The ongoing debate around negative gearing has taken another twist, with the emergence of a 2014 Reserve Bank of Australia (RBA) memo that suggests changes to the tax break could benefit financial stability in Australia.

The memo, which was originally circulated on 9 December 2014, has recently been made public under Freedom of Information (FOI) laws suggested that negative gearing and its interaction with the current capital gains tax (CGT) discount may be encouraging “leveraged and speculative investment in housing”.

“The Bank has stated in the past that we are only concerned with negative gearings interaction with capital gains tax,” the memo said.  

“Only half of any capital gains (so long as the asset is held for more than a year) are taxed at your marginal rate, however the loss on the investment initially is 100% tax deductible.

“Which may encourage chasing of capital gains - Property is especially impacted as it can be purchased using higher leverage than shares for example.”

From a financial stability perspective, the RBA memo raised concerns about the financial stability implications of a price fall in the housing market given the prevalence of highly leveraged investors.

“Any change which discourages negative gearing may be a good thing from an [financial stability] perspective,” the memo said.

While seemingly open to the idea of changes to negative gearing, the memo did raise some possible risks.

“Potential increase in rents?” it said.

“Large-scale sale of negatively geared properties? - though only if changes were not grandfathered.”

While the Labor Party has pledged to grandfather existing arrangements as part of its proposed changes to negative gearing, The Property Council of Australia has seized the RBA’s mentioning of higher rents as it continues its campaign against Labor’s plans.

“We accept that the Reserve Bank were not modelling the Federal Opposition’s policy – but this memo clearly flags that changing negative gearing would impact rents”, said Ken Morrison, Chief Executive of the Property Council of Australia,” PCA chief executive Ken Morrison said.

“This memo confirms that policy makers have real concerns about how renters would fare under policies that make negative gearing less effective,” Morrison said.

"We again call on the Opposition to release its modelling on the impact of its proposed tax changes on rents and the property market."