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The FSI final report stated that negative gearing and capital gains tax “distort the allocation of funding and risk in the economy”.
“The tax treatment of investor housing, in particular, tends to encourage leveraged and speculative investment,” the report said.
“Since the Wallis Inquiry [in 1997], higher housing debt has been accompanied by lenders having a greater exposure to mortgages. Housing is a potential source of systemic risk for the financial system and the economy.”
The report claimed capital gains tax concessions for assets held longer than a year provide incentives to invest in assets for which anticipated capital gains are a larger component of returns.
Reducing those concessions would produce a “more efficient allocation of funding in the economy”, according to the report, which also stated that negative gearing disproportionately benefits higher-income Australians.
“Investors can deduct expenses against total income at the individual's full marginal tax rate,” it said.
“However, for assets held longer than a year, nominal capital gains, when realised, are effectively taxed at half the marginal rate.
“All else being equal, the increase in the after-tax return is larger for individuals on higher marginal tax rates.”
AMP Capital chief economist Shane Oliver recently claimed that negative gearing is one of three “scapegoats” being used to explain rising house prices, alongside foreign investment and SMSF buying.
“Negative gearing is more contentious, but it’s likely that curtailing access to it when stamp duty remains very high will have a negative impact on the supply of property to the extent that it will have the effect of reducing the after-tax return to property investment,” he said.
“Restricting negative gearing for property would also distort the investment market as it would still be available for other investments.”