The Albanese government is widely expected to scale back tax breaks for investors in its May budget, under the banner of fighting intergenerational inequity. The 50% capital gains tax (CGT) discount, combined with negative gearing rules, has been blamed for supercharging debt-fuelled property speculation and contributing to unaffordable homes in Australia.
What Changes Are Expected?
Investors, including landlords, currently pay tax on only 50% of their capital gains on investments held for at least 12 months. Treasury has reportedly modelled cutting the discount to 33% or returning to the pre-1999 regime where capital gains were adjusted for inflation. Just under two weeks out from the 12 May budget, bets have firmed that the government will opt for the second option. The budget could also include more generous tax breaks for investment in new builds to lift housing supply and fend off opposition attacks.
Negative Gearing Reforms
There could also be changes to negative gearing, where landlords claim rental losses against their taxable income. Options include limiting the number of negatively geared properties or abolishing it altogether.
What’s the Problem with the Current System?
The flat 50% CGT discount was introduced in 1999 to simplify the system and encourage productive investment. However, independent economist Saul Eslake told a parliamentary committee in February that instead of creating a nation of entrepreneurs, it led to Australia becoming even more a nation of speculators. Over the past 25 years, the discount, combined with negative gearing, has been blamed for fueling property speculation and unaffordable homes.
Official data shows the top 10% of income earners receive nearly 90% of the benefit of the CGT discount. Ken Henry, a former Treasury boss, told the committee that wealthy investors have used property investment as a tax-minimisation strategy, doing a great injustice to young Australians unable to compete in the property market.
Would It Make Homes Cheaper?
Experts say making investors pay more tax would make a difference to home prices, but likely not much. Various models estimate abolishing the discount would lower house prices by between 1% and 4%, but could bump up rents slightly as the tax change drags on home building. On the other hand, research suggests abolishing negative gearing and halving the CGT discount could lift home ownership by three percentage points, as investors would be less inclined to put money in property, reducing competition for owner-occupiers.
Treasurer Jim Chalmers has emphasised that boosting supply of new homes remains the main game for improving affordability, but new tax settings should rebalance ownership away from investors and towards owner-occupiers. Stephen Smith of Deloitte Access Economics says there are sound economic arguments for reducing the CGT discount, but while it may be politically easy to portray this as a housing fix, it is really a fairness fix.
What About the Budget Impact?
The amount raised from a change to the CGT regime depends on whether it applies to existing assets or only new investments. The Grattan Institute has estimated that halving the discount and applying it to all investments could immediately raise $6.5 billion a year. If new rules are grandfathered, the additional tax revenue plunges to a fraction of that. For example, a tax package returning CGT to pre-1999 settings and getting rid of negative gearing, but grandfathered, would raise just $2 billion over four years, according to CBA estimates. Over a decade, the changes raise $25-30 billion.
Because an inflation-adjusted CGT discount targets real profits, whether it generates more or less revenue than the flat discount depends on the difference between the rate of return and inflation. If a property increases by 5% a year with 2.5% inflation, the discount is the same as under current rules. But if growth is 4% with 2.5% inflation, the discount is over 60%, giving a bigger benefit and less revenue.
Making changes retrospective would raise more revenue but break from tradition. The government could phase in the rules, with Grattan recommending five years for investors to sell under old rules and Deloitte recommending three years. The Guardian has been told the most likely option is a hybrid model where capital gains on existing investments are split: gains before the change get a 50% discount, while gains after are taxed under the new system. Chalmers has said any new rules would recognise decisions people have taken in the past.
