The Henry Tax Review and Property

Property issues remain virtually untouched in the Henry Tax Review, released on 2 May; no change to negative gearing or capital gains tax (although Henry did recommend a national land tax including the family home, which the Government dismissed).

The Report recommends that COAG meetings review development zoning procedures that inhibit affordable housing. The issue arose out of the National Rental Affordability Scheme (NRAS), where out-dated zoning densities often restrict development to low density in otherwise high density areas, which have infrastructure. The Government has not taken up these issues from the Report. It is doubtful whether COAG is the most suitable vehicle to decide these issues. The NRAS scheme needs to be extended beyond its forecast two year horizon if any real progress is to be made in affordable housing.

The Report could have done a lot more to encourage investors to build residential investment property, because the returns aren’t that attractive, even allowing for depreciation allowances and negative gearing. Issues such as tax credits could have been raised in the Report, along the lines of the National Rental Affordability Scheme (NRAS), which is only a very short run program (2-3 years). The high costs of land tax also act against afforability for larger developers holding multiple land parcels.

There has been a dearth of investment in rental accommodation throughout Australia over the past ten years. This is because face rents rarely exceed a 5% yield per annum, and net rents, 3% per annum before interest. Unless an investor has a substantial separate income for negative gearing, the benefits are small. And investment in residential rental accommodation is quite risky. Pre-interest and tax returns should really be in the order of 15-20% per annum. Small investors just don’t achieve that level of return because they don’t have any economies of scale.