The Tax Commissioner's recent warning in the Sydney Morning Herald (21/10/06) that there will be a crack down on landlords claiming rental property losses should be ringing alarm bells, the Real Estate Institute of Australia (REIA) said this week.
While it acknowledges that it is important the Tax Office cracks down on cheats, the REIA is predicting problems for both investors and renters if proposed changes in negative gearing cause investors to desert the property market.
REIA President, Tony Brasier said that the $4.1 billion in tax deductible losses related to rental properties does not take into account the net taxable profits reported by around 40 per cent of investment property owners.
"This is more than offset by in excess of $22 billion earned by all three levels of Government in related property revenue," Mr Brasier said.
Rental interest deductions are valued at about 60 per cent of gross rent reported by taxpayers. With a 0.25 per cent increase in interest rates during 2005-06, there was an average increase in interest payments by investment property owners of around $1.8 billion.
Added to this were increases in land tax of around $425 million. The REAI noted that there is a lag in rental increases in response to these increased costs, partly because State government legislation strictly controls provisions in leases for rent increases.
However, the impact will be felt, with rents already on the increase in most capital cities, said Mr Brasier.
"Nearly 1.5 million individual taxpayers have income from rental properties in Australia. Most investment property owners are not wealthy: 87 per cent have a taxable income less than $80,000."
"Negative gearing enables them to borrow money to undertake investment that would otherwise have been beyond their reach financially, and to provide for their retirement.
"At the same time they provide much needed rental accommodation to the 28 per cent of households that are private renters, renting in a market where vacancy rates are extremely low at between 1.6 and 2.4 per cent," he said.
The REIA warns that changes to negative gearing would hurt renters most.
"Investors would simply shift their investments to other asset classes, but renters would experience what those of 1985 - 1987 did, when the Government removed negative gearing: rents rose 37 per cent across Australia and by 57 per cent in Sydney."
