Last week the Treasurer released the much anticipated Tax Discussion Paper signalling the start of public debate on taxation reform in Australia. The Discussion Paper was designed to review ways of developing a better tax system that delivers taxes which are lower, simpler and fairer. Responses to the Discussion Paper are sought by the beginning of June. Following this the Government will release a tax options Green Paper in the second half of 2015. The Government will then seek further feedback on the options before putting forward its policy proposals in a White Paper in the lead up to the 2016 Federal election.

REIA will formally respond to the Discussion Paper and is set soon to launch its report into negative gearing and capital gains tax, which is in particular on the issues of negative gearing and capital gains tax utilising the report being prepared by ACIL Allen Consulting. Investment in Property and Negative Gearing The Discussion Paper highlights the following regarding negative gearing.

•The tax treatment of investment properties is the same as it is for investment in any asset that produces a mix of current income and capital gain. That is, the rental income is taxed at the individual’s marginal tax rate as it is earned, while generally only half of the capital gain is taxed, and only when the property is sold 

• Negative gearing does not, in itself, cause a tax distortion, but it does allow more people to enter the market than those who might have had the equity alone to do so. This behaviour is encouraged by the CGT discount

• Contrary to popular perception, negative gearing is not a specific tax concession for taxpayers with investment properties – it is simply the operation of Australia’s tax system allowing deductions for expenses incurred in producing assessable income (Chapter 3 – Individuals)

• The majority of tax payers with negatively geared properties fall into the middle income bands but the proportion of tax payers with negatively geared properties increases as taxable income increases 

• Any tax advantage for individuals investing in property does not come from borrowing gearing but of the taxation of the capital gain

• It would not be appropriate to tax either the imputed rent on owner-occupied housing or capital gains derived from it.

The Goods and Services Tax (GST) The Paper notes at the beginning of its discussion on GST that unanimous agreement by all state and territory governments is required to legislate any changes, as well as both Houses of the Australian Parliament. Consequently the Paper then states that the Australian Government will not support changes to the GST without a broad political consensus for change, including agreement by all state and territory governments. In what seems to be making a case for an increase in the rate of the GST, and an accompanying cut in income and company tax rates, the Paper notes that Australia’s GST rate is one of the lowest among developed countries and is roughly half of the average rate among OECD countries. Stamp Duties and Land Tax The Paper notes that not only are stamp duties some of the most inefficient taxes levied in Australia their consequences impede economic growth. In regard to land tax the Paper does not appear to be advocating for their introduction but notes that 

• Australia’s reliance on taxes on land, as a percentage of total taxation is higher than the OECD average, but around half the proportion raised in the US, UK and Canada

• Land tax is currently applied in all Australian states and territories other than the NT

• The range of exemptions applied, primarily to owner occupied housing and agricultural land, and progressive rates applied introduces a bias against large investments in residential property and discourages institutional investors from investing in private rental housing

• An “ideally designed land tax” would result in a once-off reduction in the value of the land and land owners would bear the full cost of the tax and would not pass any onto renters

• The introduction of a 20-year program by the ACT Government to abolish stamp duty by steadily increasing rates and reducing stamp duty involved significant transitional costs. If stamp duties are abolished the forgone revenue will need to be replaced by a higher GST, as advocated by REIA, or by a land tax which was advocated by the Henry Review.