There is a profound inequity when it comes to tax breaks for investors, according to a new analysis from the Parliamentary Budget Office. The wealthiest fifth of Australians receive nearly 90% of the benefit of the capital gains tax (CGT) discount, while the top 10% of earners receive more than 80% of the benefit. The top 1% of income earners, those on more than $362,900 a year, will get nearly 60% of the benefit from the CGT in this financial year.
Economists overwhelmingly agree that the 50% CGT discount is too generous and should be reduced or abolished. Brendan Coates, director of the Grattan Institute's housing and economic security program, says scaling back the discount would deliver a much-needed rebalancing in the tax system. Independent economist Chris Richardson argues it would “give this nation a less biased tax system”. The e61 Institute also notes the current concession “overcompensates high-income earners and undercompensates low-income earners”, distorting how Australians work, save, invest and finance their investments.
While reducing the CGT discount might not dramatically lower house prices—research suggests a drop of between 1% and 4%—it could shift the composition of the housing market. Coates points to research estimating that abolishing negative gearing and halving the CGT discount for landlords could boost home ownership rates by three percentage points, reversing a decades-long trend. Renters would be less likely to be outbid by investors, who would be less inclined to put money into property.
Hugh Hartigan, former head of research at Housing Australia, agrees that the impact on overall housing affordability is “blown out of proportion”, but says it would change the composition of demand. “You’ll likely have less investors and probably more home owners,” he notes. This underlines the potential for CGT reform as a tool for shifting the balance back towards homes as shelter, rather than as an investment.
Economists stress that CGT reform should not be viewed solely through the lens of the property market. Coates says, “The main case for this reform is that it helps fix the budget bottom line and reduces the inequity of the budget.” With housing affordability described by Treasurer Jim Chalmers as “the defining issue when it comes to intergenerational fairness”, the idea of curbing tax concessions may have finally come of age.
