High personal income tax rates in Australia are pushing middle-to-high-income earners toward negative gearing, according to new research from the Australian National University’s Tax and Transfer Policy Institute. This finding challenges the narrative presented by the Greens, who claim that property investors exploit tax breaks to outbid younger buyers for homes.
The study, led by economist Christian Gillitzer, reveals that higher income tax rates incentivize taxpayers to become leveraged landlords. As the Treasurer Jim Chalmers recently redistributed tax breaks from the previous Coalition government, the appeal of negative gearing has only grown among higher-income brackets.
Gillitzer’s research suggests that reductions in marginal income tax rates significantly decrease the likelihood of taxpayers holding negatively geared investment properties. He analyzed data from 2006 to 2011, during which substantial tax cuts were implemented by the outgoing Howard Coalition government and incoming Rudd Labor government. Taxpayers in the highest income brackets saw their marginal tax rates drop from 45 percent to 37 percent, leading to a notable four percentage point decline in those reporting investment properties.
The implications of these findings are significant. Gillitzer notes, “Ownership of debt-financed rental properties in Australia is concentrated among top earners and significantly decreases when marginal income tax rates fall.” This observation highlights a critical aspect of the tax landscape, where taxpayers seek methods to mitigate their tax burdens.
To illustrate the impact of high taxes, consider a hypothetical employee earning $300,000 annually. This individual faces a tax liability of approximately $101,138 in personal income tax and additional charges for superannuation contributions and private health insurance. After accounting for taxes and mandatory expenses, their net income available for investments is around $190,000. With limited options to reduce their taxable income, negatively gearing an investment property becomes a viable strategy.
Australia’s unique tax system allows net rental losses to be fully deductible against labour income. This system incentivizes high-income earners to invest in property, as the higher their marginal tax rate, the more substantial the tax deductions they can claim. Gillitzer emphasizes that debt is often used to generate tax losses, effectively shifting income from the higher taxed labour income category to the more favorable capital gains tax regime.
As the political landscape evolves, the Greens are increasingly focused on the implications of negative gearing and the capital gains tax (CGT) discount. In 2024, Treasury reviewed these tax structures, identifying capital gains as one of the most significant tax concessions benefiting high-income earners. This scrutiny is likely to shape discussions leading up to the next election, particularly regarding housing affordability.
Contrary to the widespread belief that negative gearing and CGT discounts significantly inflate home prices, research indicates that their combined impact may be relatively small, ranging from 0.5 percent to 4.5 percent. This minimal effect is overshadowed by the substantial price increases observed over the years. Moreover, Treasury’s analysis suggests that limiting tax breaks for property investors may not enhance housing supply, a point reiterated by Prime Minister Anthony Albanese.
While reducing tax breaks for property investors could have slight effects on home prices, it may also lead to higher rents. This is due to the decreased after-tax returns for investors, which could discourage the development of new housing. The challenge lies in finding an effective approach to tax reform that addresses housing affordability without inadvertently constraining supply.
Former senior Treasury tax official Geoff Francis expressed concern that Gillitzer’s findings might be misconstrued as an argument for curbing negative gearing and reducing the CGT discount. He believes the research could equally support the case for flatter income tax rates.
Political figures such as former Labor Prime Minister Paul Keating have long criticized high marginal tax rates, labeling them as “confiscatory.” Recent changes implemented by Chalmers to the income tax system have reintroduced a 37 percent rate for individuals earning between $135,000 and $190,000, while lowering the threshold for the top 45 percent rate to $190,000.
As discussions around tax reform continue, experts advocate for a more straightforward approach that separates labour income from investment income. A model that taxes non-labour income, including property rental and capital gains, at a flat rate could create a more equitable system. This shift would not only enhance the neutrality of investment income taxation but also allow for reduced marginal rates on labour income.
In summary, the relationship between high income tax rates and negative gearing is complex and multifaceted. Understanding this dynamic is crucial for policymakers seeking to address housing affordability while ensuring a balanced and fair tax system.
