Buying a newly built home will mean younger Australians can still benefit from negative gearing, as the government seeks to encourage housing supply while reforming tax concessions.
Budget Rhetoric vs Reality
Figures show the treasurer's reforms will make the tax system fairer, but some will not have the advantages enjoyed by their parents. As Jim Chalmers did the round of the parliamentary press gallery on Tuesday, he encouraged journalists to see the tax reforms in the budget as the most ambitious since the turn of the century.
The core of the tax package is that instead of paying tax on just half of profits on the sale of investments held for more than a year, Australia will return to the pre-1999 version where investors get a discount based on inflation. From budget night, negative gearing is a thing of the past for new investors, with exceptions for new builds to boost supply. The government also plans to impose a minimum 30% tax rate on income from discretionary trusts, a vehicle many wealthy households use to minimise taxes.
The treasurer in his traditional post-budget address on Wednesday said: "It's clear that these concessions have fundamentally distorted our housing market. The current tax arrangements tip the balance against first home buyers, and that's why we're changing them." But do they tip the balance back far enough for aspiring homeowners? Are the reforms as progressive as Labor claims?
A Fairer Tax System
Some experts believe the true benefit of these tax reforms is not improved housing affordability but a fairer taxation system. Budget papers show that since the turn of the century, the top 1% of earners received an average total tax benefit of more than $730,000 from the 50% CGT discount, negative gearing, and discretionary trust concessions. The next 1% of high earners over two-plus decades received a much lower average benefit of $152,000, while the median taxpayer got just $12,400.
It is clear the reforms will restore balance from now, but they will not right past wrongs. By protecting existing investors' massive profits through grandfathering, Labor has not gone as far as many would like, particularly those who missed out on decades of concessional tax arrangements. Economists argued that grandfathering would have created more budget space for tax relief for workers.
The Expectations Gap
For all the hype around Tuesday's budget, the struggle for first home buyers remains the same as before. As Ken Henry, former Treasury secretary and long-time reform advocate, writes, "this budget doesn't fix everything" but does "take a very big step in the right direction." Independent economist Saul Eslake agrees: "Although the tax changes won't solve Australia's housing crisis on their own, they will over time make a meaningful contribution."
Opposition leader Angus Taylor has vowed to oppose and repeal the changes. Shadow treasurer Tim Wilson told 4BC radio that Labor's tax changes would hurt young Australians' capacity to build wealth and enter the property market: "Young Australians have just had the ladder of opportunity ripped up from them before they can get the first foot on the rung."
By denying the next generation the tax breaks enjoyed by their parents, has Labor made it harder for younger Australians to get ahead? For some, the answer is probably yes, but it is a relatively small group. Australian Bureau of Statistics figures show that since 2019, around 6% (about one in 20) of first home buyers were investors. Besides a particular enthusiastic period in 2021, there have typically been 7,400 new first home investors a year since 2020. Not all will be negatively geared, but many will, betting on selling the property for a healthy profit to generate a deposit for a home to live in.
To the extent that future first home buyer investors will no longer benefit from the "rent-vesting" strategy due to the ban on negative gearing, they are disadvantaged. Chalmers was asked about this on Wednesday and responded that anyone wanting to negatively gear a property should invest in a newly built home, which is the exception to the new rules: "It's essentially an argument to go further. But we think we strike the right balance here. We think getting another 75,000 Australians, and most likely primarily younger Australians, into the housing market is a very good thing to do."
Biggest Tax Reform in a Quarter of a Century?
It is not all spin, although for many younger Australians, the impact will not match the rhetoric.
