reports that Labor wants to review current policies on negative gearing and capital gains tax relief and has commissioned the Treasury to draw up some modelling on possible changes.
Treasurer Jim Chalmers confirmed Wednesday that his department was examining possible policy changes.
“Treasury looks at all kinds of policy options all the time,” he told reporters.
“It is not unusual for the civil service, and in my case my department, to look at issues that are speculated about in public or in Parliament – that is how a good civil service works.”
What is negative leverage?
Under existing negative leverage policies, investors can claim rental losses on their annual tax return.
Anthony Albanese, in opposition, abandoned the policies of his Labor predecessor Bill Shorten in 2019 after the party lost its second consecutive election.
This means that a homeowner can also claim mortgage interest payments, cleaning costs, repairs, community fees, council tax, grass cutting, homeowners insurance, property management fees and water bills against their taxable income.
If rental income is less than the cost of maintaining and paying for a property, the landlord has negative gearing and can claim that loss on their tax return for that financial year.
The difference between rental income and the cost of providing rental property is deducted as an expense from a person’s income for that year.
The Labour Party is considering reviewing this policy because negative leverage has led to speculators buying multiple investment properties which they can then sell for a large capital gain.
Along the way, these investors can acquire negatively leveraged properties on any number of properties.
Traditionally more affordable housing markets such as Brisbane, Perth and Adelaide have seen double-digit increases in property values this year, despite 13 interest rate hikes by the Reserve Bank in 2022 and 2023.
This happened because investors, able to borrow against other investment properties, were able to obtain financing from the bank and purchase another home to rent out during a rental vacancy crisis.
University of Technology Sydney property economics expert Dr Mustapha Bangura and property professor Chyi Lin Lee published a report last year arguing that investors have historically bought properties, despite weak rental yields, because of negative leverage.
But removing negative leverage could also hurt mom-and-pop investors, who would be forced to sell because they can’t claim their losses on taxes.
Labor’s potential plan to scrap negative gearing tax breaks for investor landlords could also end up hurting the people it is supposed to help: renters (pictured, a rental queue in Bondi)
Younger property buyers, priced out of the Sydney property market, would also lose the chance to buy a first home they could rent out as they would continue to rent closer to where they worked.
This would mean fewer rental properties available on the private market, leading to even higher rents as a result of lower supply.
This comes at a time when Australia is facing a rental crisis: SQM Research shows that Australia’s capital cities have a very tight rental vacancy rate of 1.3 percent.
In 1985, Bob Hawke’s Labor government removed negative gearing tax breaks for investors, only to reinstate them in 1987 over fears that the absence of negative gearing would lead to large rent increases.
Rents during that two-year period had only increased in Sydney and Perth.
The Greens, who Labour could rely on in 2025 to form a minority government if opinion polls are correct, commissioned the Parliamentary Budget Office to assess the cost of negative leverage in the Budget.
Tax breaks for homeowners were found to cost $6.9 billion in lost tax revenue in 2024-25, rising to $13.5 billion in 2033-34.
Under existing negative gearing policies, investors can claim rental losses on their annual tax return (pictured, a “For Sale” sign outside a house in Canberra)
Capital Gains Tax Discount
The 50 per cent capital gains tax rebate for residential property was forecast to cost $5.4 billion in 2024-25 and rise to $7.94 billion in 2033-34.
Labour went into the 2019 election promising to halve the capital gains tax rebate to 25 per cent for future investment property purchases, but the Treasury is now reportedly exploring restricting that policy too.
Someone’s family home or main residence has been exempt from capital gains tax since it was established in 1985, but John Howard’s coalition government in 1999 introduced a 50 per cent discount on capital gains tax.
This means that if a home increases in value by $100,000 since the time an investor bought it, only $50,000 needs to be shown on their tax return as income for that financial year, if the home has been owned by them for at least 12 months.
This policy also coincided with net immigration abroad tripling during the 2000s.
In the 1980s, when Australia had negative gearing and a capital gains tax, a house in Sydney cost four times the average full-time salary.
But by the late 2000s, that debt-to-income ratio had doubled to eight and is now approaching 15, with the median home price in Sydney approaching $1.5 million.
A person with a 20 per cent mortgage deposit cannot borrow more than 5.2 times their salary.
This means that someone earning an average full-time salary of $100,017 is restricted to a $650,109 home, which would not be enough to buy a median-priced home in any capital city market except Darwin.
The 50 per cent capital gains tax rebate on residential property was forecast to cost $5.4 billion in 2024-25 and rise to $7.94 billion in 2033-34 (pictured, a house for sale in Sydney)
Fiscal policy
Bill Hayden’s Labor Party lost the 1980 election when Malcolm Fraser’s coalition government ran a scare campaign claiming it would introduce a capital gains tax.
But Hawke was re-elected in 1984 on a promise to hold a fiscal summit, leading to a capital gains tax in 1985.
The coalition lost the “unlosable” 1993 election when Liberal leader John Hewson proposed a 15 percent tax on goods and services.
John Howard, as leader of the opposition, ruled out a GST before the 1996 election – using the phrase “never again” – but was narrowly re-elected in 1998 on a 10 per cent GST platform.
So Labour’s exploration of changes to negative gearing and capital gains tax – despite losing two elections on those policies – simply shows that political parties do not necessarily give up when voters say no.
