Could a Tax Change Be the Key to Solving Australia's Housing Crisis?
Australia's housing affordability crisis is a ticking time bomb, and the Albanese government is exploring every avenue to defuse it. One idea back on the table? Tinkering with the capital gains tax (CGT) rules for property investors. But here's where it gets controversial: while this move could potentially cool the market, it might also have unintended consequences, and its effectiveness hinges heavily on the specifics of the reform.
The Labor Party isn't new to this debate. In 2019, they proposed slashing the CGT discount for property investors and other asset holders in half. The proposal fizzled after the election loss, but whispers of its return have persisted. This time around, the focus is squarely on housing affordability, a stark contrast to 2019 when the CGT debate centered on fairness, arguing that the discount disproportionately benefits the wealthy.
Labor's mantra has consistently been about boosting housing supply, a stance reiterated by ministers this week. But if they resurrect the CGT discount as a housing affordability solution, simply dusting off the 2019 policy might not cut it. What would a housing-focused CGT reform look like, and crucially, would it actually make a dent in the crisis?
The CGT: Not Your Typical Tax
Let's pause for a moment to understand the CGT. Contrary to its name, it's not a standalone tax. It's part of the income tax system. When you sell an asset – a house, stocks, even artwork – any profit you make is considered taxable income, just like your salary. However, the system acknowledges that assets naturally appreciate over time due to inflation. Before 1999, attempts were made to isolate the inflationary gain and deduct it. Since then, a flat 50% discount has been applied, simplifying the process and making investments more attractive.
Unintended Consequences for Property
This 50% discount has had unintended ripple effects in the property market. Firstly, it overcompensates property investors for inflation, which has averaged 2.9% annually since 1999, while house prices have soared at 6.4%. Secondly, it incentivizes holding onto properties longer. Someone selling a property after retirement, when they're likely in a lower tax bracket, could pay significantly less tax than if they sold during their working years. And let's not forget 'negative gearing', allowing investors to deduct rental property losses from their taxable income each year, further sweetening the deal. (It's important to note that a person's primary residence is completely exempt from CGT, and Labor has no plans to change this.)
The result? Property investment has become disproportionately attractive compared to other investments with similar returns. Some economists and reform advocates argue this has contributed to Australia's lower homeownership rates compared to other high-income countries and fueled house price growth.
Who Benefits?
The benefits of the CGT discount overwhelmingly flow to the top. This financial year, the discount will cost the federal budget a staggering $21.9 billion, with 90% going to the wealthiest 20% of taxpayers.
Price Impact: A Delicate Balance
Labor's 2019 argument focused on fairness and the discount's hefty cost. Their proposal aimed to halve the discount to 25% for all new investments, while 'grandfathering' existing ones to avoid penalizing those who invested under the old rules. This approach, designed to minimize opposition, was expected to have a 'modest' impact on house prices, according to Treasury analysis.
However, most economic models suggest even more aggressive reforms would have a limited price effect. The Grattan Institute estimates halving the discount and phasing in existing properties would only lower prices by around 1%. Deloitte's 2019 modeling, which also factored in negative gearing reforms, predicted a slightly higher 4% decrease.
Supply Concerns and Political Tightrope
Labor ministers, like their counterparts in other major parties, are wary of causing house prices to plummet, citing concerns about financial instability and the impact on homeowners' wealth. But what about housing supply, Labor's declared priority?
The Property Council, representing the construction industry and opposed to CGT reform, warns that halving the discount would be like 'slamming the brakes' on housing construction. They advocate for a more modest reduction to 40%. The Grattan Institute, a CGT reform proponent, acknowledges a decrease in new builds but estimates a relatively small impact – around 10,000 fewer homes over five years. While this might seem insignificant compared to the government's ambitious 1.2 million homes target, Labor MPs are unlikely to embrace any policy that doesn't actively boost supply, especially given the target is already off track.
A Supply-Friendly Twist?
One potential solution to avoid hindering supply would be to exempt newly built homes from the CGT changes. Taxing new home investments at a lower rate than existing ones could be framed as a pro-supply policy. However, economists like those at the e61 Institute and ANU's Bob Breunig argue that differential tax rates across asset classes create distortions. The Henry Tax Review, commissioned by the Rudd Labor government, advocated for a consistent, low tax rate across all investment types.
The Debate Rages On
The CGT debate is far from over. The Senate committee examining the issue has received submissions from 68 parties, including the Grattan Institute, Property Council, e61 Institute, and Bob Breunig, all offering diverse perspectives.
What do you think? Is tinkering with the CGT the right approach to tackling Australia's housing crisis? Would a supply-focused exemption for new homes be a viable compromise? Share your thoughts in the comments below.
