Possible tax concession for tenants

The proportion of people renting has been rising, despite the general desire for people to own their own homes and government incentives for first home buyers. Homeowner occupiers enjoy the benefit of several tax concessions, whereas tenants have none (except when working from home). Geoff Dunsford suggests a logical tax concession for tenants consistent with one of those applying to homeowner occupiers, which would reduce the inequality.

Tenants

For this article, ‘tenant’ means a person representing themselves who is a tenant of a property under a private rental agreement. The focus is on those tenants who are not using the property for business purposes, for whom tax deductions already apply.

Introduction

At the present time, homeowner occupiers receive significant tax concessions related to their property. This has applied for many years as governments have considered that owner-occupiers are likely to take pride in their property and develop strong community ties, assisting community stability.

Most people prefer to buy their home, but even with the various incentives to do so, some cannot afford this and must rent. Tenants receive no tax concessions. Arguably this is less than desirable from a social perspective.

This has become particularly significant as the proportion of households renting has increased from 27% in 1998 to 32% in 2018 and has probably increased further since then. Rents have also been increasing in the last year – faster than the Consumer Price Index.

To some extent, the financial incentives to buy a home are believed to have contributed to the increasing cost of a home – tending to resign more people to the rental market.

Also, some owners may find themselves in financial difficulty when their loan interest rate increases as is expected over the next few years; this is likely to lead to an increase in renters in the future.

Homeowner occupier tax concessions

  1. No tax on capital gain on sale.

  2. No land tax.

  3. No tax on ‘imputed rent’.

‘Imputed rent’ is the rent that the owner could obtain if the property were rented to a person other than the owner-occupier. As such, the owner would need to pay income tax on the rent at the owner’s marginal rate.

As ‘tenant’ though, such a person could not claim tax relief on the rent paid.

Since no money is changing hands and tax is not paid on the ‘imputed rent’, this is effectively regarded by Treasury as a tax concession.

An alternative view of imputed rent: Taxation deduction

An alternative way of looking at this concession is to regard:

  • the ‘imputed rent’ as being taxed in the hands of the owner under current tax rules,

  • but is also being treated as a tax deduction for the owner as ‘imputed tenant’, not allowed under current tax rules.

Since no money changes hands, the tax deduction for the owner as imputed tenant becomes the tax concession.

Fairer tax treatment for tenants – Dealing with inequality

Logically then, to provide a reasonable equivalent fair and consistent tax concession for private tenants would be to allow a tax deduction for the rents paid to their landlords.

Effectively, this could be seen as a ‘correction of inequality’ rather than a generous tax concession.

Impact on the Federal Budget

This would depend upon how generous the Government may wish to be. An estimate of the annual cost of providing a full deduction from taxable income for tenants is $16.4 billion.

A possible approach would be to focus on the lower-income renters – say by allowing up to just $10,000 of annual rent to be deductible. The estimated cost comes down to $7.2 billion.

This would come down further when welfare payments for rent relief were adjusted to avoid double counting. These currently total $4.9 billion, according to the Australian Institute of Health and Welfare.

For the purposes of this article, Housing Commission home renters have been ignored.

Tax reform

If the introduction of rent relief was part of an overall tax reform policy – say in conjunction with an increase in GST, the opportunity for ‘real justice’ for tenants might be taken, and a full deduction allowed.

Administration

It is accepted that the development of processes for verification of rents paid would not be a trivial exercise – requiring co-operation from both tenants and owners. Appropriate clear separation of processes for business deductions would be required.

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