As bold economic reform ideas go, an 'imputed rent' tax on home owners has precedents

Australia Broadcast Center

4 hours ago

As industry leaders and the federal government prepare for next week's economic summit, two economists have started a national conversation by arguing that, to make Australia's tax system fairer for all, we should consider taxing home owner-occupancy.
This week, Peter Siminski from UTS Sydney and Melbourne University's Roger Wilkins said Australia's tax-free treatment of owner-occupied housing was allowing home owners to derive untaxed income from their homes, and it was an unusual privilege in our tax system.
They said that, to make Australia's tax system work more fairly for everyone, we should consider taxing owner-occupied housing in some way (and cutting taxes in other areas of the economy).
But how do home owners derive income from their homes?
They were talking about two specific concepts: "Imputed rent " and "accrued capital gains".
Imputed rent was part of Australia's income tax base from 1915 to 1923 and its reintroduction for taxation was proposed in 1975, although it didn't go ahead.
What does "impute" mean?
It means to assign a value to something by inference.
In the case of imputed rent, that's the estimated rental value of your residential property.
In 2022, the OECD published a useful paper surveying the different ways family homes were taxed in OECD countries. lt explained imputed rent this way:
Part of the return to an owner-occupier housing investment accrues to the taxpayer in the form of living in the property rent-free. This in-kind return is known as imputed rent.
The concept of imputed rent on owner-occupied property is motivated by the idea that the owner-occupier could rent out the property on the market to earn a rental income. However, refraining from doing so indicates that the value of the housing service to the owner-occupier must at least be equal to the forgone rent. While the property owner (making the investment) and the dweller (paying the rental income and consuming the housing service) are two separate individuals in the case of rented housing, they are one and the same person when considering owner-occupied property.
Imputed rent is commonly exempt for tax purposes. This has been found to be one of the most significant drivers of the preferential tax treatment of owner-occupied housing.
While mortgage interest relief for rental property allows owners [i.e landlords] to deduct costs that are associated with generating taxable rental income, mortgage interest for owner-occupiers is deducted without a corresponding taxation of imputed rental income [NB: Australia does not allow tax-deductibility of mortgage interest payments for owner-occupiers]. This generous tax treatment of owner-occupied housing results in negative marginal effective tax rates in some countries, effectively providing a tax subsidy for owner-occupied housing.
To remove distortions in housing investment decisions and eliminate the homeownership bias, the taxation of imputed rents combined with mortgage interest relief has often been suggested as a 'first-best' policy approach.
In practice, a range of conceptual, administrative and political considerations have made the taxation of imputed rental income difficult to implement in practice.
Only four OECD countries (Denmark, Greece, the Netherlands and Switzerland) tax imputed rents, although at comparatively low rates and only under certain conditions.
The OECD report shows how residential housing is taxed in different ways globally.
It says property is taxed when it's purchased (acquisition of asset), when someone is living in it (holding of asset), and when it's sold (disposal of asset).
All OECD countries levy recurrent taxes on immovable property.
The report says owners of rental properties (that is, landlords) are taxed on their rental income, but in a minority of countries owner-occupiers are also taxed on imputed rent.
Transaction taxes are commonly levied on housing purchases (eg: stamp duty). Capital gains taxes are levied on the disposal of housing (when a house is sold), although many countries (including Australia) exempt capital gains taxes on the sales of main residences.
Inheritance and gift taxes may also be levied when property is transferred to heirs.
The report also has a table of 38 countries that show how every country in the OECD taxes residential property (as of January 1, 2022).
Here's a shorter version of the table:
Of the 38 countries, only four countries tax owner-occupiers' imputed rent.
They're included in the list above: Denmark, Greece, Netherlands and Switzerland.
Notice how countries can use very different combinations of taxes on residential property.
Professors Siminski and Wilkins did not say we should try to directly tax imputed rent in Australia.
However, they said its existence, combined with the accrued capital gains that home owners receive from rising property prices, was contributing to growing inequality between renters and home owners.
They said when we include owner-occupiers' imputed rental income and accrued capital gains in measures of household income, inequality is much higher in Australia than we think, and it's rising more strongly.
They said it makes Australia's tax and transfer systems less "redistributive" than we think.
For its part, the Australian Bureau of Statistics (ABS) also says that including imputed rental income in an analysis of Australian household income would allow for "more meaningful comparisons" of the income of people living in different housing tenure types.
It says it would also better-capture how income levels and the distribution of income changed over time as people moved in and out of different tenure types.
The ABS says net imputed rent is estimated this way:
Net imputed rent is estimated as gross imputed rent less housing costs.
For owner-occupiers, the housing costs subtracted are those which would normally be paid by landlords i.e. general rates, water and sewerage rates, mortgage interest, building insurance, and repairs and maintenance.
When Professors Siminski and Wilkins said policymakers should consider taxing the family home to make housing more affordable and to remove the distortions in our tax system that were encouraging Australians to pour so much money into housing (which is a non-productive investment), they weren't necessarily calling for a direct tax to be whacked on residential properties.
They were suggesting something more subtle.
They were saying that, when we think about household income, if we make conceptual space for the existence of imputed rental income and accrued capital gains that Australia's home owners enjoy (both of which are untaxed), it would allow us to re-jig our tax system to make the system work more fairly for everyone, rather than its current heavy privileging of property owners.
They said there were plenty of ways to fairly incorporate owner-occupied housing into our tax and transfer systems too, while simultaneously cutting taxes in other areas of our economy (eg: personal income tax).
For example, we could use a broad-based land tax, or a broader wealth tax, or an explicit tax on owner-occupied housing wealth. And there was a "strong case" to reconsider the exemption of owner-occupied housing from pensions means tests.
"We should have a national conversation on whether the current tax treatment of owner-occupied housing is sensible," they wrote.
"Moving away from complete [tax] exemption would open up opportunities for reduced reliance on income taxes and more food on the table for renters and owners of modest homes."