Zhong Jianying
VIC
Tel: 03-9329 7310
11 December 2003

Inquiry into first home ownership
Productivity Commission
LB2  Collins Street East
Melbourne  VIC  8003
copy to:
(a)	The Treasurer
(b)	The Department of Treasury (attention James Bond, Domestic Economy Division)

Sir,
Concessional tax treatment of owner-occupied housing
I refer to my letter of 7 October 2003 to the Treasurer, which was copied to the Inquiry (and reproduced below).  I also enclose a letter dated 2 December 2003 from the Treasurer’s Office.  I would be grateful if you could publish this letter, together with the Treasurer’s letter, as part of my submission to the Inquiry.
1	The Treasurer has been asked whether the Commission is precluded from recommending the abolishment of concessional tax treatment for owner-occupied housing
In my letter to the Treasurer, I expressed concerns that the Inquiry’s Terms of Reference precluded the Commission from recommending measures to make housing affordable, whether owner-occupied or not.  In particular, I was concerned that the Commission is precluded from recommending any of the following:
(a)	abolishing the concessional tax-treatment for owner-occupied housing;
(b)	allowing taxpayers to deduct rental expense from taxable income;
(c)	allowing taxpayers to nominate a single residential property in respect of which concessional tax treatment would apply regardless of whether the property is occupied by the taxpayer.
2	The Treasurer has indicated that the Commission may recommend measures to make housing affordable, whether owner-occupied or not
It would seem that the Treasurer believes that the Inquiry’s terms of reference is wide enough to allow the Commission to recommend measures to make housing affordable, whether owner-occupied or not.  While the focus of the Inquiry is on first home ownership, the Terms of Reference:
“have been drafted to evaluate all components of the cost and price of housing [whether owner occupied or not], and to identify any impediments to the efficient operation of the [rental and owner occupied] housing market”.
3	The Terms of Reference requires the Commission to assess “direct ownership subsidies” including concessional tax treatment for owner-occupied housing
Whilst the Treasurer has not expressly confirmed that it is open to the Commission to recommend abolishing the concessional tax treatment for owner-occupied housing, I submit that:
(a)	“direct ownership subsidies” (see the Terms of Reference) includes a reference to the concessional tax treatment for owner-occupied housing;
(b)	the Treasure has directed the Commission to assess such “direct ownership subsidies”; and
(c)	it is therefore open to the Commission to recommend:
(i)	abolishing the concessional tax-treatment for owner-occupied housing; or
(i)	extend the concessional tax-treatment to rental housing by:
(A)	allowing taxpayers to deduct rental expense from taxable income; or
(B)	allowing taxpayers to nominate a single residential property in respect of which concessional tax treatment would apply regardless of whether the property is occupied by the taxpayer.
Each of the recommendations mentioned promotes:
(a)	the “efficiency … of taxes”; and
(b)	“the efficiency of use of existing residential [rental and owner occupied] housing stock”
(see the Terms of Reference).
4	There should be a tax deduction for the annualised cost of capital invested in the owner-occupied property
I note that if the Commission recommends abolishing concessional tax-treatment for owner-occupied housing by taxing the implicit value of rental services provided by owner-occupied housing, the owner-occupier should also be allowed to claim, as a tax deduction, any interest expense incurred in respect of that housing property.  Under current tax principles, such a deduction should of course be set off against all sources of income.
Yours faithfully,

Zhong Jianying