The Taxation of Australian Landlords: Would the British Tax Treatment of Rental Investments Increase Tax Burdens if Introduced in Australia?

Abstract

The tax treatment of housing can have important implications for the relative attractiveness of investment in housing. The tax regime for private landlords in Britain appears to be less favourable than in many other advanced welfare states, including Australia, where negative gearing is commonly cited as a tax preference encouraging investment in rental housing. If private landlords in Britain are tax disadvantaged compared with their Australian counterparts, tax burdens and rents will increase if British central government tax arrangements replace current provisions. This proposition is tested using micro data from a survey of private landlords in Australia to model the impact of the two tax regimes on their user cost of capital. It is found that, at the inflation rates prevailing in the early 1990s, tax burdens are marginally lower under Australian as compared with British tax arrangements. However, at lower rates of inflation, this conclusion is reversed; this is particularly the case for landlords with relatively short holding periods who invest in low-income rental housing.

The Other Side of Housing Affordability: The User Cost of Housing in Australia*

“…Wood and Kemp’s (2003) study simulated the effect of adopting British tax laws in Australia and suggested that the effect of the less generous British rules on negative gearing in Australia would be limited. Being a simulation study, Wood and Kemp (2003) cannot – and did not intend to – provide an estimate of the effect that the negative gearing rules have in fact had. Accordingly, we re‐estimate the user cost for investors, assuming that losses were not deductible at all; this is a particularly harsh tax treatment because it eliminates even the carrying forward of losses.…”

“…There have been several Australian studies. Wood and Kemp (2003) estimate the impact on the user cost if Australia switched to the British tax system. In general, the British system provides investors with a more generous treatment of capital gains and a less generous treatment of negative gearing.…”

“…20 20 We refer to it as a ‘partial’ test because we take the property prices as given; that is, we do not model the possible effect of tax changes on property values. In this respect, Wood and Kemp (2003) take the same approach. …”

When and Why Do Landlords Retain Property Investments?

“…This is the latest in a series of studies that examine the importance of after-tax economic costs (user cost) and taxation arrangements to rents and the housing decisions of Australian landlords (Wood and Watson, 2001;Wood and Kemp, 2003;Wood and Tu, 2004). These studies use different methods and alternative datasets, and have been conducted at different times in economic cycles.…”

“…Yet the authors argue that these supply responses were largely due to factors other than negative gearing, with the latter a marginal influence on private rental supply. Wood and Kemp (2003) offer evidence suggesting that Australian taxation arrangements are not as preferential as might be thought when focusing only on negative gearing provisions. Respondents to the in-depth interviews conducted by Seelig et al (2009) seemed evenly divided on whether they would have invested in the absence of negative gearing.…”