The International Monetary Fund has signalled qualified support for Labor’s plan to curtail negative gearing, but warned that reducing tax breaks that encourage excessive borrowing should be part of a broader tax reform and be rolled out carefully.
In an interview at the conclusion of a review of Australia’s economy, IMF mission chief to Australia Thomas Helbling told The Australian Financial Review that tax incentives for leveraged real estate and shares, as well as tax concessions for other assets, should be reviewed.
Cautiously weighing into the politically-charged debate over Labor’s proposal to unwind negative gearing and capital gains tax concessions, Mr Helbling said the fund had long supported discouraging too much borrowing for assets including residential real estate.
“Australia would benefit from broader tax reform, including revisiting tax concessions that favour leveraged investment by households,” he said.
“Major changes affecting investment decisions and underlying demand for housing should be gradual.”
“Preferably, such reforms should not be looked at in isolation.”
The fund wants more revenue raised from the 10 per cent goods and services tax and the removal of tax concessions to help fund a cut in corporate tax to lift productivity and the economy.
The Coalition government has warned the Labor opposition’s proposal to end negative gearing for future investments, except newly built homes, would smash house prices.
If it wins next year’s election, Labor would also reduce the 50 per cent capital gains tax discount to 25 per cent.
Opposition Treasury spokesman Chris Bowen said the IMF had maintained its call for tax reform around housing supply and affordability.
“As Australia’s economic agencies and the government’s Financial Systems Inquiry have found, negative gearing and the capital gains tax discount, almost unique to Australia, contribute to the structural incentive for leveraged investment by households the IMF is talking about,” Mr Bowen said.
“Labor’s housing affordability reforms and priority is to boost housing supply and help first home buyers who aspire to enter the housing market over investors seeking their 6th or 7th property.”
Mr Helbling said negative gearing and the capital gains tax discount were only two aspects of housing taxation.
Replacing state stamp duties on property sales with a broad based land tax levied on the value of land should also be considered, he said, to encourage the efficient movement of people and better use of land.
“Every tax textbook would say taxing transactions is very inefficient and land is an ideal tax base that is under utilised in Australia,” Mr Helbling said.
‘Expanding the available toolkit’
The government has put its faith in the prudential regulator’s limits on investor loan growth and caps on interest-only loans, among other measures, to manage the previously-hot housing market.
The IMF endorsed these so-called macroprudential tools.
“Earlier prudential intervention by the Australian Prudential Regulation Authority has lowered the risks to financial stability from higher-risk household debt and other vulnerabilities, in particular reducing the share of investor and interest-only borrowing,” the IMF said.
“This has supported the strengthening of lending standards and the increase in bank resilience,” the IMF said.
The IMF said preparing further measures for potential future use in the medium term should be considered by the government and regulators.
Mr Helbling said the tool kit could be expanded to include lending limits based on debt-to-income and debt servicing costs, as enacted overseas.
“Given prospects of interest rates remaining low for some time, macroprudential policy should focus on expanding the available toolkit by addressing any data, legal and regulatory requirements and thus enhancing readiness to implement such measures if and when needed,” the IMF said in its concluding statement.
The IMF’s review welcomed the recent cooling of prices in Sydney and Melbourne, saying it would help improve housing affordability.
“Housing market downturns in many ways are part of cyclical fluctuations of economies – they may be more exaggerated – given delays in the supply response but we don’t think some of the factors that have concerned us in other downturns are present in Australia,” Mr Helbling said earlier at a press conference in Sydney.
“If the housing market downturn had been driven by an economic shock we would be more concerned – but it’s a strong economy.”
“It has been partly driven by a tightening of lending standards and partly of a natural adjustment in the market as supply comes on stream.”