Landlords pay almost $7 billion a year more in tax than home owners, pushing rents higher

In Tuesday’s federal budget, the government is widely expected to bring in changes to how investment properties are taxed, including negative gearing and the capital gains tax discount.

Ever since the Albanese government’s re-election, there have been growing calls to tax landlords more.

In March, a Senate committee report on the capital gains tax discount concluded:

there is evidence that the concessions provided by the capital gains tax discount, in combination with negative gearing, have skewed the ownership of housing away from owner-occupiers and towards investors.

That suggests rented housing is under-taxed, compared to owner-occupied housing. But is that actually true?

What landlords pay that homeowners don’t

Some federal and state taxes apply only to rented housing, and not to owner-occupied housing.

At a federal level, this includes personal income tax on net rental income and personal tax on capital gains from housing. At a state level, there are land taxes on investment properties. Owner-occupied homes are exempt.

I’ve gone back through a decade of data from the Australian Taxation Office and the Australian Bureau of Statistics to estimate how much revenue these extra taxes on rented housing raised.

In 2022–23 (the most recent year we have complete tax statistics), I calculated landlords paid around A$500 million in personal income tax on their net rent income. However, their interest deductions were unusually low in 2022–23, because interest rates were unusually low.

To get a clearer idea of what happens under more typical circumstances, with higher interest rates, I calculated annual averages of tax payments, using tax data from 2013–14 through to 2022–23.

Over that decade, interest deductions were higher than in 2022–23, leading to net rent income being negative. As a result, instead of paying some tax on their net rent income as happened in 2022–23, landlords typically saved $400 million a year in tax from their net income.

This reflects the negative gearing issue that the Senate report raised concerns about.

However, landlords also paid other taxes over the decade – and that’s where the biggest difference with owner-occupiers emerged.

An extra $69 billion over a decade

From 2013–13 to 2022–23, I found landlords paid an average of $3.7 billion a year in capital gains tax, even after the 50% discount allowed for capital gains.

They also paid around $3.6 billion in state government land tax, which I was able to estimate by obtaining unpublished Australian Bureau of Statistics land tax data.

Allowing for all three taxes, landlords paid a total of $6.9 billion in a typical year from 2013–14 to 2022–23, as shown in the table above.

While owner-occupiers do pay some other taxes, such as the goods and services tax on new housing and local government rates, landlords pay those other taxes as well.

So the bottom line is that landlords have paid an extra $69 billion in taxes over the past decade, which owner-occupiers didn’t have to pay.

Renters end up paying higher rents

Do landlords pass that extra tax burden through to renters? The authoritative 2010 Henry Tax Review concluded it was likely they do:

Since owner-occupied housing is exempt, land tax on residential investment properties is probably passed through to renters as higher rents.

While the Henry Review was specifically referring to land tax, the same economic logic applies to the other extra taxes on rented housing.

We can see how significant this extra tax burden is by comparing the annual amount of extra tax – around $6.9 billion a year – to the 10-year average for the value of actual rents, $47.9 billion.

If those costs were being passed on in full, that would mean around 14% of housing rents in the past decade would have been due to taxes that apply to rented housing, but not to owner-occupied housing.

Tackling housing affordability in the right order

Extra taxes being passed onto renters are regressive, because renters have lower average incomes than owner occupiers.

The most recent Bureau of Statistics data we have, from 2019–20, showed average gross weekly income for all households was $2,329. But for renter households, it was only $1,908.

To help both renters and would-be owner-occupiers with housing affordability, far greater national reform is needed beyond how we tax property owners.

As former prime minister John Howard has observed since retiring, the planning policies of both local and state governments

avoid policy decisions that might reduce the value of the existing housing stock in an area […] The interests of current home owners are always preferred to those of new entrants.

While politically difficult, it’s in the national interest for those planning policies to change to increase the space available for housing. That would increase national income and reduce inequality.

In the meantime, the first priority for housing tax reform should be to better share the existing tax burden between renters and owner-occupiers.

More than a decade ago, the Henry Tax Review recommended broadening the base for land tax to include owner-occupiers, similar to local government rates which are a more efficient tax. That could fund a substantial reduction in tax rates for land tax.

It would also finally mean land tax was no longer an extra cost on renters compared to owner-occupiers.

So first we should reduce rents by reforming land tax. Under lower rents, it would become reasonable to tighten up negative gearing in future federal budgets.

Read more: Negative gearing tax breaks could finally be tightened in the May budget. What options are on the table?