Labor have not been subtle in testing the water for changes in the CGT treatment and / or negative gearing with the political positioning around housing supply and affordability.
The accepted position is that Australia is not building enough houses with the National Housing Accord (2024) targeting 1.2 million homes over five years. The current forecasted shortfall is 262,000 homes by 2029. Studies indicate that the main drivers for this are a fall in productivity combined with shortages of skilled labour and materials constraints. Despite this, changing the taxation treatment of housing is still considered by many to be a mechanism for change in this marketplace.
Currently, investors have no restrictions on the number of properties that they can negative gear and are eligible for the 50% general discount when they dispose of a property that they have held for more than 12 months. The combined effect of this is, in simple terms, to provide a tax deduction upfront at (say) 47% for interest costs and an effective tax rate for a capital gain on disposal of (say) 23.5%. This appears as a “win win” for investors who are willing to fund the cash shortfall throughout the ownership period.
Whilst nothing has been set in stone, a variety of changes have been floated by the government with a view to addressing intergenerational wealth issues and increasing the supply of housing. These include:
- Limiting the number of properties a taxpayer is able to negatively gear
Whilst initially attractive, it would be helpful to understand why it would be acceptable to negatively gear a property at say $5m but not 5 properties at $1m – the economics would on the face of it be the same. What is the arbitrary number of properties to cap investors at?
How does limiting the number of houses a taxpayer can negatively gear change the number of available houses?
In addition, the question of whether this limitation applies to other assets (such as shares) then arises. Would these also be impacted?
- Reducing the rate of the general discount
There are already different discount rates and therefore an additional discount rate for certain assets should not be hard to manage, however, the question would arise is how does this increase housing supply and why is it not a simple tax grab?
Ideas have also been proposed to have differing rates of discount for new (70%) and older (35%) housing. Again, this appears to be an arbitrary line in the sand.
- Reverting back to the pre 1999 methodology of CPI measurement
Before the general discount a series of calculations were required with a view to eliminating the gain made on a property due to inflation measured by CPI. This methodology has complexity and accuracy issues (eg whether the measure of CPI adopted is the right measure) and again seems to fall at the issue of increasing supply.
Treasury’s view is that the taxation of housing (CGT changes) does not directly result in a significant increase in the supply of housing. Increasing the supply would appear to require more houses to be built which means that different parts of the government (Federal and States) would need to work more closely together as well as engaging with business to achieve the desired increase in supply.
As mentioned, nothing is set in stone as yet. The Federal Budget is due to be handed down on Tuesday May 12th and we’ll provide our Budget Analysis on the 13th – stay tuned for more.
