Statute Law (Miscellaneous Provisions) Bill 2011

There is a Statute Law (Miscellaneous Provisions) Bill currently before the NSW State Parliament, and it relates in part to residential tenancies legislation.

The Tenants' Union has made the following comment on the Bill, on its own behalf and that of the network of Tenants Advice and Advocacy Services.

The TU has no concerns about the proposed amendments, with the exception of those to s 41(1) and (2) of the Residential Tenancies Act 2010 (NSW). The proposed amendments go mostly to clarifying the operation of, and fixing potential problems in, existing provisions of that Act.

We note that the proposed amendments to s 41(1) and (2) would expose tenants under existing agreements for a term of exactly two years to the prospect of a rent increase, where otherwise their rent could not be increased. We submit that the Bill should be amended to include a transitional provision in relation to existing agreements to prevent this happening.

We note that proposed new s 89(6) does not fix technical problems identified in the operation of s 89(5), but it does not create any additional problems.

We have identified a number of other technical problems in the Residential Tenancies Act 2010 (NSW); had we been consulted prior to the introduction of the Bill we are confident that they might have been fixed too.

Don't bank on real estate agents

Further to the dodgy advice from agents discussed in our previous post, we've had our attention drawn to the following shocker. A Canberra agent is quoted in a Toowoomba paper (making us suspect that the piece may have appeared in other papers too) as advising money-conscious tenants:

They should increase the amount they pay in rent to their agent... by as much as they can afford until it hurts....

[The agent] puts the extra away in a bank account – say an extra $200 per week – and after two years they will have over $20 000 which is a big step in the right direction.

Here's the article, with the dodgy advice indicated.


Now, there is a time-honoured practice amongst some tenants of paying a couple of dollars extra each week so they don't have to worry about paying the rent over Christmas, but I don't think anyone does what this agent is recommending. And for good reason. Let us count the ways in which this advice stinks.

1. First, and probably least, it is a bit rich for real estate agents, as inveterate debt-pushers and spruikers (check the headline: 'Now is the time to buy'!) to presume to give tenants advice on establishing a savings culture.

2. Secondly, if you're handing over extra money as rent to an agent, it will go to the rent account, not into any other sort of account. It will not earn interest for you. Under section 47 of the new Residential Tenancies Act 2010, you are, happily, entitled to get overpaid rent paid back to you within 14 days of requesting repayment (but note: this is the New South Wales Act, and it does not apply, of course, to renter-savers in Canberra and Toowoomba).

3. Thirdly, if you're handing over extra money not as rent or some other legitimate charge under your tenancy agreement – don't. Put it in a savings account at the bank yourself – and if you don't trust yourself to keep in the habit, set up a scheduled transfer. Don't trust a real estate agent to do it for you. Quite apart from the risk of a rogue agent making off with the money themselves (and we note that in 2009-10, Fair Trading issued penalty notices to 83 agents, for a total of 99 offences, under the Property, Stock and Business Agents Act), you have to keep in mind: even an honest agent works for your landlord, not for you. You're not paying them to be your banker; don't expect them to act as one.

4. And handing over an extra $200 a week to your real estate agent? Why not just go ahead and ask for a rent increase?

We dips our lid to Delusional Economics at Macrobusiness for bringing this one to our attention.

Agents behaving badly - rent arrears and CTTT costs...

Tenants beware - real estate agents don't always get it right!

(Real Estate Agent School - not as easy as you might think.)

We've recently heard of some tenants receiving notices of termination for rent arrears that include threats of obtaining costs for eviction proceedings in the Consumer, Trader & Tenancy Tribunal (CTTT).

That this would happen once is alarming enough, but numerous instances occuring simultaneously across different parts of NSW smacks of an emerging industry practice. A dodgy one, at that. Let's hope not, but just to be sure, let's all be on the look-out for it...

The letters read something like this:

... You are in breach of your lease and we hereby give you notice of termination under section 88 of the Residential Tenancies Act.

We have lodged an application for termination with the CTTT. Costs for the application are $36 and we will hold you responsible for this cost regardless of whether or not we have to proceed with this application.

Should a hearing become necessary, we will seek further costs in the CTTT - including our preparation costs and our attendance fees of $xx.xx per hour.

You can only avoid termination by paying the rent or entering into an agreed payment plan within 7 days.

There are a few implications here that ought to be promptly addressed.

Implication 1 - real estate agents can easily obtain costs orders in the CTTT...

Implication 2 - tenants can be held responsible for real estate agents' CTTT application fees - even where the matter is resolved without having to attend a hearing...

Implication 3 - tenants cannot avoid termination for arrears unless they do exactly as the real estate agent tells them...
The view from the Brown Couch is, as you would expect, somewhat different. Let's look at each of these implications in turn:

1. Under the Consumer, Trader and Tenancy Tribunal Act 2001, parties to any proceedings are required to cover their own costs. The Tribunal does have the power to order one party to pay the others' costs, but only in matters where there are "exceptional circumstances" that would warrant it. In general terms, costs are difficult to obtain, and it is usually not even worth asking for them...

2. The Residential Tenancies Act 2010 stipulates that tenants can only be required to make certain types of payment to the landlord under their residential tenancy agreement. These are bond and rent, and in many instances charges for water consumption. Requiring a tenant to pay a CTTT application fee, absent a difficult-to-obtain CTTT costs order, would be in breach of the law, and could leave a landlord liable for a $2,200 fine.

3. Tenants should not rely on the advice of a real estate agent. Agents are, after all, there to work for the landlord, not the tenant. Don't be fooled or intimidated into leaving the property without a CTTT hearing - particularly if you disagree with the arrears claimed, or if you've made an offer to pay by installments that the landlord wont agree to. It's always a good idea to get advice from a Tenants' Advocate before deciding what to do.

Taking all of this into account - real estate agents who hand out this kind of notice of termination are perhaps putting themselves in harm's way. The information included with the notice may be seen as misleading or even unconscionable, and a complaint to Fair Trading could be made on this basis. Contact your local Tenants' Advice service for more information about making such a complaint.

The Henry Review reviewed: part 3

The Henry Review was more than a review about Australia's tax system: it was a review about Australia's tax and transfer system, so as well as looking at the money the Government takes in, it also looked at the payments, subsidies and other forms of financial assistance that the Government pays out to individuals.

We'll consider what Henry says about housing transfers – in particular, Rent Assistance and public housing – below.

(Ken Henry contemplates the effective marginal tax rates associated with public housing rent rebate policies)

But first, a final word on what Henry says about tax.

We've noted in the previous two parts of our review that the taxation of income from savings (which, on Henry's definitions, includes property speculation) is a focus of the Henry Review, and in his recommendations Henry develops the theme of treating different means of savings more consistently, particularly by taxing most forms of savings income at a 40 per cent discount to the saver's other income.

As always, the question arises: if you tax savings incomes less heavily than labour incomes, who benefits? Virtually by definition, the wealthy benefit.

Henry gives an indication of just how skewed is this benefit in the preliminary discussion paper to the Review, which shows just how skewed is the distribution of wealth – and hence, the distribution of labour incomes and capital incomes (ie what we've been calling savings incomes: interest, net capital gains, net rent, dividends and trust incomes).

In 2005-06, the bottom 50 per cent of Australian taxpayers received 17.6 per cent of total labour incomes, and 15.8 per cent of total capital incomes. On the other hand, the top 10 percent (keep in mind, this is a much smaller group) received 28 per cent of labour incomes, and 53 per cent of capital incomes.

To really make the point, an even smaller group – the top one per cent of tax payers – received 5.3 per cent of labour incomes, and 28.5 per cent of capital incomes.

In other words, the better off you are, the stronger the mix in your income of capital income to labour income. And Henry would generally tax capital incomes lightly, and labour incomes relatively heavily.

Henry doesn't give a strong justification of of this basic bias in the tax regime he proposes. He does, however, make a suggestion that would go a little way towards mitigating it: a bequest tax. The tax Henry has in mind would apply only to inheritances above a 'substantial threshold', so as to fall on the wealthiest 10 per cent of households, and then apply simply as a low flat rate.

'You mean "death duties"!' gasp the decadent bourgeoisie. That appellation is fine by us here at the Brown Couch, though a bequest tax could probably be even more accurately called an 'unearned wealth tax'.

It should be noted that the Henry Review does not go so far as to positively recommend a bequest tax – it just spells out the benefits of one, then invites a community discussion of the issue. Good luck with that.

*

On to housing transfers.

First up, Henry gives a strong statement – albeit in the peculiar language of economists – of support for housing assistance:

A key function of national government is the prevention of capability deprivation — that is, the absence of fundamental capabilities that enable people to participate fully in society. Income support is a major mechanism for achieving this end. It provides people with resources to maintain an adequate standard of living and supports their participation in the community, including the workforce.... There is a further need for specific housing assistance in recognition of the special role it plays in supporting wellbeing.

And in similar terms, Henry states his general principle for the provision of housing assistance:

Housing assistance should be provided in a way that is equitable, does minimum harm to participation incentives and gives recipients choice in the housing they occupy.

Now we turn to the actual lie of the land. In Australia, Henry observes, 'there are two major forms of housing assistance available to low-income earners: Rent Assistance and public housing. A person can access only one or the other.'

The implication is that there is a great divide in Australian housing assistance policy. There is, but with respect, Henry doesn't quite define the divide exactly right. Rather than 'public housing' he really ought to have referred to 'social housing', which is a larger category that also includes community housing organisations. True, it's only a slightly larger category: in 2008, there were about 30 000 community housing tenancies, compared with 330 000 public housing tenancies (and, for the record, about 940 000 Rent Assistance recipients). Still, I don't think this is nit-picking, and we'll return to the complicating factor of the community housing organisations further below. Henry notes their existence, but otherwise he refers to public housing.

So how does that general principle of housing assistance go, either side of the great divide?

Rent Assistance
Rent Assistance is paid by Centrelink to recipients of other Centrelink payments (eg Age Pension, Disability Support Pension, Newstart), and recipients of Family Tax Benefit Part A (where paid at more than the base rate), where the recipient pays more than a certain threshold amount of rent. These thresholds vary according to the recipient's household type (ie single or couple, and number of kids). The amount of Rent Assistance paid is 75 cents for every dollar of rent above the threshold, subject to a maximum amount, or cap. These caps also vary according to household type.

Generally speaking, Henry likes Rent Assistance. For Henry, it's equitable, in that it is well-targeted to need (the thresholds rule out about 40 per cent of Centrelink recipients, who pay no or low rents). It's okay in terms of work participation, because the amount paid is independent of the amount of the recipient's other Centrelink payment. This means, for example, that the recipient who does some work and earns a bit of money might have their Newstart payment reduced, but not their Rent Assistance – which is less of a discouragement to working than if both the Newstart and the Rent Assistance were hit at once. It also means that the rate at which income support is withdrawn is the same for renters and owner-occupiers – which is important in terms of equity.

And, in terms of choice, Rent Assistance recipients can choose which houses to apply for, and when to move. Henry also observes that because Rent Assistance works as a 'co-payment' - that is, you and the Government go 25/75 in paying the rent above the threshold amount – there is an incentive for receipients to economise and choose lower cost rental housing (about 30 per cent of Rent Assistance recipients receive less than the maximum amount).

For Henry, the main problem with Rent Assistance is one we've discussed before on the Brown Couch: the amounts at which it's capped are too low. Henry's solution is the same as we discussed: lift the caps. In particular, Henry would set the cap for each of the various household types at the 25th percentile rent for a dwelling of suitable size. (In other words, take all rental dwellings of the same size, rank them according to the amount of rent: the 25th percentile is more expensive than 25 per cent of dwellings, and cheaper than 75 per cent.) And looking ahead, Henry recommends that the caps should rise in line with rents, rather than the CPI, as is currently the case.

As we discussed previously, one possible objection to increasing the maximum amounts of Rent Assistance is that this may cause rents to rise – that is, landlords will simply eat up the increase. Henry doubts this would be a problem, noting that Rent Assistance recipients comprise a minority of the market... and anyway, would it be such a bad thing if the rents paid by Rent Assistance recipients increased? This would be (in economist-speak), 'a market signal to suppliers of rental housing to shift toward provision of the type of housing demanded by Rent Assistance recipients. Suppressing price signals is not conducive to promoting increasing supply over the long term.'

That's how much Henry likes Rent Assistance. What about public housing?

Public housing

Says Henry:

Public housing is a significant mechanism for providing housing to disadvantaged groups. It has become the primary source of housing for people who cannot access appropriate or adequate housing in the private market such as people with a mental illness and Indigenous Australians who still too often face discrimination in the housing market. Social housing (public housing and community housing) provides a valuable stock of houses in the context of Australia's housing supply difficulties, and in some areas such as remote Indigenous communities is the only viable source of housing.

(You can feel a 'however' coming, can't you?)

However, there are a number of areas where social housing is not adequately supporting the Australian households that rely upon it for adequate housing.

Thereinafter, Henry conducts a thorough demolition of the way public housing delivers housing assistance – particularly the way it delivers rebated rents (in most cases, rebated to 25 per cent of household income) to tenants of certain publicly-owned dwellings.

This is, Henry says, inequitable. Public housing rent rebates deliver a much greater level of assistance to public housing tenants than Rent Assistance delivers to tenants of like means in private rental. And within the public housing system, the level of assistance is inequitable because it is the same, regardless of the relative amenity of the particular dwelling with which it comes (that is, person pays the same rent, whether they're in a roomy house by the beach, or a pokey bedsit in the sticks), and regardless of any other costs (transport, etc) that go with that. It is also inequitable because it is the same for those in greatest need (eg those who were previously homeless, those whose health is at risk) as for those who are not but who are on a low income. Rather, public housing differentiates between these levels of need by giving preferential placement to those in greatest need on its waiting list.

Which leads us to work disincentives. The waiting list is the site of a major discouragement to work, because to stay on the list you've got to stay poor. Henry refers to research that reports that rates of unemployment are 11 per cent higher for men, and 5 per cent higher for women, when they are on the public housing waiting list, compared to when they are in public housing.

But when in public housing, these persons face another round of work disincentives. As Henry points out, public housing's income-related rents mean that if you do some work and earn a little money, your rent goes up, while your Centrelink payment goes down. In terms of effective marginal tax rates, public housing's 25-per-cent-of-income-rents straightforwardly add 25 per centage points on top of the effective marginal tax rates ordinarily associated with increasing work and incomes.

This too is something we've discussed on the Brown Couch before, and illustrated in the following charts. Each gives the effective marginal tax rates faced by one of three typical public housing households, based on their Centrelink payments and Family Tax Benefits being withdrawn, and their rent, income tax and Medicare levy being increased, as their income from employment increases. (The data is from 2008, but the general shape of things will be similar today).

(Click on each for a better view)

Our focus then was on the effect of a variation on income-related rents that's peculiar to New South Wales: the moderate income rates, which slide your rent up to 30 per cent of household income and stack on even higher effective marginal tax rates. Henry doesn't mention this particular policy: for him the underlying policy of 25 per cent income-related rents is bad enough.

As for choice: public housing tenants don't really get a choice about their housing. Receipt of a public housing rent rebate is tied to occupation of a public housing dwelling, and they get the dwelling that's offered to them – and they better take it lest they spend even longer on the waiting list or, worse, get kicked off the list. Once in public housing, a person can move around and take their assistance with them, but here too public housing's systems make a mess of persons' choices.

For one thing, public housing authorities place restrictions on moving around (eg you have to be eligible, as if you're on the waiting list). Another thing: because the rent is the same regardless of amenity and location, tenants have, as Henry puts it, 'an incentive to maximise their "in-kind subsidy" — that is, they try to stay in larger and better houses than they would normally occupy if they had to pay directly for their housing.' And public housing landlords lose the benefit of receiving 'effective price signals' about what sort of housing stock tenants would really prefer to occupy, and so labour with a public housing stock that is poorly matched to public housing households.

It is, as I said, a demolition job. There are a couple of points at which Henry probably overdoes it. The fact that unemployment is higher on the waiting list than in public housing may be attributed, as Henry does, to the work disincentive effect of having to maintain eligibility, but you could also make the case that unemployment is lower in public housing because the relative stability and security of the tenure helps get people work-ready and back into employment. (The authors of the research cited by Henry suggest both factors are at work).

Henry also suggests that income-related rents may contribute to 'intergenerational poverty' in public housing, because they assume a contribution from children's incomes. He does not, however, consider that the children of tenants in private rental housing might also make such contributions, and in larger amounts, considering the generally lower level of assistance that Rent Assistance provides. If there's a problem of intergenerational poverty in public housing, it is not so directly the result of including children's incomes in the calculation of income-related rents.

Still, even if you're a committed defender of public housing and income-related rents, Henry's is a critique that you'll have to come to grips with.

So how would Henry cure the ills of public housing? Firstly, with the benefits of Rent Assistance. Henry proposes that public housing tenants should receive Rent Assistance and pay market rents to their public housing landlords:

As recipients of social housing would receive Rent Assistance, the amount they pay to their landlord should reflect the market rent of a dwelling. A dwelling's rent reflects the range of benefits it provides, such as the building's size and quality and the location's proximity to employment, services or nearby amenities. Charging market rents would allow recipients to make trade-offs between these aspects of housing and other elements of their consumption. It would also provide signals to social housing providers about the housing that is valued by their clients. In combination, Rent Assistance based on market rents should encourage the provision of social housing that is of value to tenants.

Henry allows a couple of qualifications on this. First, there would have to be 'carefully targeted transition arrangements, to prevent households from being forced into housing stress or pulling up roots and moving away from support networks. Secondly, there are some locations – particularly remote Indigenous communities – where there really is no housing 'market' and hence no 'market rents', and yet other locations – particularly mining towns – where even a reformed Rent Assistance (ie with higher caps) won't get low-income households anywhere near an affordable rent. In these locations, some limiting of public housing rents with reference to tenant incomes would be okay.

Secondly, in respect of 'high needs' clients, Henry recommends that there should be a new additional payment, made by the Commonwealth Government, reflecting the higher costs of housing such persons, which would go to their public housing landlord – or indeed, if they were to move, to another social housing landlord. (Henry specifies 'social housing', because that's where so many of the 'high needs' tenants are, but expressly leaves open the prospect of the additional payment being made available to private landlords.)

You'll notice that the term 'social housing', as distinct from 'public housing', has crept into the account; it does so in the Henry Review's recommendations, too. Let's turn briefly now to those other social housing landlords, the community housing organisations, and the way they complicate the picture of housing assistance in Australia.

Community housing

Let's be clear: the way it currently works places community housing, in very large part, on the same side as public housing in the great housing assistance divide. Most community housing tenants pay income-related rents, at a rate of 25 per cent of their household income, on very similar terms to public housing tenants, with all the implications for inequity, work disincentives and interference with choice that go with that.

However, by a peculiar dispensation of the Government, community housing tenants do receive Rent Assistance. They do so, however, on terms that avail them of none of the benefits that Henry identifies in Rent Assistance.

Here's how Rent Assistance works in community housing. The community housing organisation effectively says to a tenant: we do income-related rents, so give us 25 per cent of your income, not including Rent Assistance. Now, if that was your rent, you'd get so much Rent Assistance (according to Centrelink's usual thresholds). Let's count that Rent Assistance as income for our income-related rent purposes. This additional income means the rent will go up (by a small amount), and as your rent has gone up, so has your entitlement to Rent Assistance (by an even smaller amount). Repeat until the increasingly tiny increases approach their mathematical limit. Now give us all of the Rent Assistance.'*

So, the community housing organisation maximises and captures all of the tenant's Rent Assistance. The tenant has no incentive (or opportunity) to economise on their housing costs, and the community housing landlord receives no 'market signals' about their housing stock. Rent Assistance is becomes just another an operating subsidy to community housing orgainsation, albeit one that is directed through the bank ccounts of individual tenants, who bears all the risks associated with making sure Centrelink pays it in the amount expected by their landlord.

That's not the only potential problem with this odd arrangement. Community housing is the only growing part of the social housing sector, and this growth is increasingly being achieved through private financing – particularly debt financing. Community housing organisations are relying on those Rent Assistance payments to pay mortgages.

And they're involved in other financial innovations, too, such as the National Rental Affordability Scheme, which has created partnerships between community housing organisations and private investors that are supposed to turn a profit, within the strictures of a requirement that tenants pay not more than 80 per cent of the market rent. This too, raises questions about revenues, rent setting and housing assistance.

All of this is to say that housing assistance policy as we know it is under challenge on a number of fronts. The Henry Review indicates a number of them:

• efficacy – in particular, Rent Assistance as it is currently capped is often not effective in producing affordability;
• equity – in particular, income-related rents in social housing deliver to similar persons a higher level of assistance than Rent Assistance, and without regard to differences in need or the amenity of the dwelling also provided;
• work participation – in particular, the waiting list for social housing creates a work disincentive, and so do income-related rents and the high effective marginal tax rates to which they contribute.

And we've identified another: the financing of social housing – in particular, the new private debt and equity arrangements into which community housing organisations are getting, and the implications of these for reveues, rent setting and housing assistance.

These four fronts of pressure will change the shape of housing assistance policy. Henry's own vision of the new shape is an enhanced Rent Assistance, extended to social housing tenants, and supplemented by a new housing payment for persons with high needs. What do tenants and their advocates in the community sector think?

Next: a summing up of the Henry Review, and the Government's response.

____________________________________________________

* For the mathematically inclined, this iterative process can be reduced to a fairly simple formula.

RC = 4TC-3LT

where:
RC is rent charged to the tenant - that is, what they are actually expected to pay;
TC is the 'tenant's contribution' - that is, 25 per cent of the tenant's household income, excluding Rent Assistance;
LT is the lower Rent Assistance threshold.

Landlord selling? Looks like you're free to go *

The new Residential Tenancies Act 2010 has now been in operation for five months. Regular visitors will recall that this Act marks the first comprehensive rewrite of renting laws in more than 20 years - fixing many flaws in the old 1987 Act, and bringing a few new measures in to reflect the changing of the times.

As with any new piece of legislation, what's written down by Parliament can mean different things to different people. It's only when disputes under a law are taken into the judicial system for arbitration that we can start to properly understand that law's meaning - because the courts generally get the last word on how to interpret a law. In the case of the Residential Tenancies Act, the first port of call for arbitration is the Consumer, Trader & Tenancy Tribunal (CTTT). Although decisions made by the CTTT do not set legal precedents (in fact it is not even bound by its own decisions), for the purposes of understanding how fiddly bits of our new renting laws work, we need look no further than decisions made in the CTTT.

Not all CTTT decisions make it into print, and there's often a lag as most juicy decisions take time to write up and publish. But luckily for us, we've got access to the collected works of the Tenants Advice and Advocacy Services, so we can spot 'em as they happen.

Recently, the CTTT decided a case that helps to clarify part of the new law*. At section 100(1)(c) the Act allows tenants to give notice to end a tenancy during a fixed-term (without having to compensate the landlord) - if the landlord tells the tenant that they're going to start selling the property. But there's a catch... the landlord must not have already told the tenant about the proposed sale before the tenancy began.

And, maybe, there's another catch. Another section of the Act - s26(2)(a) - requires a landlord to tell the tenant about a proposed sale before entering into a residential tenancy agreement (specifically, if a contract for sale has been prepared).

Until now, it has been unclear whether this would mean that tenants could not make use of the s100(1)(c) option, unless the landlord had failed to disclose an already existing intention to sell before entering into the agreement. In other words, if a landlord had no intention to sell at the beginning of the tenancy (and therefore had nothing to tell the tenant), could they later change their minds, and would this prevent the tenant from giving notice under section 100(1)(c)?

Tenants' advocates have formed a view on this - that the two sections of the Act can be read independently of one another - and this has now been successfully argued in the CTTT. In the case of Kutzner v Kamp (NSWCTTT unreported) the Tribunal stated:

The issue for determination is whether in these circumstances the tenants were entitled to give notice of termination under section 100(1)(c) of the Residential Tenancies Act 2010. I am satisfied that it is not a requirement of this provision that the landlord must have an intention to sell the property at the time of entering into the residential tenancy agreement which was not disclosed. It is only necessary for the landlord to have notified the tenant of such an intention during the fixed term without notice prior to commencement of the tenancy. "Disclosure" in the sense used in s100(1)(c) does not mean disclosing what was known to the landlord but rather whether prior notice had in fact been given of the landlord's subsequent decision.

The question arising upon the Tenant being told of the intention to sell, is whether the Tenant had been told at the commencement of the tenancy that this would happen. It is not an answer to say that the landlord did not know then that this would occur.

This is a good outcome for tenants, but we'll be keeping an eye on how landlords respond to it. Will we start to see blanket disclosure under section 26(2)(a)? Presumably, not all prospective tenants will be keen to enter into agreements on properties that are listed for sale, so even if landlords do start to try this on, we don't think it will take off. Most landlords wouldn't want to limit their pool of potential tenants in this way. Even so, if you're sitting down to sign a new lease and the agent says "oh, by the way, we need to tell you the landlord is going to sell, but it's nothing to worry about because they haven't listed it yet", it would be a good idea to press them for more information. If they can't give you any indication of when a listing for sale is likely to proceed, there's a good chance you'll be able to distinguish - when it matters - between what was known to the landlord then, and any subsequent decision to sell.
* This information is not to be construed as legal advice and should not be relied on in the making of any rash decisions about moving house. If in doubt, contact your local TAAS.

NSW State Govt dumps affordable housing policy

Reported in today's Herald:

THE Planning Minister, Brad Hazzard, has called an immediate halt to new development applications made under a controversial policy designed to boost affordable housing for low- and middle-income-earners, and announced amendments to the scheme while a new policy is developed.

We understand the 'controversial' policy to be the Affordable Rental Housing State Environmental Planning Policy (ARHSEPP) - or, at least, those aspects of the ARHSEPP that deal with 'infill affordable rental housing'.




(There's no word in the report or, as yet, on Planning NSW's website as to whether other aspects of the ARHSEPP, such as those dealing with boarding houses, supportive accommodation, or developer contributions to compensate for the loss of affordable housing, have been changed.)

The Herald quotes Minister Hazzard as saying the infill affordable rental housing provision gave ''an avenue for small-time developers to rip into local communities and change [their] entire face''.

We submit that unaffordable housing also rips into local communities, by forcing essential workers like nurses, police officers and teachers to live far away from their places of work, and by forcing out residents who might have deep roots in a community, but not deep pockets.

The Tenants' Union supports the ARHSEPP, but with some pretty heavy reservations. It doesn't - and to be fair, couldn't - address the primary causes of unaffordable housing, which lie in the tax system, rather than the planning system. (It's not as if housing is unaffordable because low-income renters have been too greedy as to the standards required of their bedsits).

But even on its own terms, the ARHSEPP is a policy instrument of marginal usefulness. This is because its approach is basically permissive: it allows certain things to be done that, under the usual rules applied to developments, wouldn't otherwise be allowed to be done, provided they're done to provide affordable rental housing. It doesn't require or mandate that anyone do anything about affordable housing.

If the State Government will not pursue the provision of affordable housing outside the usual rules for developments, it's going to have to do so within the rules. That means mandating substantial quotas of affordable housing for major developments, and requiring all local councils to plan for affordable housing.

The Henry Review reviewed: part 2

In part 1 of our review of the Henry Review, we looked at tax and owner-occupied housing. This time we're looking at tax and rental housing – but before we do, a bit of news.

You'll recall the Federal Government's promise to convene a tax summit, at which the Henry Review may get a second lease on life. Now a date has been set – 4-5 October 2011 – for what's to be called the National Tax Forum. Pencil it in, readers! You can get up to speed and keep up to date by checking out the excellent TaxWatch website – and, of course, the Brown Couch's own continuing review of the Henry Review.

(Ken Henry (at right), with Treasury officials in sportive mood.)

*

In a universe parallel to our own, the story of rental housing and tax might be a simple one: rental properties are valued as assets that produce a valuable service – housing – and owned by persons with the necessary skills to make a viable business out of providing this service; the revenue of the business covers its costs and provides an income for the owner, which is taxed, and if the assets increase in value, the gain is taxed too.

For a picture of how differently things go in our own universe, consider the following charts. The first shows the number of persons who have become landlords (or more precisely, persons who declare rental income in their tax returns) – which grew strongly over the last decade-and-a-half. It also shows the proportion of them declaring a rental loss – and this grew strongly too.

(Source: ATO Tax Stats Chapter 2 – Personal Tax, various years)

And let's look at their losses, in dollar terms. In 2008-09, the most recent year for which we have figures, Australia's landlords took in rent revenues of more than $26 billion – but after their costs, ended up losing $6.5 billion. Since the turn of the century – the last time they actually made money from rents – the nation's landlords have lost more than $36 billion.

(Source: ATO Tax Stats Chapter 2 – Personal Tax, various years)

And these were rental property's boom years (that uptick in 2008-09 is the result of some landlords bailing out in the GFC). What's going on?

Negative gearing, that's what's going on. Negative gearing is financial alchemy, turning losses into gains – or rather, at an elemental level, turning income into capital.

More prosaically, negative gearing is the name given to the situation where an investor borrows to buy an asset and the interest they pay is greater than the revenue generated by the asset. They get into this situation with the hope or expectation that for all the losses they have to wear along the way there will be a greater payoff at the end – that is, through an increase in the value of the asset.

Other names can be given to this strategy: 'speculation', or 'gambling.' The Henry Review calls it another form of savings, like putting money in the bank is savings, and putting money into owner-occupied housing is savings. This is, in our view, an undeserved compliment to negatively geared rental property speculation, but it does give us some common points of reference with the 'bank saver' and 'owner-occupied housing saver' from part 1 of our review and a way of thinking about how negative gearing works, so once again we'll work with Henry on this.

Here's how the alchemy works. Start with the negatively geared landlord's gross income: rental income from the property, and income from other sources – namely work. All the rental income goes on interest and other deductible costs, and a far bit of their other income – in total, $6.5 billion of it – goes on those costs too. There's no tax payable on the rental income (because in net terms, it is wiped out by costs) and – under a provision of Australian tax law that is almost unique internationally – there's no tax payable on that other bit of the landlord's income too.

By contrast, our bank saver only puts their money away after the tax office has run its eye over all the saver's income and taxed it accordingly; likewise our owner-occupied housing saver puts their money into the house after it has been taxed. With the negatively geared rental property saver, the money is put towards the cost of the loan before it is taxed, thus reducing taxable income and possibly even the rate of tax. It is as if the income they spend on interest etc melts into air, before the taxman's very eyes.

Or so it seems. It reappears as the value of the property it has bought increases, transmuted into capital. And when the property is sold and the capital gain is realised, it does get taxed (contrast the income from the owner-occupied saver's capital gain, which is not taxed at all) – but it gets taxed at half the rate applicable to income from work.

Now, there's a golden rule to be observed here: the negatively geared rental property saver makes a profit only the after-tax capital gain pay-off at the end of their speculative adventure is more than the total income lost to interest etc along the way. Satisfaction of this rule is helped a lot, of course, by only half-taxing the capital gain, and by the fact that the landlord paid no tax on the income that was spent on interest, and may have paid a lower rate of tax on the rest of their income.

And it has also been helped a lot by the fact that they are using, as the crucible of their alchemy, the housing market. A person can (and quite a few people do) negatively gear other assets, such as shares, but when it's housing, they're trading in a market alongside owner-occupiers who, as we've seen, don't pay tax on capital gains and so are encouraged to put any money they have to spare into housing. Thus the tax-preferencing of owner-occupation is also an encouragement to speculation by landlords, and encouragement to speculation is encouragement to further speculation, even to the extent that the speculators begin squeezing out the owner-occupiers – which, prior to the GFC at least, is precisely what was happening in the Australian housing market, as evinced by declining rates of home ownership.

Henry presents a neat graph showing the results of the different tax treatment for each of the savings strategies we've discussed (it also includes superannuation, domestic shares and foreign shares). The results are presented in terms of effective marginal tax rates – in other words, how much each additional dollar of income from these savings actually gets taxed, with reference to the various marginal tax rates that apply to incomes generally.

(Click on the image for a better view. Graph based on Treasury assumptions of 6 per cent nominal return; 2.5 per cent inflation; for rental property, 50 per cent of the return is attributable to capital gain and 50 per cent to rental income and the rental property is held for 7 years then sold; shares are held for 7 years then sold; superannuation is held for 25 years and the individual is eligible for a tax-free payout at the end of the period.)

On these assumptions, pity the tenant diligently putting their spare dollars away into a bank account, rather than borrowing and spending on a house.

In a second graph of effective marginal tax rates, Henry zeroes in on the rental property saver category and shows how crucial negative gearing is to the success of their strategy. More than that – it shows how crucial is the level of gearing (that is, the proportion of borrowed money in the landlord's purchase of the property).

(Click on the image for a better view. Graph based on Treasury assumptions of 6 per cent nominal return; 2.5 per cent inflation; for rental property, 50 per cent of the return is attributable to capital gain and 50 per cent to rental income and the rental property is held for seven years then sold; tax on debt provider disregarded.)

The more debt, the more income melts into air, the more tax is reduced – all subject, though, to the golden rule above. 'This creates', Henry says, with some understatement, 'significant distortions in how rental properties, in particular, are financed and for the rental property market.'

And how! Just look at the huge growth in the debts of landlords (and, for good measure, owner-occupiers):

(Click on the image for a better view. Source: RBA Table D2)

All that money, pumped into higher prices.

(Australian capital city house prices, index. ABS cat no 641601 and 641603)

And look, too, at how landlords spend their borrowed money: pursuing gains in tried and tested housing markets, on established houses and flats. These speculators barely build any new stock.

(Click on the image for a better view. Source: RBA Table D6 - note lending commitments are not aggregated, unlike debts in Table D2).

So how to address the sources of these distortions in tax system? One way would be to put an end to the Australian oddity and allow interest etc to be tax deductible only against rental income. This way no more of a landlord's income from work and other sources would disappear before it is taxed, and the golden rule of profiting from rental property would apply a sterner test of value. This is TaxWatch's preferred reform, and as we saw in the articles referred to here, Saul Eslake advocates it too.

The Henry Review proposes something different. In keeping with his theme of making the tax treatment of the various forms of saving more consistent, Henry would reduce the favourable treatment of capital gains by lowering the capital gains tax discount from 50 per cent to 40 per cent. He'd also even up the treatment of rental income, by applying a 40 per cent discount to it (net of interest etc), too (as he would to interest income from bank savings, as we saw in part one). Negatively geared landlords could still deduct interest costs from their non-rent income, but the effect of applying the discount on a net rental income basis would reduce the extent to which interest costs reach into non-rental income and reduce taxable income.

Henry indicates the results in a chart contrasting the current approach to his proposed one, again in terms of effective marginal tax rates and using the same assumptions as before.

(Click for a better view.)

This is, so to speak, a proposal for watering down the alchemy of negative gearing. It is, to use Henrian understatement, a mild reform.

Next: housing transfers – that is, rent rebates in social housing, and rent assistance in private rental.