0INCOME TAX LAW AND PRACTICE
Income tax law and practice
Treatment of negative gearing and capital gains tax discounts as per the policy of The Leader of the Opposition, the Honorable Bill Shorten MP in Australia
This year, Australia will have a federal election, and there have been a huge debate regarding the current tax policy whereby the current leader of Opposition, the Honorable Bill Shorten MP states that the current tax policy regarding negatively gearing will have to be reformed (Mather, 2016) Bill released an election policy as pertains negative gearing as well as the treatment of capital gains tax discounts as they relate to the housing market. The key contents of the bill pertains capital gains tax discount and negative gearing whereby it states that existing investors with access to negative bearing would be ‘no worse off’ and that the measures that would be taken could save up to $32.1 billion over the next 10 years (ABC, 2016).
The key measures of the new tax reform are that negative gearing would be restricted only to newly constructed homes and that capital gains tax discount would be reduced to 25 percent from the current 50 percent (ABC 2016). All these two measures would be effected as from July 2017 as per Bill. However, in his policy, Bill states clearly that all existing projects and investments under the same scheme would not be affected and there will be measures aimed at protecting them against the changes to be made if he wins the next elections. Bill describes this as the most important structural budget reform that has been made over the last decade (Stapledon& Roberts, 2016).
As from July 2017, the policy says that people who buy already existing homes would no longer be in a position to access any tax write-off, which has been estimated to cost the Australian economy an amount of $ 4 billion in a year. Negative gearing will only be available to newly constructed homes. He states that the reason why this was left only to new homes is to ensure that most citizens are able to own homes and that the new government will be in a position to create 25,000 new construction jobs as many citizens will be encouraged to build new homes instead of buying already existing homes.
According to Bill, these reforms will come up at the best time whereby restricting negative gearing to newly constructed home would offer a form of powerful incentives that will lead to increased housing supply as well as ensuring that there is greater price stability and increased access for new entrants and lower rents for the people (Jones& Rogers2015).
Thus, he states that this negative gearing overhaul would add an amount of $4.5 billion to the county’s GDP. Bill’s intention is to ensure that he puts the great dream of Australia back with the reach of both the working and the middle-class Australians who have for long been priced out if the real estate market. In his speech, Bill states that the new tax reform will be targeting what he calls the entrenched tax subsidies (Jones& Rogers2015).
Explanation of negative gearing and the current treatment of capital gains tax discounts
Generally, gearing occurs when someone borrows money so as to make an investment. Gaming exists in the field of investment properties. Negative gearing occurs when the rental return or rather the money obtained from tenants, is less than the interest repayments and other expenses of maintaining the property and this places the owner at a risk of losing income.
According to the Australian law tax, the current negative gearing allows all investors in real estate who make such a loss to reduce the tax they pay on their income (Mather, 2016).This applies for all investors irrespective of whether one is constructing a new home or he or she is purchasing from someone. However, this is what Bill plans to change when he wins the federal elections whereby he will only allow this policy to work for only those constructing new homes. Is has been indicated that the current policy of negative gaming deprives that economy a lot of money in terms of tax loss. For the 2013-2014 financial year, Australia had more than 2 million landlords and out of this number, more than 60 percent made a loss from rental incomes (Jones& Rogers2015).On average, this comes to a loss of $10,000. If someone earned wages of, say $80,000, then the current policy of negative gearing would cut their taxable income to $70,000 meaning that the rest ($10,000) goes untaxed and this means a loss to the economy. In the same financial year, claimed tax deductions totaled to about $11 billion (ABC 2016).
Basically, negative gearing is just a strategy that offers immediate tax benefits to owners of real estate property and at the same time offer promising long term gains that occurs in the form of capital appreciation. According to the Australian Taxation Office (ATO), property investors are allowed to offset the income loss from rental property against other personal income(ATO 2016b).
There are various reasons why the Labor Party under Bill wants to alter the current policy as regards to negative gearing. At the moment, anyone who wants to buy a home for the first time or a young family trying to get a home to cater for the needs of their growing family are believed to get little support from the government someone buying a home for the second, third or even 10th time get a lot of tax benefits through the system negative gearing. Bill wanted to make this playing field fairer where by first buyers as well as other people trying enter the residential market will be given a fair go in the market (ABC 2016).The new government plans to keep negative gearing but as from 2017, the policy will change whereby negative gearing will be used to increase and grow the number of home owners in Australia. Experts assert that the best way in which Australia could increase housing affordability is through getting more new houses and apartments in the market. Thus, according to Bill, tax treatment of negative bearing will be geared toward supporting new home buyers or those building a house for purposes of renting. Thus, Bill encourages members of the public to support and work with the Labor Government once it resumes power and this will help increase the number of houses and apartments available in the market.
What is capital gains tax discount?
The policy of capital gains tax discount was introduced in Australia in 1999 by the Howard Government and the same policy has existed up to today. Generally, the policy sees half of the profits from the sale of an investment go untaxed. For example, if an investor makes a profit of $100,000 through the sale of a house, only $50,000 would be taxed with the remaining $50,000 going untaxed. When this concept was introduced, Australia has seen a lot of people investing in property so as to gain the advantage of tax discount. This policy for investor-owned properties was estimated to have cos the national budget by more than $6 billion in the last financial year (2014-2015) (ATO 2016b).
This concept applies to the real estate industry whereby investors get a tax discount of 50 percent. In addition to the issue of negative gearing, Bill also wants to reduce this rate to 25 percent and ensure that the government does not lose a lot of money form untaxed incomes. For the two planned reforms by Bill, Labor is committed to home ownership especially to the middle income owners and at the same time ensure that the country’s budget has been repaired (Jones& Rogers2015)..
Doesthe new policy have characteristics of a good tax system?
Some of the characteristics of a good tax system exhibited by the new policy include: productivity of the tax system, elasticity of the taxation policy, diversity, taxation for economic stability, taxation as an instrument that leads to economic growth, and finally taxation as an instrument that improves the distribution of income (Barkoczy 2006).
Principle of productivity or fiscal adequacy
According to this principle, a good tax system should be in a position to produce enough revenue for the government to be able to finance its projects and avoid being forced to look for other ways of financing for deficit. The new tax system of Negative gearing will work towards reducing tax exemption rates for real estate property for buying homes and ensuring that these benefits only accrue to the construction of new homes only(Barkoczy 2006).Through this, the Australian government will ensure that the money that was being lost to negatively geared projects adds to the country’s total revenues. Through this, the government will be able to fund various projects aimed at increasing the rates of revenue collection and also ensuring that there are no or minimal budget deficits. In addition to this, the new policy works towards reducing capital gains discounts from 50 percent to 25 percent. The extra money that was being lost to capital gains discounts will now be used to fund other projects and increase the county’s productivity. Thus, the new tax policy would bear the characteristics of a good tax system, based on the principle or cannon of productivity.
Elasticity of the new tax policy
According to this principle, a good tax should follow the concept that an increase in national income of a county comes as a result of economic growth. Increased national income should also correspond to an increased government revenue from taxes(Barkoczy 2006).In this case, the new tax policy by the labor party will follow the concept that the Australian real estate sector will experience a resurgence since the policy encourages the construction of new houses and apartments and discourages the buying and sale of already existing houses. Through this, the government will be in a good position to collect extra rental and other kinds of taxes from the new house and this will lead to an increased national income and hence an increased economic growth.
Another principle of a good tax system is the principle of diversity which states that there should not be a single or few taxes from which the government raises revenues from (Barkoczy 2006). This is because if the government relies on a single tax or few taxes, then the only option would be to raise the rates of taxation which will impact negatively on the economy especially in the long-term as it will encourage tax evasion (Jones& Rogers2015). The key measures of the new tax reform as stated by Bill are that negative gearing would be restricted only to newly constructed homes and that capital gains tax discount would be reduced to 25 percent from the current 50 percent. This would add into the diversity of the current system since more taxes will collected. Thus, in terms of diversity, the new proposed tax policy by Bill follows the concept of a good tax system.
Taxation as an instrument of economic growth
In any economy, taxation should be used as an instrument of economic growth, as this is the primary function of the government. The government, through the policy of taxation should always be focused on capital formation as well as on the growth of the economy. This is as result of the fact that taxation forms the main source of revenues for governments especially for the developing countries (Barkoczy 2006).
My Bill, the current leader of opposition in Australia plans to reform the system negative gearing and the capital gains tax discount with the intention of transforming the economy through capital formation (ATO, 2016b) Once the labor party wins the upcoming federal elections, Bill believes that the proposed tax regime will be executed whereby capital gains tax discount will be reduced to ensure that the government does not lose unnecessary money. The new government will work to restrict negative gearing only to new homes and at the same time reduce capital gains concessions from the current 50 percent to 25 percent and this is expected to save about $32 billion over the next decade (Jones& Rogers2015).The implication of this is that the money saved will be used to fund projects aimed at growing the Australian economy.
Taxation as an instrument of improving the distribution of income
A good tax system in any economy need to be focused on reducing economic inequalities among the people by ensuring that the tax system does not only work towards raising revenues for the government but also ensuring that the burden of taxations fall more on the rich members of the society (Barkoczy2006).Clearly, the new tax reform follows this principle whereby the main idea in the policy is to ensure that the middle income earners are able to construct their own homes through the concept of negative gearing. Through the current negative gearing system, the rich members of the society are able to own and buy homes and houses at the expense of the low income earners.
The tax system will work towards delivering incentives aimed at building new homes and apartments and this will mostly benefit the low income earners who have been suffering for long at the benefit of the rich people with the ability to purchase even more than 20 houses due to the current system of negative gearing. The new system will only be restricted to new homes (Stapledon& Roberts, 2016)
Taxations as an instrument of ensuring economic stability
Economic fluctuations have been a big problem especially to developed countries, and for reducing these fluctuations, a good tax system can be applied (Barkoczy 2006). In Australia, the current system of negative gearing has seen the government lose billions of money and this has led to cases of budget deficit. The new reformed system will ensure that enough a lot of money is saved which will in turn mean that cases of tax dud get deficits will be minimized. All these principles discussed are present in the proposed tax policy by Bill and thus the policy qualifies to have the characteristics of a good tax system.
ABC, (2016). Labor Leader Bill Shorten to announce capital gains tax, negative gearing election strategy. Retrieved on 12 Feb 2016 from http://www.abc.net.au/news/2016-02-13/bill-shorten-negative-gearing-capital-gains-tax-plans/7165462
ATO (2016b) Taxation statistics 2013-14, retrieved on 21 March 2016, from https://data.gov.au/dataset/taxation-statistics-2013-14
Barkoczy, S. (2006). Foundations of Taxation Law 2016. Oxford: Oxford University Press.
Jones, R & Rogers, D. (2015). Housing in 21st-Century Australia: People, Practices and Policies: Farnham: Ashgate Publishing, Ltd.
Mather, J. (2016) ‘Labor denies negative gearing policy will hurt small business’, The Australian Financial Review 7 March 2016, accessed 23 March 2016, from http://www.afr.com/news/politics/labor-denies-negativegearing-policy-will-hurt-small-business-20160307-gncjhh
Stapledon, N. & Roberts, A. (2016) ‘Taxation and Housing — The Great Debate ‘, Notes on Housing, University of NSW Business School (1).