Cutting negative gearing deductions for the highest-earners could save the Australian Government more than $1.7 billion each year, research shows.

The new study commissioned by the Australian Housing and Urban Research Institute (AHURI) and conducted by researchers from Curtin University and Griffith University.

The report models reforms to negative gearing and capital gains tax (CGT) that are likely to reduce the impact on ‘mum and dad’ investors.

“Current negative gearing policies are heavily skewed towards high income earners, raising concerns about the extent to which these policies exacerbate income and wealth inequality in Australia,” said Curtin’s Professor Alan Duncan.

“There is concern among policymakers that reforms to negative gearing may have adverse impacts on ‘mum and dad’ investors.

“Our modelling suggests that a progressive rental deduction for investors cushions less wealthy ‘mum and dad’ investors from significant drops in tax savings, and may be an appropriate policy option,” Professor Duncan said.

The reform model proposes that investors in the bottom 50 per cent of the income distribution continue to receive a 100 per cent rental deduction; those in the 51st–75th percentiles receive a lower 50 per cent rental deduction, and those in the 76th–100th percentiles (representing ‘sophisticated’ investors) receive zero rental deductions.

Professor Duncan said such a reform would save Government more than $1.7 billion from the annual $3.04 billion cost of negative gearing deductions each year – a 57.3 per cent saving.

The research also identified that CGT discounts are heavily weighted towards those who are more affluent.

These investors, on average, own a property portfolio worth more than $730,000 and have a tax assessable income of $82,000, compared to $31,000 for renters who do not own any properties

The report finds that a reduction in the CGT discount has the potential to reduce inequality, as higher income earners will pay more tax, however this equates to a smaller percentage of their overall income than lower income investors.

The authors say CGT reform could be gradual, to soften the impact by providing a transition pathway that raises after-tax costs incrementally.

The full report is accessible here.