Negative gearing: Labor preparing ground for changes as think tank proposal estimates $29.3b saving

James Massola tabling The McKell Institute’s Switching Gears report for The Sydney Morning Herald.
Labor is considering a proposal to limit home buyers’ use of negative gearing to new properties only, in a move designed to drive the creation of new housing and deliver a $29.3 billion benefit to the budget bottom line over a decade.
The proposal is contained in a policy paper by the Labor-aligned McKell Institute and is being released on Thursday as the ALP signals a willingness to reform negative gearing if it wins the next election and as the government is under pressure over property prices.
Prime Minister Tony Abbott was forced to defend Joe Hockey on Wednesday after the Treasurer said first home-buyers struggling to enter the heated Sydney market should “get a good job that pays good money“. At the same time, Reserve Bank governor Glenn Stevens said he was “very concerned” about the “crazy” Sydney market.
Under a Remuneration Tribunal ruling, politicians are allowed to claim up to $271 per overnight Canberra stay tax-free, even if they stay in their own homes.
The Switching Gears paper states that limiting negative gearing to new houses would “provide tax incentives for new housing. It is widely recognised that, particularly in certain markets such as Sydney, supply constraints are an important driver of the high housing prices”.
“Given the overall magnitude of negative gearing – in 2010-11 there were 1.2 million individuals with negatively geared properties – a shift in tax incentives towards new construction has the potential to have a material impact on housing supply”.
Report author Professor Richard Holden also examines the costs and benefits of keeping the existing system in place, ending negative gearing but grandfathering existing properties, allowing new participants to negatively gear up to $1 million of property and abolishing the system entirely.
But it is the proposal to allow negative gearing only for new housing construction, while grandfathering existing arrangements, that has excited interest within Labor.
Fairfax Media has spoken to several members of the shadow cabinet who confirmed the McKell proposal is on the party’s agenda, though they cautioned that a final decision on whether to adopt the policy could be some months away and was dependent on the timing of the next election.
“We need to find structural reforms to bring the budget into structural surplus and this is a big-ticket reform that is both fair and responsible. Chris [Bowen] is determined to be both innovative and brave,” one shadow cabinet member said, and “we are all on the same page”.
Another shadow cabinet member said there was considerable sympathy for the proposal and that the party was effectively “testing the idea” with voters at present.
The party would not fall into the trap that the Coalition fell into before the last election of ruling out too many economic reforms, that MP added.
Publicly, Labor’s economic team of Chris Bowen, Tony Burke and Andrew Leigh have signalled that changes to negative gearing are being considered. They have not ruled out changes to the system as the party readies its policy on housing affordability.
Mr Burke said on Wednesday that Labor was “the first opposition in a couple of decades to say we’re willing to include it [negative gearing] in the conversation, we’re willing to include it in the discussion and work our way through on it”.
“What we have ruled out is anything that would be retrospective … and anything that would have an impact on the provision of new housing supply.”
Opposition Leader Bill Shorten, however, cautioned on Monday that negative gearing changes were not the immediate focus of the party.
Sydney-based Labor MPs, in particular, are determined for Labor to take action on housing affordability and put a major package on the table ahead of the next election. Melbourne-based MPs are also supportive of reform to the system.
The McKell proposal is seen by many Labor MPs as a sensible compromise between the Coalition’s position of not touching negative gearing and the Greens push to abolish the tax break.
That Greens proposal would raise an estimated $42 billion over 10 years.
Labor has already announced two tax measures this year, on superannuation and multi-national tax avoidance, that would raise a combined $21 billion over a decade.