It’s not negative gearing that should be getting the chop but the capital gains tax (CGT) discount, experts and property industry groups claim.

As the government shifts its focus to the tax treatment of rental properties, industry groups have jumped to the defence of negative gearing, describing it as ‘dangerous territory’.

‘I think it is a real concern they [the government] are contemplating changing negative gearing, given property is one of the few areas of the economy that’s functioning,’ Property Council of Australia’s chief of policy and housing Glenn Byres said.

‘We are just getting to the level where supply is catching up to demand for property, and this tinkering could radically change the driver of supply.’

AMP Capital chief economist says a more sensible solution would be to revise the ‘generous’ capital gains tax discounts offered to investors.

Removing negative gearing would ‘create a disconnect between property and other asset classes,’ Dr Oliver said.

‘It’s just a fancy term to be able to deduct expenses from your income,’ he said.

But removing the relatively recent introduction of attractive capital gains tax discounts after 12 months of owning an investment property was more palatable, he said.

The 1999 change allowing investors to slash their capital gains tax bill in half is ‘overly generous’ and ‘doesn’t make sense,’ he said.

He recommended a system where the rate of inflation was subtracted from the capital gains tax.

‘There will always be more of an uproar over negative gearing changes than changes to the capital gains tax discount,’ Dr Oliver said.

Even the Property Council wasn’t ruling out changes to the CGT discount and are ‘prepared to have a conversation around the edges,’ Mr Byres said.

Negative gearing and the capital gains tax discount cost the government around $6.8 billion each year, according to the Grattan Institute.

On Monday treasurer Scott Morrison strongly defended negative gearing describing it as ‘a real opportunity for middle income earning Australians’.

Real Estate Institute of Australia’s (REIA) president Neville Sanders said the calls for ending negative gearing have been a ‘recurrent theme’ over the past few years.

‘We have taken the view negative gearing should remain as it is rather than tinkering with one part of the system,’ Mr Sanders said.

‘Property shouldn’t be singled out,’ he said.

Curtin University associate professor Steven Rowley disagrees, arguing that negative gearing should be ‘high on the agenda for any discussion of tax reform’ in addition to the capital gains tax discount.

‘I am more concerned with the argument that ‘average Australians’ cannot enter the property ownership market because it is too expensive and one of the reasons for this are current tax concessions which encourage investment activity in property,’ he said.

‘Certainly the favourable tax treatment offered on investment property does distort the market and has a negative impact on the ownership side of housing affordability,’ Dr Rowley said.

‘The total removal of negative gearing would have an impact on the housing market but probably not as great an impact as many think as most investors seek the majority of their returns through capital growth rather than through income flows,’ he said.

Reforming negative gearing to encourage new housing supply by making it available only on new build properties could be an option, he said.

Submissions to the Tax White Paper saw property lobby groups and industry organisations oppose changes to negative gearing, including the HIA, UDIA, Australian Bankers Association, Property Council of Australia and National Tax and Accountants Association.

Posted by Jennifer Duke – Domain (Fairfax) on 10th February, 2016