State government targets investment property with capital gains tax amendments
There is nothing more Australian than investment property and negative gearing. Well, OK, maybe Vegemite – but this great nation’s undying fixation with bricks, mortar and wood goes back to the rapid appreciation of real estate that started in the 1990s.
Back in 1890s, if you didn’t lose all your gold mining riches to the depression, the house you bought would return a steady real price increase of around 0.5% per annum – and that steady increase continued (on average until the heady days of the late 1990s).
A typical Sydney house back in 1973 only cost $18,700 (according to the ABS). That same source puts the figure at $228,000 in 1996 before leaping to $1,154,000 at the start of this year. Even bearing in mind that $18,700 is actually worth $263,000 in today’s money – that’s a big jump – and as we all know, first time home buyers are struggling to get a start on the property ladder.
Back in the early seventies, a house would cost your client around 4.5 times their salary – now, in Sydney, they would have to spend a little over 12 times that figure to get a (typical) roof over their heads.
There are a wide range of reasons that Australian property has, and continues to, boom – but one ‘solution’ that keeps being mentioned is preventing investors from being allowed to claim tax breaks for property investment profits.
Stopping CGT discounts could kill negative gearing – the ‘gearing’ only works if losses offset against highly taxed top rate dollars can be replaced with lower-tax CGT gains when a house is sold.
Although Labor has dropped its plans to halve the CGT discount and has announced that it wants to keep the status quo on negative gearing, NSW Planning Minister (and former wannabe premier) Rob Stokes has just made a submission to a federal parliamentary enquiry headed by Jason Falinski that would see CGT on investment property profits reviewed.
The proposal claims that the 50% CGT tax relief that investors can currently claim on properties that have been owned over a year is contributing to “speculative pressures in the market” and that adjusting the tax would result in “The continued upward growth in housing prices [being] lessened to some degree.”
"The federal government should review taxation settings, including the capital gains tax discount of 50 per cent on properties held for over 12 months, and consider reforms to ensure an appropriate balance between the purchases of properties for owner-occupied and investment reasons," the proposal said.
Originally introduced by John Howard and Peter Costello in 1999, the cut was part of a number of recommendations by John Ralph in his Review of Business Taxation report.
And any solution that raises taxes (for the good of first home buyers, obviously) is bound to be highly palatable for politicians – “we want to tax you more - it’s for the good of the kids/first home buyers” - but the suggested changes may not be plain sailing. Any tax-hike on coalition voters will have to be handled very carefully, which is why the Feds have been quick to make sure that any unwanted mess stays on the NSW government’s doorstep.
Chair Jason Falinksi is very aware that the Coalition campaigned heavily against Labor’s previous tax suggestions saying that any moves would be “inviting a housing market crash” and so has been quick to point the finger back at the state.
Calling the proposal “disappointing” he said “Instead of focusing on their own reports that show they’re short 100,000 houses in Sydney and they need to be building 40,000 houses a year just for the problem not to get any worse, they talk about Federal Government issues like capital gains tax and requesting more money to transfer from stamp duty to land tax”.
Well known economist Saul Eslake has, however, weighed in to support the suggestions, telling the AFR that the CGT was one of the “dumbest tax breaks in history”.
“For all the crocodile tears which politicians of all persuasions routinely shed about the difficulties facing those wishing to get their first foot on the property ladder, deep down they know that there are far more people who already own at least one property and who therefore have a very strong interest in policies which result in continued property price inflation” he wrote in a submission to the enquiry.
What really drives house prices?
CGT + Negative Gearing 1-4%
Zoning regulations 29-42%
1% rate cut 8%
(Figures from Centre for Independent Studies/RBA)