A new release by the Parliamentary Budget Office has shed further light on which taxpayers benefit most from negative gearing on residential property. Harry Chemay crunches the numbers.
The report runs counter to the popular media narrative that it is ‘mum and dad’ investors who would stand to lose most from any winding back of these tax concessions.
With a reputation for being fiercely independent and non-partisan, the PBO is a department of the Parliament, established in 2012, that provides policy costing analysis to politicians upon request and self-initiates work exploring budgetary information and fiscal analysis.
Following a request by Australian Greens leader Adam Bandt in late September, the PBO has just released its findings into his request for “budget analysis on the revenue forgone in relation to the cost of negative gearing and the capital gains tax discount applied to residential properties.”
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The request made by Bandt called for the data to be presented in percentage form, showing the proportion of tax revenue forgone that is associated with each taxable income decile, i.e. for ten bands of taxpayers, each representing one-tenth of taxpayers by increasing taxable income.
The PBO created two tables: one for the estimated annual value of tax revenue forgone due to the capital gains tax (CGT) discount and another for the estimated annual value of tax revenue forgone due to negative gearing deductions (i.e. from investors claiming deductions for expenses associated with holding one or more residential investment properties).
Each table provided a forecast for this financial year (2024-25) and for each subsequent year up to and including 2034-35.
I have taken the PBO data for 2024-25 and 2034-35 and plotted it on the chart below to provide a sense of which taxpayers receive the lion’s share of tax concessions from negative gearing.
Source: Parliamentary Budget Office, Harry Chemay.
The chart shows each taxpayer decile, rising from the lowest 10 per cent of taxable incomes (the 1st decile on the bottom) to the top 10 per cent of taxable incomes at the very top (10th decile).
For each of the two financial years in question (2024-25 and 2034-35), the chart breaks down the benefits received between CGT discount and negative gearing deductions. The table at the bottom of the chart shows the numerical value of the benefit for each taxpaying band.
Looking first at the ‘average’ taxpayer, the 5th decile shows the middle or median result.
The PBO analysis suggests that in this financial year, just 1 per cent of estimated tax revenue forgone due to the CGT discount and 5 per cent due to negative gearing deductions will be captured by middle-income taxpayers.
This is forecast to increase only slightly over the next decade for CGT, to 2%, but to remain constant for negative gearing deductions.
By contrast, the PBO forecasts that in this financial year, 80 per cent of estimated tax revenue forgone due to the CGT discount will be captured by those in the top 10 per cent of taxpayers, with these individuals also responsible for 43 per cent of the revenue forgone due to negative gearing deductions.
The PBO forecasts that by 2034-35, the nation’s top 10 per cent of taxpayers will account for 73 per cent and 38 per cent of tax revenues forgone for residential property CGT and negative gearing deductions, respectively.
No surprises
None of this PBO analysis should be a surprise to anyone who follows the data.
In creating its forecasts, the PBO used inputs from both the ATO and from Treasury, the latter’s latest ‘Tax Expenditures and Insights Statement’ noting that rental deductions are most commonly claimed by those with higher taxable incomes, with individuals in the top 30 per cent of taxable income accruing 65 per cent of the total benefit.
Residential property investing, and the 50 per cent CGT discount plus negative gearing deductions that power it, is a strategy most often deployed by those higher up the income scales.
It is, to be fair, a perfectly legal way for high-income Australian taxpayers to reduce the amount of taxable income (what is earned less deductions claimed) they face, falling squarely in the tax avoidance bucket (which is legally permissible) and not the tax evasion one (which is not).
And so we should not be surprised that some of the most enthusiastic adherents of residential property investing are among the highest income earners, as a recent piece from the Australian Financial Review uncovered.
The AFR’s article noted that “while supporters of negative gearing have tended to paint the policy as a middle-class tax break,
the Tax Office figures show that high-income earners are disproportionately more likely to claim the tax concession.
The piece went on to note the top 5 occupations that are negatively geared as being surgeons, anaesthetists, internal medicine specialists, psychiatrists and school principals, with average total incomes ranging from $480,298 for surgeons to $147,180 for principals.
While one could conceivably label school principals as notionally part of ‘mum and dad’ middle-income Australia, their average incomes are in reality significantly higher than what ‘middle income’ genuinely means today.
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Economists have their say
That changes to negative gearing are being openly discussed, having been repudiated by the electorate at the 2016 and 2019 elections, is a measure of how dysfunctional Australia’s residential property market has become.
The ‘housing hunger games’ are creating pressure right across our society, from younger Australians locked out of home ownership and stuck potentially as ‘forever renters’ to older Australians still carrying large mortgages as retirement approaches.
Which is why some of the nation’s top economists are now saying that doing nothing about housing reform is no longer an option.
In a recent poll conducted by The Economic Society of Australia, of the 49 economists participating, none opted to ‘do nothing, the market will determine appropriate prices’.
Instead, given a choice of 14 measures to alleviate the housing crisis, the top 3 measures supported were:
- Easing planning restrictions (65 per cent support);
- Providing more public housing (61 per cent support); and
- Tightening negative gearing and CGT concessions (37 per cent support)
While the first two are logical and needed, supply-side measures, adjusting negative gearing and CGT concessions on residential investment property would seem to be an equitable demand-side measure.
Just ask the Parliamentary Budget Office.
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Harry Chemay has more than two decades of experience across both wealth management and institutional asset consulting. An active participant within the wealth and superannuation space, Harry is a regular contributor to investment websites in Australia and overseas, writing on investing and financial planning.