Fundamental tax reform and its impacts on alternative providers of rental housing
Summary
In favourable economic conditions the impact of the new tax system upon boarding house rents and caravan site fees is estimated to be an increase of 5% to 6%. Those cities with higher capital gains on property values may be able to hold rent and site fee increases lower. As tenants living in boarding houses and caravan parks are on very low incomes, proprietors could find it difficult to pass on any cost increases, making it more economic for them to exit the business.
Project Number: 80023
Research Theme: Private_Rental, Economic
Project Leader: Wood, Gavin
Funding Year: 2000
Research Centre: Western Australia
Description
This project measured the impact of fundamental tax reform on rental housing costs and rents. One or more of the following measures will affect each of the different suppliers of rental housing; Recapture of the special building write-off under capital gains tax (introduced May 1997). Removal of indexation and averaging provisions from capital gains tax (CGT) rules, and taxation of one half of nominal capital gains (introduced by the Review of Business Taxation, September 1999). Introduction of GST on inputs used to build, maintain, manage and improve rental dwellings. Cuts to personal marginal income tax rates and changes to corporate tax provisions. The modelling exercises that have been conducted concentrate on the third of these four measures.
While housing rents will be GST-free, inputs used to build, maintain, manage and improve a dwelling will be taxed at the 10 per cent rate. Since GST is not payable on rents, no input tax credits will be allowable to landlords providing rental accommodation. Existing estimates of likely rent increases, have then been based on the presumption that some fraction of the increase in input costs will be passed on to housing rents. The government's own estimates, based on Commonwealth Treasury projections, are that housing rents will increase by 2.3 per cent if landlords pass on all cost increases attributable to input taxes.
All other estimates of likely increases in rents are higher than the government figure. The Housing Industry Association estimate that the long term effect of the tax reform package will be a 3 per cent increase in rents. The NSW Federation of Housing Associations and Econtech estimate rent increases of 11 per cent and 3-4 per cent respectively. This wide range of estimates indicates considerable uncertainty about likely impacts. Indeed the Senate Committee investigating the impacts of the GST, concluded that there had been a lack of modelling and research on the tax plan's effects on housing rents (Parliament of Australia, 1999 para. 4.8).
This research project fills this gap in what is a crucially important aspect of the tax plan, given the importance of housing expenses in household budgets. The principal investigator has already measured the impact of the special building write-off and the Review of Business Taxation measures on private landlord supply of rental housing. He is currently extending this research to incorporate the impact of the GST and personal income tax cuts on private landlord supplied rental housing. The project seeks to extend this tax incidence exercise to other providers of rental housing ranging from state housing authorities to public companies. Some of these suppliers will be relatively untouched by fundamental tax reform (eg state housing authorities), while others will be affected by all four aspects of fundamental tax reform (eg public companies). As National Shelter argued to the Senate Committee (Parliament of Australia, op. cit. para 4.6), the rental housing market is not homogeneous, and different segments of the market could respond in a divergent manner. Since suppliers will be differentially affected, National Shelter's argument is valid. It does not make sense to talk in terms of a typical rent increase.
More Information
Positioning Paper: No. 009: Fundamental tax reform and its impacts on alternative providers of rental housing
416 KB PDF Document
Final Report: No. 003: Fundamental tax reform and its impacts on alternative providers of rental housing
315 KB PDF Document
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