Financial commentator Scott Pape, widely known as the Barefoot Investor, has publicly endorsed the Albanese government's potential overhaul of Australia's Capital Gains Tax discount system. Pape has described the existing 50% CGT discount as fundamentally flawed, arguing it has artificially inflated property prices and contributed to the nation's housing affordability crisis.
The Controversial Tax Break Under Scrutiny
Established in 1999 under Prime Minister John Howard and Treasurer Peter Costello, the current Capital Gains Tax rules allow investors who hold assets like property or shares for over twelve months to pay tax on only half of their profit upon sale. This replaced the previous system where gains were indexed to inflation, ensuring taxation applied solely to real increases in value rather than providing an automatic 50% reduction.
Treasurer Jim Chalmers has indicated that significant tax reforms may feature in the upcoming May Budget, with the CGT discount emerging as a central focus. The government aims to tackle pressing issues of intergenerational inequality and housing accessibility through potential policy adjustments.
Testing the Waters for Political Change
Scott Pape suggests the government might already be gauging public reaction to proposed changes. "There's a good chance the Treasurer is floating this now to soften people up," Pape observed. "Whether it actually happens in May will depend on how loud the backlash is over the next few weeks."
He elaborated on his longstanding opposition to the policy, stating, "I've always thought the CGT discount was a bonehead policy. It pushed property prices higher." This critique gains urgency as new research reveals Australians now require an annual income of approximately $200,000 to comfortably afford a typical house in most capital cities without experiencing mortgage stress.
Divergent Views from Political and Economic Figures
The debate has drawn contrasting opinions from prominent figures. Former Reserve Bank governor Bernie Fraser supports reducing the CGT discount for investment properties, though he remains more open to maintaining discounts for other assets like shares. "From day one, I've argued against the bloody thing," Fraser stated. "Housing should primarily be for living in and to raise a family, rather than for wealthy investors."
Conversely, former Prime Minister John Howard and ex-Treasurer Peter Costello oppose any changes. Howard criticized the potential reform as "yet another tax slug by the Albanese government which lazily leans on the [Australian Taxation Office] to provide extra revenue" that would "hurt the aspirational middle class."
Potential Impact on Investment Landscape
Pape highlighted that if modifications target property exclusively while sparing shares, investment properties could become markedly less attractive post-Budget. "Good news for first-home buyers. Bad news for property investors," he summarized. However, he cautioned against impulsive investment decisions based on speculative tax changes, noting, "I don't make investment decisions based on proposed tax changes."
He further advocated for shares as a superior long-term investment, citing their tax-effective franking credits, potential for stronger growth, and fewer management hassles compared to property ownership. "After all, shares don't leak, break or ring you on a Sunday needing a plumber," Pape remarked.
Historical Context and Future Prospects
Labor previously campaigned on halving the CGT discount to 25% during the 2016 and 2019 elections, both unsuccessful attempts that led current leader Anthony Albanese to initially rule out changes. Meanwhile, a Greens-led Senate inquiry will examine the CGT discount over the coming month, with Senator Nick McKim labeling it Australia's "most unfair tax break."
McKim argued, "The discount is a textbook example of a system tilted toward the ultra-wealthy. Right now, the system makes it easier to buy a fifth property than a first. It rewards speculation over work and entrenches advantage for those who already own assets."
A government source confirmed to The Australian Financial Review that discussions are underway regarding possible adjustments to the tax break for inclusion in the May budget, signaling renewed political will to address these systemic issues.
