Limiting negative gearing to newly constructed property and doubling capital gains tax remains a central plank of federal Labor’s policy platform, (who re-confirmed their commitment to the policy last week) their argument being that the current rules lead to inequality and unaffordability.

Any plan to mess with the current negative gearing provisions will impact our economy because it is so deeply entrenched (it’s been part of our tax system for more than 100 years) and therefore interlinked with our vast and complex tax system. Tinkering with one part of it inevitably impacts on others in a manner we can’t really accurately predict. That said, it’s clear some reform is somewhat inevitable sometime soon.

Claims that negative gearing is the main reason for pushing up house prices affecting affordability is untrue. It is the cost of construction and infrastructure and planning issues that is mostly responsible. Labor’s policy of allowing negative gearing for new dwellings is deeply flawed policy and will simply encourage more urban sprawl, deliver hastily constructed, crap housing products and, importantly, have first home buyers competing with investors for homes in these newer areas, pushing up the prices. The idea, therefore, that Labor’s plan helps affordability in newly built suburbs where all future investors will buy defies all logic.

Labor’s plan acts as is a disincentive to supply rental accommodation in the established parts of our cities. Existing housing stock would be ignored as an investment option putting pressure on the supply of rental stock in established areas where most people want to live. As a result rents would inevitable rise. Labor’s plan grandfathers the rules so investors holding existing rental properties are discouraged to sell putting pressure on supply in these areas, forcing families to the outer-reaches away from the developed parts of our cities. Because the plan actively discourages investment in existing housing stock, it will be left to state governments to deliver more affordable housing.

About 80 percent of investment properties are owned by mum and dad types who only have one investment property. Labor’s proposal is not a tax on the wealthy and assumes all property investors are seeking to avoid paying tax. Also, investors are often attracted to properties that either break even or are positively geared where they pay tax on the income; something ignored so far in this debate.

The government’s “do nothing” plan is pretty lazy with opportunity to tweak the current rules sufficiently that meets the rigors of the “pub-test” without blowing a hole through property investment in Australia. Perhaps consider a cap on the amount of losses that can be claimed against income, maybe limit losses claimed to the first three properties owned by an investor or exempt regional areas from changes to help grow those communities. Either way, a more measured and moderate approach to the issue is needed here.

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