Budget test: Will Labor back a tax break to deliver cheap hot water to rentals?

With the federal budget just weeks away, Harry Barber is hoping the Treasurer will deliver targeted cost-of-living relief that does more than offer a short-term fix — a tweak to the tax system that could cut energy bills for renters and accelerate the shift away from gas.

A passionate advocate for electrification and emissions reduction, Barber, from Electrify Yarra in Melbourne, wants Treasurer Jim Chalmers to allow landlords to claim an instant write-off when they install a heat pump hot water system.

The idea is to break one of the most stubborn barriers in the energy transition — the split incentive between landlords and tenants. Landlords are reluctant to invest in appliances they don’t directly benefit from.

“We’ve got to break into that cycle,” Barber told the SwitchedOn Australia podcast. “We’ve got to work out a way for them to benefit by choosing a heat pump.”

While Victoria is moving to phase out new gas appliances, effectively forcing change, Barber argues “sticks” alone won’t deliver the speed needed: “People respond much better to carrots.”

His proposal is to extend to landlords what many businesses already receive: the ability to deduct the full cost of an asset in the year it’s installed, rather than depreciating it over a decade or more.

Landlords currently can’t access that opportunity because they’re not regarded as a business under Treasury rules.

Under current tax arrangements, landlords can depreciate appliances like heat pumps over 10 to 15 years. An instant write-off would bring those deductions forward and make the switch more financially attractive.

Crucially, Barber says this is not about handing out cash, rather “it’s more effective assistance with the cost of living than the once-off electricity bill booster was.”

Instead, it targets relief where it’s most needed — renters, who are often locked into inefficient gas systems and higher running costs.

The idea isn’t new. The Grattan Institute, in its Getting off gas: why, how, and who should pay? report, made a similar recommendation, arguing governments should provide tax incentives to overcome the financial barriers landlords face in electrifying rental properties.

Grattan found that when gas appliances fail, landlords tend to replace them like-for-like — locking in another decade of higher emissions and energy costs. Without an incentive, the default decision is to stick with gas.

The think tank also noted that financial constraints, both real and perceived, are the biggest barrier to retrofits. An instant write-off, it argued, is a simple fix: adjust the tax depreciation schedule so that appliances like heat pump water heaters can be written down immediately.

And the “tweak” wouldn’t come with a large price tag.

Costings prepared by the Parliamentary Budget Office for independent MP Allegra Spender in 2023 found an instant write-off for heat pump hot water systems would cost the budget about $22 million over four years, while lifting uptake in rental properties by around 35 per cent — roughly a third.

Even when expanded to include air conditioners and induction cooktops, the PBO estimated the total cost to be $93.5 million over the same period.

For Barber, hot water is the most obvious place to start — not because it’s glamorous, but because it delivers quick wins.

Whilst “it’s not the sexiest [electric appliance]”, he points out that there are fewer decisions involved in buying hot water systems.

“Hot water tanks just go down the side of the house – you don’t have to choose the colour, they’re all grey.”

Heat pump hot water systems are relatively cheap, especially in states with rebates, simple to install, and can deliver immediate bill savings. Barber estimates households can save around $600 on their energy bills a year by switching.

Still, the politics are complicated. Landlords already benefit from tax concessions such as negative gearing and capital gains discounts, and there is growing pressure to wind those back.

Barber suggests the two debates could be linked. If the government reins in the more generous tax benefits landlords receive, the Treasurer could “give them this small hot water carrot.”

The broader question is whether policymakers will act quickly enough. With gas phase-outs looming in some states, landlords will eventually be forced to switch. But Barber argues waiting for that moment risks locking in years of unnecessary costs.

“If the treasurer was to do this, then all of a sudden everyone who’s a landlord in Australia is concentrating on hot water.”

“We need to be doing lots of smart things in lots of areas, and this is a little overlooked area that I think has enormous potential. “

You can hear the full interview with Harry Barber on the SwitchedOn Australia podcast here, and an interview about the Grattan Institute’s Getting off gas report with Alison Reeve, Program Director, Energy & Climate Change, here.

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