As industry leaders and the federal government gear up for next week’s economic summit, a provocative proposal has emerged from two leading economists, sparking a nationwide debate. Peter Siminski from the University of Technology Sydney and Roger Wilkins from Melbourne University suggest that Australia should consider taxing the imputed rent of owner-occupied homes to create a fairer tax system.
This proposal challenges the current tax-free status of owner-occupied housing, which the economists argue allows homeowners to derive untaxed income from their properties. They believe this privilege contributes to economic inequality and propose that taxing this imputed rent, while reducing taxes elsewhere, could balance the scales.
Understanding Imputed Rent
Imputed rent refers to the estimated rental value of a residential property that an owner-occupier could potentially earn if they rented it out. This concept was part of Australia’s income tax base from 1915 to 1923 and was reconsidered in 1975, though it was never implemented.
“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,” explains a 2022 OECD report.
Currently, only four OECD countries—Denmark, Greece, the Netherlands, and Switzerland—tax imputed rents, albeit at low rates and under specific conditions. The OECD report highlights that imputed rent is commonly exempt from tax, which contributes to the preferential treatment of owner-occupied housing.
Housing Taxation in the OECD
The OECD’s comprehensive survey reveals diverse taxation methods on residential properties globally. Taxes are levied at various stages: acquisition, holding, and disposal of the asset. While all OECD countries impose recurrent taxes on immovable property, only a minority tax owner-occupiers on imputed rent.
Denmark, Greece, the Netherlands, and Switzerland are the only countries taxing owner-occupiers’ imputed rent, reflecting a unique approach among the 38 surveyed nations.
In Australia, the tax system heavily favors property owners, with capital gains on the sale of main residences often exempt from taxation. This, according to economists, fuels an income divide, leaving renters disadvantaged.
Implications for Policy and Society
Professors Siminski and Wilkins emphasize that their proposal does not advocate for a direct tax on imputed rent. Instead, they highlight the economic disparity caused by untaxed imputed rent and accrued capital gains, which they argue exacerbates inequality.
The Australian Bureau of Statistics supports this view, suggesting that including imputed rental income in household income analyses would provide more meaningful insights into income distribution and changes over time.
“Including imputed rental income in household income measures reveals a higher level of inequality in Australia than previously thought,” the economists assert.
Their proposal aims to stimulate a national conversation about the current tax treatment of owner-occupied housing. They suggest exploring alternatives such as a broad-based land tax, a wealth tax, or reconsidering the exemption of owner-occupied housing from pension means tests.
Looking Forward
The economists argue that reforming the tax system to include imputed rent could reduce reliance on income taxes and provide more equitable opportunities for renters and owners of modest homes. They call for a balanced approach that incorporates owner-occupied housing into the tax system while lowering taxes in other economic areas.
As Australia prepares for the economic summit, this bold proposal is likely to be a topic of heated discussion among policymakers and industry leaders. Whether or not the idea gains traction, it has already succeeded in highlighting the complexities and inequities within Australia’s current tax framework.
