The Australian government has “an appetite to be bold and ambitious” in its economic reform agenda. And tax reform is on the menu at its much-publicised reform roundtable, to be held next week.

Here, we serve some food for thought – the taxation of owner-occupied housing. This may seem distasteful, but there are some strong arguments for doing so.

Tax breaks for owner-occupied housing are very large​

The size of tax concessions for owner-occupied housing is similar to that of superannuation, and much larger than for investment property. Treasury estimates it forgoes more than A$50 billion per year by exempting owner-occupied housing from capital gains tax (CGT).

There is also no tax on the rental value of owner-occupied housing, although we did tax such “imputed rental income” (what a homeowner would pay in rent) briefly between 1915 and 1923.

Owner-occupied housing exacerbates inequality​

Australia prides itself on being a fair society. In reality, we are near the middle among developed countries on standard measures of income inequality. But such statistics ignore the income that owner-occupiers derive from their homes.

In a new paper, we see what happens to income inequality if owner-occupied housing income is included. This non-cash housing income refers to the imputed rent and unrealised capital gains on the property.

When these are included in the income measure, inequality is higher, and it increases more strongly over time. The effect is large enough to shift Australia’s inequality from 16th to tenth highest amongst OECD countries (though we haven’t conducted the same exercise for other countries).

Unsurprisingly, outright home owners are much better off than renters when income from the home is counted. They have an average income 86% higher than the average income of renters – compared with 34% higher if housing income is ignored, as it usually is.

Australia’s progressive tax system is largely a mirage​

Income taxes reduce inequality because the tax rate is higher for people with higher incomes. That is what is meant by a “progressive” tax system.

Our paper finds that this changes greatly when income from owner-occupied housing is included. The income tax system reduces inequality by a lot less (about 40.5% less) if we include such housing income. Because this income is tax-free, the average tax rate for the rich is much lower than it seems. So the tax system is less progressive than it appears to be.

The same is true for government pensions and benefits. They also reduce inequality, since they are targeted to people with limited means.

But housing wealth is excluded from the pension assets test, so pensions are not as as targeted as they appear to be. Repeating the exercise above, we find the effect of pensions and benefits on inequality is 18.9% smaller when housing income is included.

Overall, the combined impact of income taxes and pensions/benefits on inequality is 26.7% lower when we include income from the family home.

Favourable tax treatment is built into house prices​

These tax concessions may also increase house prices and encourage inefficient allocation of resources. Income from investing in owner-occupied housing is tax-free, while all other investments attract tax. So Australians plough their money into their home instead of other, more economically productive, investments. These funds could instead be invested into private firms (directly or through the stock market), stimulating entrepreneurial activity and lifting productivity, wages and profits.

While stamp duty is typically payable on home purchases, the value of the income tax exemption is much larger. That lifts demand for housing, and hence housing prices. We know of no recent studies that have estimated the size of this effect, but it is likely to be large and therefore make the move into home ownership more difficult.

The absence of recent studies may be because taxing owner-occupied housing is not seen as a politically viable option. Much more attention has been placed on the much smaller tax concessions for investment property income.

Home owners have an average income 86% higher than the average income of renters, new research shows. Artem Podrez/Pexels, CC BY

Most people would be better off

The Australian community as a whole would benefit from a reduced incentive to invest in housing because it would lead to increased investment in productive activities.

In terms of who would benefit most, renters stand out as obvious beneficiaries, since the tax burden would shift towards homeowners. But a progressive tax on housing could also benefit owners of modest homes, as part of a broader redesign of the tax system.

There is a temptation to equate a new tax with more total tax. This depends on the design. But it is certainly possible to implement a progressive tax on housing wealth, perhaps combined with an income tax cut, which could leave most people better off.

How would this look in practice?​

There are many policy options for more fairly incorporating owner-occupied housing in the tax system. We do not make a specific proposal here, but options include:

• a broad-based land tax would go a long way to addressing the issue, and should be on the government’s agenda. This is an economically efficient tax that is advocated by many economists
• an explicit tax on owner-occupied housing wealth is also justifiable, since it is the only large asset that generates income that is not taxed
• a broader wealth tax could also be considered.

We also believe there is a strong case for reconsidering the exemption of housing from the pension assets test. Many wealthy retirees benefit from public pensions, which are funded by taxes on the incomes of younger workers and renters.

Too important to be squeamish​

We should have a national conversation on whether the current tax treatment of owner-occupied housing is sensible. Moving away from complete exemption would open up opportunities for reduced reliance on income taxes and more food on the table for renters, and owners of modest homes.

Will the reform roundtable etiquette permit consideration of reforming the taxation of owner-occupied housing? This is an important and much neglected consideration in assessing the overall fairness and efficiency of the tax system.

This article is republished from The Conversation under a Creative Commons license. Read the original article.

 

[Vinylted]

In this article, they are actually discussing taxing “imputed rental income” (what a homeowner would pay in rent), which means that there would be tax on every home based on what rental income the home would generate if it was rented out. Nowhere does the article state that only rented rooms/houses would be taxed. It's stating that all homeowners would be taxed as if the house is being rented out. I believe that anything like this would decrease home ownership. It also states that putting money into our own homes is wasting money, which should be spent on enterprise instead. I'd rather improve my home.

In other words the same way your house is valued by councils.. net annual value (ie if rented) and Capital improved value! Improve your house, the council ups your rates, now Albo wants a piece of that pie!

 

[Vinylted]

​

Do You Need To Pay Tax On The Family Home?​

In an environment of booming house prices, many people are tempted to capitalise on the value of what is almost certainly their most valuable asset in any number of creative ways.
As a general rule, your family home isn't subject to Capital gains tax (CGT) wgen you sell it. Unfortunately, in many cases, there can be tax consequences, both in terms of immediate income tax liabilities and – down the track - capital gains tax arising on the ultimate disposal of the property.

Renting out space in your home​

If you are renting out a room, the rental income will usually be taxable. You should be able to claim a  tax deduction for costs such as insurance and depreciation of new furniture and fittings in the rooms available for rental as well as making a claim for part of your utilities, rates and water bills.
The family home is generally exempt from CGT but if you rent out a room, part of any profit on the sale of the property may be liable to CGT, payable on a pro-rata basis for the percentage of floor space rented out.
A good tip is to get the property valued before you start to rent out the room since CGT will only be due for the period the room is used to produce income.

Renting out a room for student accommodation​

By comparison, letting a room for student accommodation can be non-taxable, provided you are only covering your costs rather than making a profit. These arrangements are usually made through an educational institution for foreign students with the amount paid set by the institution to cover food, laundry and other costs.
The ATO describes these arrangements as ''non-economic rentals'' but hosts are advised to get some sort of agreement in writing (a private ruling for instance) from the ATO to give certainty to their position, since issues can arise where the ATO regards the level of board as excessive.

AirBnb hosts​

With the growth of websites like Airbnb, increasing numbers of people are turning part of their home over to B&B. If you're letting a room out for B&B, your tax treatment will depend on factors including what you charge, what services you provide, where you advertise and the regularity of income. If the B&B is designed to make a profit, then income tax will be payable. Again, CGT on the sale of the property will be an issue because the main residence exemption won't apply to the part which is rented but if you are running a commercial venture you may be able to claim small-business CGT concessions.
Commerciality is assessed on such things as regularity of bookings, the number of rooms available and length of time they are let, but this is a complex area and getting professional advice

Rent out a room for BNB? of course you are looking to make a profit.. if so declare it and pay tax.

 

[Vinylted]

Obviously thought up and written by a paid up member of the Communist Party.
If you charge rent for someone staying in your home it is declared income and so is already taxed!!!

Ahhh but only if it is declared!

 

[RobbyNotTheRobot]

Obviously thought up and written by a paid up member of the Communist Party.
If you charge rent for someone staying in your home it is declared income and so is already taxed!!!

Albo is a communist and so is anyone who sucks up to the Chinese and selling us out to them (We wont touch what Dan Andrews did dealing the Chinese) and turning their back on The USA. The USA sacrificed lots to defend Australia and indeed all the Pacific during WW2 and is a dept we need to pay back just by being Allies with the USA.

 

[Vinylted]

The USA bought into the Pacific war ONLY because the Japanese stupidly attacked Pearl Harbour. Had they not done so we would possibly be there southern state! Check your history mate, come to our aid just because we are mates.. no way.. unless the US are directly threatened forget any help.

 

[Miss Chris]

This article is certainly inflammatory and there is a range of opinions on it…….it certainly smacks of a degree of communism if taken with the cashless society question….the amount of money going out of Australia is ridiculous when paired with the amount of money marked for the homeless, the poverty stricken, the housing shortage and the pensioners who have to live from pay day to pay day and see the basic wage much more than the recent pension increase….I think that if the topic in the article eventuates it will not be in our lifetime so there’s no need for a bit of a panic……it is however, something that future generations might have to deal with, that is if they can afford to buy a home, or if they take in a paying guest…..…and I wish them very good luck for their future retirement plans…..

 

[Cheezil]

They are not looking at charging tax on the average family home !! They are looking at charging tax if you live in your home but charge someone rent for a room or renting part of your home. At the moment its tax free
I think that is fair as it does form part of your income. If you didn't live in your home and rented it out you would pay tax including Capital Gains.

It's the same as if you rent out your whole house. If you then haven't lived in it for 2 years after renting it out, then you pay capital gains tax.

If you own your home and don't charge rent to another person, then you won't pay tax.

Charging tax on your home that you don't rent out will never happen.

This article is a little confusing and should state from the beginning, "If you own your home and rent any part of it out, then the Government wants to bring in tax !!!!

Agree, but with a housing shortage already, would have to think this move will deter people from renting out their home/room in their home & thus potentially leaving even more people homeless! Ludicrous!

 

[ARL]

This article is very badly written. Too many unexplained terms, what is income from owner occupied housing? What is meant by including housing value in the pension test if you have nowhere else to live? Unrealised capital gains, how can you pay them if you have not sold the asset? For retirees where do they live If the home is taxed? Not clear what the proposals are or what is trying to be achieved.
Looks like another self appointed expert who does not understand the issues, which is becoming too common in sdc articles.

 

[Vinylted]

Another point not really mentioned, a normal family home, as the children grow up and get jobs in my day they were expected to pay board. I know it happens very little now days AND kids are living at home much longer, are they then regarded as tenants and their parents expected to pay tax on what they are contributing?

 

[Georgyna]

Can anyone explain the 'income' my home supposedly generates? I only see it generating repair bills.

I don’t own a home but if the govt can tax your home perhaps any maintenance costs & improvements might give you a tax deduction or tax break you need who know it might put way any tax just sayin