This article argues the Commonwealth can use its tax powers to regulate better conditions in private rental housing by restructuring and sharpening the negative gearing and capital gains tax discounts.
Dealing with Australia’s housing crisis is a pressing issue for politicians and policy makers.
Among many concerns the reform of negative gearing and capital gains tax discounts seems to be a stuck debate. A wide body of opinion supports retaining these schemes as essential underpinnings for rental housing supply.
Yet a similarly large group views these concessions as wealth creation programs for landlords at the expense of renters, and advocates abolition.
Together negative gearing and the capital gains discounts cost the Commonwealth around $6 billion in foregone revenue.
The Commonwealth is also projected to spend around $6 billion annually on Commonwealth rent assistance, funding 1.2 million households of which 61 per cent are aged, disability, carers or sole parent pensioners. These are some of the most vulnerable households in the country but are left to the vagaries of the notoriously low-quality insecure sector.
With tax concessions and rent assistance the Commonwealth is spending around $12 billion per year on the private rental market, 24 times the annual funding through the showcase Housing Affordability Future Fund.
But what private rental housing outcomes does the Commonwealth get from its expenditure on private rental housing? We know that rent assistance lifts around half of recipients out of affordability stress. But we do not know the quality of their dwellings or tenancy conditions. And because of variations in tenancy legislation a dollar of assistance buys different levels of rental dwelling quality and tenancy security across the different states.
It is worse with negative gearing and capital gains tax discounts. We do not know if negatively geared properties are targeted to low-income tenants nor the quality or the security of their tenancies.
This lack of accountability and transparency for a $6 billion Commonwealth tax expenditure program is scandalous. Reform is urgently needed to get clearer and better outcomes from this Commonwealth tax expenditure on the private rental market.
In a new policy research paper we propose the creation of a new National Rental Regulation System (NRRS) that coordinates Commonwealth Rent Assistance with negative gearing and capital gains tax discounts. We argue that landlords should not receive negative gearing and capital gains tax discounts unless they commit to new national rental tenancy standards of dwelling quality and tenant security. These standards include minimum five-year fixed term leases with only one rent increase and one inspection per lease period.
Three tiers for landlords
Our proposal packages negative gearing and capital gains tax discounts into three tiered bundles of assistance that landlords can choose from.
In Tier 1 landlords get a low rate of negative gearing and a low capital gains tax discount. In return they must let their property at 5 per cent below the market rate and adhere to national tenancy standards.
In Tier 2, the property must be let at 5 per cent below market rate, adhere to new national rental tenancy standards and be rented to a Commonwealth Rent Assistance recipient.
In return the landlord gets a full negative gearing and an increased capital gains discount. Tenants would also benefit, with increased Commonwealth Rent Assistance payments.
This provides mutual incentives for Tier 2 landlords and Commonwealth Rent Assistance to match, and mutually benefit. Landlords could also get access to the Housing Australia discounted housing finance, just like social housing providers.
In Tier 3 the landlord headleases the dwelling to a community housing organisation. Landlords receive the highest negative gearing and capital gains tax discount rate, and can access to Housing Australia discounted finance.
Landlords can opt out
Landlords who choose not to participate in this new national rental regulation system are unable to claim any losses which exceed rental income as tax concessions and receive a CPI indexation discount on taxable capital gains. They can operate as private market investors with no government subsidy, governed by state tenancy legislation. They face no penalty, but cannot access the tax benefits of the NRRS participants.
Instant asset write offs
For all three tiers we propose instant asset write-offs for dwelling sustainability and energy performance improvements, such as heat pumps, insulation and double glazing, to improve quality, affordability and sustainability of dwellings.
To administer the scheme, the Commonwealth would create new national rental tenancy leases incorporating the national rental tenancy standards. These would be templated to reflect each State’s tenancy legislation and enforced by routine state tenancy enforcement mechanisms.
By setting national rental tenancy standards and rewarding landlords with favourable tax concessions the Commonwealth can use its strong tax powers to regulate conditions in the private rental sector, without needing to undertake complex negotiations to harmonise state rental tenancy legislation.
The role of the states and territories would be in enforcing the national rental tenancy leases via their complaint and tribunal mechanisms.
This may seem like a radical policy shift but many of the features of what we propose already exist in fragmented forms.
For all three tiers we propose instant asset write-offs for dwelling sustainability and energy performance improvements, such as heat pumps, insulation and double glazing, to improve quality, affordability and sustainability of dwellings.
To administer the scheme, the Commonwealth would create new national rental tenancy leases incorporating the national rental tenancy standards. These would be templated to reflect each State’s tenancy legislation and enforced by routine state tenancy enforcement mechanisms.
By setting national rental tenancy standards and rewarding landlords with favourable tax concessions the Commonwealth can use its strong tax powers to regulate conditions in the private rental sector, without needing to undertake complex negotiations to harmonise state rental tenancy legislation.
The role of the states and territories would be in enforcing the national rental tenancy leases via their complaint and tribunal mechanisms.
This may seem like a radical policy shift but many of the features of what we propose already exist in fragmented forms.
For all three tiers we propose instant asset write-offs for dwelling sustainability and energy performance improvements, such as heat pumps, insulation and double glazing, to improve quality, affordability and sustainability of dwellings.
To administer the scheme, the Commonwealth would create new national rental tenancy leases incorporating the national rental tenancy standards. These would be templated to reflect each State’s tenancy legislation and enforced by routine state tenancy enforcement mechanisms.
By setting national rental tenancy standards and rewarding landlords with favourable tax concessions the Commonwealth can use its strong tax powers to regulate conditions in the private rental sector, without needing to undertake complex negotiations to harmonise state rental tenancy legislation.
The role of the states and territories would be in enforcing the national rental tenancy leases via their complaint and tribunal mechanisms.
This may seem like a radical policy shift but many of the features of what we propose already exist in fragmented forms.
We already have capital gains tax discounts
Landlords can already access higher capital gain tax discounts if they provide discounted rents.
Defence Housing Australia operates Commonwealth leases via eight templates aligned with relevant state requirements. The Housing Australia bond aggregator supplies discounted credit to social housing providers; our proposal extends this to participating landlords. Instant asset write-offs have operated across other areas of taxation, such as for small businesses.
The advantage of our proposal is that the Commonwealth can use its tax powers to regulate and shape the private rental sector. This overcomes the historical presumption that the Commonwealth has no direct power to regulate housing and must deal with the states.
Because the proposed national rental regulation system operates via the tax power, it is not subject to those constitutional limits. As far as we are aware the constitutional capacity of the Commonwealth to provide existing tax concessions for rental housing has not been contested. Thus the refinements we propose to these concessions are unlikely to be challenged.
While our report is a detailed investigation of how the rental housing tax concessions can be reformed we do not assume that it will be implemented in toto. But adoption by the Commonwealth of the principle that landlords receiving rental housing tax concessions must demonstrate a clear social return would be a policy step forward.
We hope this research will help inform public debate about fairness, tax and rental housing in Australia to consider options beyond the stuck binary of retention or abolition of negative gearing and capital gains tax discounts.
The report can be accessed via the RMIT Centre for Urban Research