As the budget approaches, Labor's proposed adjustments to tax concessions for property investors have sparked minimal controversy, suggesting a significant shift in housing policy dynamics. Changes to capital gains tax and negative gearing, long considered untouchable, now appear increasingly likely, with the political tide turning towards addressing housing affordability.
Historical Context and Misconceptions
Negative gearing, a topic of debate for years, has been surrounded by myths. In 2015, then Treasurer Joe Hockey claimed that scrapping negative gearing in the 1980s led to rental price increases, but data shows this was inaccurate. While rental prices rose in Sydney and Perth, they remained stable in Melbourne, Brisbane, and Adelaide. Moreover, rental prices grew faster after negative gearing was reinstated in Sydney and Brisbane, indicating other factors like low vacancy rates drove changes.
The Current Political Landscape
With less than a month until the budget, the mooted changes to negative gearing have barely registered in political discourse. The Liberal party has avoided the issue, not asking a single question on housing in the last sitting fortnight. Independent MP Dr Sophie Scamps has called for reforms to address intergenerational inequity, reflecting growing voter demand for action on housing affordability and tax breaks for investors.
Rumors suggest the government may limit negative gearing to two properties, covering 90% of investment property owners and mitigating criticism of targeting "mum and dad investors." The number of people owning more than two investment properties has remained around 9% for 15 years, following a spike after the capital gains tax discount was introduced in 1999.
Capital Gains Tax Discount Revisions
More notably, the government is reportedly set to change the capital gains tax 50% discount. Prior to its introduction by Howard and Costello in 1999, negative gearing was less significant, with rental profits and losses balanced. The discount transformed negative gearing into a strategic accounting move, increasing its popularity until recent years.
Evidence Against Supply Claims
Opponents, such as the Master Builders Association and Property Council, argue that the CGT discount encourages housing supply, but 25 years of data show no improvement in construction rates. Removing or adjusting the discount is unlikely to cause supply collapses or rent increases.
The government is considering cutting the discount or reverting to the pre-1999 method of taxing "real" capital gains, accounting for inflation. This approach is difficult to criticize, as the 1990s saw a functional housing market focused on living rather than profit-making.
Technical Implications of Changes
To illustrate, imagine buying an investment property for $575,000 and selling it a decade later for $1,000,000, reflecting average price trends. Under the current system, only half of the $425,000 profit is taxed, with $212,500 tax-free. If taxed based on real gains with 20% inflation, the taxable amount increases due to a 55% real return. However, with 40% inflation, the real return drops to 35%, potentially reducing taxes compared to the current system.
Some advocate for cutting the discount to 25%, arguing it remains generous compared to wage taxation. Reverting to pre-1999 settings would still be beneficial, undoing Howard-era policies. The lack of apocalyptic warnings from vested interests suggests that popular policies can overcome opposition, empowering the government to pursue meaningful reforms.
