Australia's Future Tax System

Final Report: Detailed Analysis

Chapter F: The transfer system

F5. Housing assistance

F5–3 Reforms for adequacy, targeting and participation support

The Panel proposes reforms to housing assistance to ensure that assistance is adequate, targets need and supports participation incentives.

Recommendation 102:

The maximum rate of Rent Assistance should be increased to assist renters to afford an adequate standard of dwelling. To ensure that Rent Assistance can be maintained at an adequate level over time, the rent maximum should be indexed by movements in national rents, which could be measured by an index of rents paid by income support recipients.

Recommendation 103:

To better target an increase in the maximum rate, Rent Assistance should be part of the income support system, with eligibility based on rent paid and the income support means test, rather than on eligibility for another payment (for example, Family Assistance).

Recommendation 104:

Mechanisms should be developed to extend Rent Assistance equitably to public housing tenants along with removing income-linked rent setting in public housing.

Recommendation 105:

A high-need housing payment should be paid to social housing providers for their tenants who have high or special housing needs or who may face discrimination in the private market. This payment should be funded by the Australian government. The Commonwealth and the States should retain the option of providing capital for social housing construction.

Recommendation 106:

Income-linked rents should be phased out in social housing, with providers charging their tenants rents linked to the market rate, with existing rent-setting for current tenants phased out using grandfathering or other transitional arrangements. However, continued use of income-limited rents is appropriate in some circumstances, such as in remote Indigenous communities.

Rent Assistance to better target adequacy

The rent caps for Rent Assistance should be raised. They should be set to ensure assistance is paid up to an adequate level of housing and does not compromise an income support recipient's consumption of non-housing goods and services.

While the Review has not conducted a detailed survey of adequacy or of the rental market, it appears that setting the upper cap of rent with reference to rental costs of one- and two-bedroom dwellings in the 25th percentile of rents across capital cities is a reasonable benchmark for determining adequacy (see Recommendation 102). Dwellings of this size are consistent with the need for housing in assessments such as the Budget Standards (Saunders et al. 1998). One- to two-bedroom dwellings should be adequate for households without children — assistance for the housing costs of children in families is discussed below. Setting the rent cap rents with reference to the capital cities should ensure access to job markets and reflect the housing costs where the majority of Australians live. Set with reference to rents at the 25th percentile, there should be a reasonable standard of housing and number of dwellings available. However, this benchmark should be reviewed over time to take into account future developments in rental markets.

A cap set with reference to this level should also be consistent with ensuring an adequate level of non-housing consumption. Rent Assistance involves a co-payment, without which there would be no incentive to economise on housing costs. As such, it is not possible for income after housing expenses to be the same across renters with different costs, between renters and non-renters, or between pensioners and allowees. Adequacy should focus on the remaining base payment of pensioners receiving maximum rate of assistance.

Providing additional assistance to low-income renters is likely to increase their demand for housing. Where supply is restricted or slow to respond, this may place some upward pressure on rents. However, several factors will limit the potential for more adequate Rent Assistance to increase rents. The co-payment associated with Rent Assistance will limit this potential, as not all recipients will choose to demand more housing. The increased assistance for recipients who currently pay more than the existing caps would accrue to them, and the scope for their landlords to further raise rent is limited by its level being tied to the term of the tenancy agreement. Though they are a significant proportion of the rental market, Rent Assistance recipients will represent a minority of that market, which, along with their modest means, limits the potential impact on overall rent setting.

Importantly, the potential for increases in rents is not a reason to deny an increase in Rent Assistance caps. Such increases in rents would result from greater spending power and choices for low-income earners. This provides a market signal to suppliers of rental housing to shift toward provision of the type of housing demanded by Rent Assistance recipients. Suppressing price signals is not conducive to promoting increasing supply over the long term. There are, however, constraints to supply in the housing market overall, which reflect a range of factors including tax and, especially, non-tax policies, which are discussed at Section E4 Housing affordability.

Rent Assistance should continue to include single, couple and sharer rates, with the rent caps set to reflect economies of scale in housing. Budget Standards found the relative housing needs for singles and couples to be the same in terms of bedroom numbers, suggesting that couples can achieve large economies of scale through the sharing of a room. However, assessments of housing need for a couple should recognise that some additional floor space, such as for storage or living areas, may be required with a second person. As such, it would be appropriate to set the rent cap for couples at a slightly higher level than for singles. A sharer rate should continue to be used. It should ensure that sharers have an incentive to occupy housing of a similar quality to the adequate standard used for singles and couples. However, unlike the desire to live with a partner, the decision to share is predominantly motivated by achieving cost savings. If the sharer cap were set too low and discouraged sharing, this would be counterproductive as sharing is beneficial both recipients and taxpayers, through lower costs of subsidies. To ensure Rent Assistance is applied consistently across all income support types, the sharer rate should be extended to recipients of Disability Support Pension and Carer Payment.

To ensure assistance continues to target an adequate level over time, the maximum caps threshold should be indexed to move in line with national rents (see Recommendation 102). While the rental component of the CPI is a readily available and transparent measure, use of an index of rents paid by Rent Assistance recipients would provide a more accurate assessment of their rental costs.

The minimum rent thresholds are currently set as a flat amount, which means recipients of allowances pay a greater share of their base payment in rent before Rent Assistance starts than pensioners. Setting assistance as a percentage of a recipient's base rate of payment, such as 20 per cent of the base payment, would result in a more consistent recognition of rent costs for income support recipients and be consistent with targeting assistance toward those facing high housing costs.

Eligibility for Rent Assistance

The purpose of Rent Assistance should be to ensure that adults with limited means can afford to live in an adequate standard of rental housing. As such, Rent Assistance eligibility should be based on a person's means and rental costs. This is best done by paying Rent Assistance as part of the income support system. Eligibility for Rent Assistance will therefore be set by the interaction of the maximum rates of payment, rates of Rent Assistance, and the taper rate. An increase in the maximum rate of Rent Assistance may mean that some Newstart Allowance recipients with high rents receive a portion of their payment even when engaging in full-time work at the minimum wage.32 Though the Review's position is that participation payments should generally be withdrawn before this point, providing Rent Assistance in these circumstances is consistent with minimising disincentives for taking on work.

Rent Assistance should be paid to tenants in public housing to provide more equitable and effective assistance. The interaction of eligibility for Rent Assistance and overall funding for social housing is discussed below.

In line with reforms that ensure family payments cover the housing costs of children, Rent Assistance caps should no longer be increased based on the number of children in a household. This will ensure clear functions for both payments, with Rent Assistance contributing to the income support for adults and family assistance providing for the direct costs of children (see Section F3 Family and youth assistance).

Equally, eligibility for Rent Assistance should no longer be attached to receipt of more than the base rate of FTB Part A. The means testing of the income support system determines when people have sufficient incomes (or assets) to support themselves. The proposed increase in the maximum amount of Rent Assistance will have the effect of increasing this income level at which people who have high rent costs can access Rent Assistance. This increase will mean more families will be eligible for Rent Assistance on the basis of their income. Removing eligibility for parents whose income exceeds income support cut-offs is consistent with the greater targeting of Rent Assistance to need. However, grandfathering arrangements should accompany the introduction of such a change to prevent income shocks for people currently eligible for Rent Assistance only through FTB Part A. In addition, consideration will need to be given for single parents whose income may be affected due to reforms to FTB Part B (see Section F3 Family and youth assistance).

Not extending an equivalent of Rent Assistance to mortgagors

While homeowners with a mortgage may face cash flow pressures similar to those faced by renters, the Review does not recommend extending the general scheme of rental assistance.

Mortgagors have access to mechanisms to smooth cash-flow difficulties — including repayment deferral or restructuring options through their banks, or through accessing equity in their homes — that are not available to renters. Further, assistance for mortgagors based on the cost of their mortgages would in effect be an interest rate subsidy. This poses a significant moral hazard problem of encouraging greater borrowing, which does not apply to Rent Assistance for renters. Though not well-targeted to housing stress, the non-taxation of the equity in their home, and its exclusion from income support means tests, benefit mortgagors.

While mortgage stress is a real issue, it would be very difficult to design a fair and simple assistance arrangement that addresses these issues, and the Review does not recommend it at this time.

A high-need housing payment to assist recipients with special needs

Housing assistance would be incomplete if it did not provide a mechanism for assisting people likely to have high housing costs or unlikely to be well served in the private market. Recipients of such assistance should include people who, for behavioural or cognitive reasons, find it difficult to sustain a private tenancy, or are likely to face discrimination in accessing the private rental market. Funding should ensure that social housing providers have an incentive to provide such recipients with an adequate standard of housing.

High-need tenants should be assisted with a new form of funding. A high-need housing payment would provide assistance for the higher costs of housing people with special needs. The level of assistance would be based on the high-need category to which a recipient belongs, such as having a disability or being homeless. The payment would reflect the potential costs associated with housing high-need clients, such as modifications to housing or the greater need for maintenance and repair.

The high-need housing payment would depend on the assessed needs of an individual recipient and would be portable across different eligible social housing providers. This would ensure competition among providers, which should encourage the delivery of housing that best meets the needs of their tenants. The assistance would also be scalable, allowing providers who meet the needs of their clients to expand their provision. This would encourage development of a more dynamic social housing sector.

The high-needs housing payment should be tied to housing, as it is an entitlement to enable recipients to access social housing that reflects their needs. As such, while directed by individual recipients, it should be paid to the provider of their choice. However, the high-needs housing payment reflects only housing costs, so it is not intended to replace funding that providers can also receive for delivering other support services to their tenants.

Though the majority of high-need renters will receive Rent Assistance, eligibility for the payment would best be governed by assessment of a person's high-need characteristics, rather than their income. Ongoing eligibility assessed by periodic review would mean that recipients would not have a disincentive to take on work, which may occur if eligibility were also linked to income.

The high-need housing payment should be provided by the Australian government. As noted in Section F1 Income support, preventing capability deprivation is a public good, best provided by a national level of government. The high-need housing payment would supplement the redistributive nature of Australian government income support. Further, having the Australian government pay all providers through the same mechanism is consistent with ensuring competition among community providers and State housing authorities.

As the majority of high-need recipients are currently likely to live in social housing, the reform should focus on that sector when introduced. Once established, however, the scope for extending the high-need housing payment to private providers should be explored.

A national assistance program

The Review does not recommend that Rent Assistance or the high-need housing payment vary geographically. Higher rents based on locations are generally associated with access to better services or lower costs of travel of those areas. It can also be difficult to set meaningful rent boundaries as there can often be as much variation in rents within a major city as there is between the average rent in that city and the average rent in a regional area. Setting Rent Assistance with reference to all capital cities should enable recipients to live in those areas or move to them to find employment.

Further, the responsibility for providing assistance to people with limited means and high needs is a Commonwealth responsibility, with assistance responsive to movements in national rents. Where regional rents vary significantly from national averages this is likely to be due to forces beyond the control of a national government. State and local governments have responsibility for aspects of policy that overlap with housing — such as infrastructure provision and planning regulation — and are likely to affect the rental costs of particular regions. High rents in a specific region can only be sustained where supply restrictions constrain the addition of supply. Policies that address the source of regional variations in rents would be more effective in the long term.

Rent setting and funding of social housing

Income-related rents generally should be phased out in social housing, with providers charging their tenants rents linked to the market rate (see Recommendation 106). Carefully targeted transition arrangements will be necessary to ensure households are not forced into housing-related stress or dislocation from social networks.

As recipients of social housing would receive Rent Assistance, the amount they pay to their landlord should reflect the market rent of a dwelling. A dwelling's rent reflects the range of benefits it provides, such as the building's size and quality and the location's proximity to employment, services or nearby amenities. Charging market rents would allow recipients to make trade-offs between these aspects of housing and other elements of their consumption. It would also provide signals to social housing providers about the housing that is valued by their clients. In combination, Rent Assistance based on market rents should encourage the provision of social housing that is of value to tenants.

There will, however, be some circumstances where the use of market rents will be neither possible nor appropriate. For example, in some remote Indigenous communities there is no effective market for rental housing. It may not be possible for market rents to be used in these areas. In a limited number of areas — such as in mining towns facing supply constraints in the provision of rental housing — market rents may reach a level where even the enhanced Rent Assistance program envisaged by the Review will not provide assistance that makes social housing affordable by low income households. A short-term departure from setting market-based rents may be the most effective way of addressing such cost pressures on tenants. In such cases, there may be a need for social housing to limit rents with reference to tenant incomes.

The Review Panel considers that combining access to Rent Assistance with market rents would improve the equity of housing assistance. However, this approach would be a significant departure from the existing approach of charging income-based rents. Transitional arrangements would need to be considered as part of any changes to rental subsidy arrangements (see Box F5-1).

Box F5-1: Transition mechanisms in social housing

The proposed approach for rent-setting and funding in social housing is a substantial shift from current practices.

Even with access to increased Rent Assistance, tenants who occupy dwellings of high market value would be exposed to a reduction in income if these reforms were introduced suddenly. The move to market rents should be phased in gradually. A potential approach could be for tenants to receive Rent Assistance based on the market value of their social housing dwelling, but have their providers charge them a rent at a discount to the market value to ensure that they are not initially worse off. This discount could be reduced at an annual proportion, enabling a very gradual transition toward market rents over a number of years. A gradual approach would enable tenants time to find alternative housing if they find it better value than the dwelling they currently occupy. In some cases, grandfathering of existing tenants may be necessary.

The National Affordable Housing Agreement would require renegotiation to facilitate reform, which should take into account transitional arrangements for tenants.

The high-need housing payment would involve very substantial reform to the current National Affordable Housing Agreement. In combination, the Rent Assistance and high-need housing payment would direct assistance to recipients on the basis of their means and needs and would also be a reliable and transparent form of funding for housing providers. Through Rent Assistance and the high-need housing payment, the Australian government would become the main funding provider for housing assistance. Housing for low-income and disadvantaged households would be delivered by State housing authorities and community organisations, as well as private providers. This approach would effectively create a user-directed funding model for the provision of public and community housing. Allowing assistance to be directed by recipients gives them greater choice and places pressure on providers to deliver housing that recipients want to live in. Housing support that is neutral between public and private rental tenures would encourage more responsive provision of social housing. The 2007 National Housing Survey indicates that 63 per cent of public housing tenants are satisfied with their dwelling, while 78 per cent of community housing recipients are satisfied with theirs (AIHW 2007a and AIHW 2007b).

However, the Rent Assistance reforms and the high-need housing payment will not replace the need for governments to provide capital funding for social housing. This is particularly the case for Indigenous housing in remote areas, where the Australian government has already assumed responsibility for the provision of capital funding. As the social housing sector will need to continue to provide a significant part of the stock of housing in Australia, capital funding can also enable a more immediate increase in supply when the housing market is constrained.

Tenure security and housing assistance

Tenure security is an important aspect of social housing for some recipients. Because many renters are unable to purchase long-term secure leases at a reasonable cost in the private market in Australia, social housing has tended to become the default provider of long-term secure rental properties. However, under the current arrangements, security of tenure comes at a large cost to providers, as the rent they receive from tenants generally moves in line with income support (indexed to CPI or wages), which is unrelated to the market rent of the dwelling. Further, while they receive tenure security, it is only for one dwelling, which can lock recipients in to particular housing.

The proposed funding model for social housing should enable security of tenure for recipients. By providing assistance in line with the likely costs of tenants, the high-need housing payment provides an incentive for social housing providers to house tenants with special needs. As Rent Assistance is proposed to move in line with rents, this reduces risks to clients and enables social housing providers to charge market rents. This should facilitate the use of long-term leases that are valuable for both recipient and provider.

In addition, the Review's proposed reforms to land tax (see Section C2 Land tax and conveyance stamp duty) and income taxation (see Section A1 Personal income tax) should facilitate improved tenure security in the private market over time. These reforms would reduce barriers for larger investors, such as superannuation funds, to invest in the housing market. Institutional investors are more likely to invest over long-term horizons.

32 This currently occurs for recipients of higher rate Newstart (such as long-term recipients aged over 60) who receives maximum rate Rent Assistance. For example, the remaining income support, after income testing, for a person in this position earning the minimum wage ($28,276) would be around $9 per fortnight.