Saul Eslake examines the controversial tax changes in Australia's 2026 federal budget, addressing misleading claims about their effects on renters, young investors, small businesses, and inheritance.
Will the changes negatively impact renters?
It has been widely asserted that changes to negative gearing and capital gains tax will increase rents, as was claimed during the temporary abolition of negative gearing between 1985 and 1987. However, investment in established residential properties, which accounts for over 80% of property investment lending, does not increase housing supply. Instead, it drives up prices and adds to rental demand. Reducing such investment would have equal and opposite effects on supply and demand, leaving rents unaffected. Landlords charge what the market bears, and existing investors have been grandfathered, so no rent increase is justified. Moreover, Treasury modelling may be flawed; redirecting investment to new builds could increase housing supply and potentially lower rents.
What about 'rent-vestors'?
The claim that reducing the CGT discount harms young 'rent-vestors' is overstated. In 2022-23, only 4.4% of taxpayers aged 18-34 reported capital gains, compared to 14.3% of those over 65. Young people accounted for just 4.2% of total capital gains, while those over 55 claimed 62.4%. The number of young negatively geared property investors has fallen from 260,000 in 2011-12 to under 166,000 in 2022-23, while older investors rose from 248,000 to 294,000. These tax breaks do not help young savers building deposits through traditional means.
Is the budget bad for small businesses and startups?
Claims that tax changes hurt small businesses and startups are misleading. While taxing capital gains at full marginal rates with an inflation allowance may penalize startups whose assets start at zero value, the government should consider averaging provisions similar to those for farmers, sportspeople, and entertainers to mitigate this. However, small business owners should not pay less tax on the same income than wage earners.
Has the government introduced a 'death tax' in disguise?
The assertion that a 30% minimum tax on discretionary trusts, including testamentary trusts, is a covert death tax is exaggerated. This tax applies only to new trusts and not to fixed trusts. Australia is one of only 12 OECD countries without inheritance or estate taxes, while the US and UK have them. Given the anticipated transfer of over $5 trillion from baby boomers to their children, such taxation is not necessarily bad.
The budget reforms are not perfect but represent material improvements to the tax system and are welcome.
