Should the Capital Gains Tax change?

Publicly, the Federal Government says it is focused on supplying more housing, rather than paring back taxation incentives to housing investors, as a solution to Australia’s housing shortage and unaffordability issues. 

However, there is chatter in the media that the Federal Government is considering limiting the 50% deduction on capital gains tax (CGT) for new investors (the discount, it has been claimed, would be grandfathered), giving this idea a new lease on life.  

Even the usually economically cautious financial news organisation, The Australian Financial Review (AFR), has come out in support of winding back the CGT discount for property investors. 

The Senate is currently inquiring into the CGT discount and is due to report by mid-March, in time to inform the Federal Government in its preparations for the May Budget.  

The Greens-initiated inquiry is investigating the discount’s impact on productivity, housing affordability and fairness and whether it is fuelling property speculation and run-away prices. 

Capital Gains Tax discount 

There are two main tax benefits available to property investors. The current discussion centres on the CGT discount: 

• Negative gearing, which allows landlords to deduct losses on a property, when expenses exceed rental income, against their taxable income. 
• The CGT discount, introduced by then-treasurer Peter Costello in 1999, applies to any asset held for at least 12 months. For example, an investor who made a $200,000 capital gain on an asset held longer than 12 months would be taxed on $100,000, or half the total profit.  

The 50% reduction replaced a less generous Keating-era capital gains discount, which had been in place since 1985 and was based on the cumulative increase in inflation over the life of an asset. 

Labor went on to win the 2016 and 2019 elections, promising to pare back the CGT discount to 25% and to place limits on negative gearing. Neither of the proposals were retrospective. 

The Treasury estimates that the top 1% of taxpayers received 54% of the benefit of the CGT discount. Parliamentary Budget Office analysis published last week suggested the figure was higher at around 59%. 

The Treasurer, Jim Chalmers, continues to be guarded in his statements on the issue, although most commentators say the current discussion has been spurred by government leaking of information to test public opinion. 

Mr Chalmers has told the media he is open to tax reforms that address intergenerational unfairness, driven by the property market without publicly backing a change to CGT as the means to achieve this.  

“As we think about what tax reform might come next, we’re guided by this idea of intergenerational fairness, especially for working people,” he said, with the reporter commenting that the Treasurer believed the cost of housing was a “defining part of this intergenerational challenge”. 

For and against the CGT discount 

Supporters of reforming the CGT discount say it would help new home buyers wanting to get into the market by reducing competition for limited housing by cutting out property investors. They argue this would put more housing on the market for buyers and therefore reduce housing costs.  

Some economists want the benefit pared back only for existing housing, as that was where most property investment was targeted, and to leave it at 50% for new houses, to encourage supply. 

Opponents say the reform would result in less housing development, including rental housing, in an already low-supply and expensive rental market, as investor-landlords would leave the housing market.  

In its submission to the Senate inquiry, the Housing Industry Association has called on the Treasurer to rule out the proposed changes, which it said would “reduce housing investment incentives” and contribute to difficult building conditions, which include rising insurance costs, delays, and cost of planning approvals, and the availability of skilled labour, with 73% of builders expecting to not hire more staff in the coming year.  

So, what is your opinion?