Residential property investors are likely to be targeted by tax reform.

The tax debate has intensified since Labor announced plans to limit negative gearing to new properties and trim capital gains tax discounts. Financial experts are split on the issue but believe changes are inevitable.

Some say negative gearing — where investors claim a tax deduction when their expenses exceed income — remains one of the few tax breaks available for everyday Australians, while others say it is bad policy.

Analysis of Australian Taxation Office data has found that middle and lower income earners such as teachers and clerical staff are the biggest users of negative gearing - but the tax benefits they gain are much smaller than for high income earners.

SMALL INVESTORS, SMALL RETURNS

About 1.2 million people claim negative gearing tax deductions on investment properties. The most claims — almost 400,000 — come from those with taxable incomes between $40,000 and $70,000.

“If you start to take these benefits away you will get an enormous backlash,” said Fausto Pastro, a director of accounting and advice group William Buck.

“There’s a fine line between crimping some advantages and slaughtering the whole area,” he said.

“Negative gearing really belongs to the mass investor. Wealthy investors don’t negatively gear into residential property — they end up with commercial properties, businesses and shares.”

Labor’s plan would not affect existing investors and has been rejected by the Turnbull Government, which is believed to be considering other options such as putting annual caps on the amount people can deduct through negative gearing.

Property Council of Australia research released last year showed more than 83,000 clerical staff benefited from negative gearing tax deductions, as did 61,000 teachers and child carers, 42,000 nursing and aged care workers, 46,000 sales assistants and 21,000 hospitality workers.

BIG BUCK FOR BIG EARNERS

However, independent think tank Grattan Institute’s CEO, John Daley, said the bulk of the benefits in dollar terms went to big earners.

Mr Daley said spending cuts and tax increases to rebalance the Federal Budget were “common sense to anyone who doesn’t have a political axe to grind”, and negative gearing, capital gains tax and superannuation concessions were obvious places to start.

“They’re extremely skewed towards the top,” he said.

“Every time you have a tax increase somebody is going to be unhappy.”

Mr Daley said both parties were signalling tax changes for investments and superannuation so “you would be very brave to expect no change”.

If, for example, the government limited negative gearing claims to $5000 a year, that would be hard for the ALP to oppose, he said.

The Turnbull Federal Government has so far been quiet about capital gains tax, but both parties are eyeing superannuation tax changes.

Pitcher Partners wealth management partner Martin Fowler said negative gearing reform was essential. “The existing policy has caused a large misallocation of resources to a sector which is relatively unproductive. While essential for shelter, houses are passive assets,” he said.