Labor should steer clear of negative gearing in its quest to raise taxes

Australia has an acute housing crisis. Mortgage repayments are at record levels of unaffordability, measured by the ability to pay, and the national rental vacancy factor is only 0.8 percent.

Government moves to increase taxes on superannuation and uncertainty over whether they will or will not apply capital gains tax to the family home are likely to make the crisis worse. The government needs to stabilise the situation by affirming that it will not alter any tax arrangements.

While the treasurer has now ruled out imposing a capital gains tax (CGT), he has been silent on another area that Labor has traditionally targeted for adjustment-negative gearing.

The negative gearing rules affect investors, and if they are concerned that they will lose the ability to deduct losses on a rental property from their total income, they will be reticent to invest. The impact of this will be hardest on low-income earners, the treasurer's core constituency.

Australia has different tax rules for owner-occupiers and investors. The homeowner is the most tax-advantaged.

They generally have a concessional rate of stamp duty when they buy, and when they sell, they are not taxed on any profit. In addition, first-home buyers are given a range of assistance towards deposits and building costs.

They cannot deduct interest payments, as the U.S. homeowner can. They also live rent-free on their own property, giving them the benefit of an imputed rent, which is also not taxed (although it is in some jurisdictions around the world).

An auctioneer counts down a bid during an auction of a residential property in Sydney, Australia, on May 8, 2021. (Lisa Maree Williams/Getty Images)

First homes are generally leveraged to 80 percent or even higher, meaning that a 20 percent gain in a house price translates into a tax-free doubling of the initial deposit. This is the traditional way Australians get financially established.

For investors, gearing is also an attraction, which they often achieve without an initial deposit by collateralising their existing family home. They have to pay tax on the rent from the property, less any expenses.

If expenses are higher than the rent they can deduct that against other income-this is commonly called negative gearing.