Plan to cut capital gains tax discount for property investors, not negative gearing

Australian Financial ReviewFeb 15 2017 11:00 PM

Phillip Coorey

The Turnbull government is planning a crackdown on capital gains tax concessions for property investors to seize the mantle on housing affordability and provide revenue to help replace soon-to-be dumped budget cuts.

The policy backflip, to be unveiled in the May budget, comes after more than a year of savaging Labor's proposal to halve the capital gains discount as an assault on badly needed investment.

It is understood the policy being worked on within government would be confined to property investment, and not apply to all investments such as shares, as Labor's plan would. Neither would the Coalition policy target negative gearing, as Labor is doing.

Options being worked on include following Labor in halving the 50 per cent discount on capital gains tax to 25 per cent, or reducing it by another amount. The other is adopting a phased model in which the discount would increase the longer the property was held. A property would have to be held for several years before the investor was eligible for the full 50 per cent discount.

At present, a CGT discount of 50 per cent applies as long as the investor holds the asset for a minimum of 12 months.

Tax increases

The development comes as Treasurer Scott Morrison and Social Services Minister Christian Porter have threatened tax increases and spending cuts to recoup up to $13 billion in budget cuts that have been marooned in the Senate, mostly since the 2014 budget, and which have scant hope of passing.

The so-called "zombie" measures are predominantly the $6 billion in cuts to welfare, as bundled together in the budget omnibus bill before Parliament, and about $7 billion in cuts to higher education.

On Tuesday, The Australian Financial Review reported Mr Morrison was preparing to abandon these cuts before the May budget should the Senate reject them again, as is anticipated, and replace the revenue with tax hikes or spending cuts elsewhere. "We will have to frame a budget that deals with their ultimate decision," he said.

The decision to ditch the "zombie measures" is part of a major policy reset in which the Coalition would abandon the measures that have caused considerable political damage since Tony Abbott's notorious first budget.

Upside of upping tax

Charting a new path, and even adopting some of Labor's tax proposals, such as a CGT concession crackdown, would sever links with the unpopular remnants of the Abbott era and limit the lines of attack for the opposition, which has accused the government of hurting families and trying to foist $100,000 degrees on university students.

The government was insisting yesterday that it had not yet given up on the zombie savings and was hopeful of passing at least some of the measures in the omnibus bill before Parliament rose at the end of March, the last sitting before the May 9 budget.

"They still have weeks and weeks to think about this..." Mr Morrison said. "The Labor Party are saying 'no', they think we should be paying more and more in welfare and sending the bill to our kids."

The Treasurer stressed he was reluctant to increase taxes but if the savings were blocked, the only options were increasing taxes or going further into debt. "I have no desire to increase taxes or increase debt..." he said.

Iron ore windfall too unreliable

Mr Morrison said he was "doing everything I can to avoid those options being contemplated". Despite an expected revenue windfall from a spike in the iron ore price, Mr Morrison said it was too volatile to be relied upon and budget repair had to involve sustainable, structural measures.

Prime Minister Malcolm Turnbull agreed higher taxes would have to be considered if the Senate continued to block the cuts.

"Those who oppose savings measures by definition are supporting tax increases, if you assume that they want to bring the budget back into balance," he said.

Labor leader Bill Shorten said the government should scrap its $50 billion in company tax cuts, rather than impose new taxes on people to pay for the dumped budget measures.

The government has made the cost of living its focus for the year and, alongside energy costs and childcare, housing affordability will be a priority.

Economists have frequently argued that curbing the CGT concession would be more effective than touching negative gearing. In a submission to a parliamentary inquiry into housing affordability in 2015, the Reserve Bank of Australia also focused on the CGT concession as the main villain.

Negative gearing

The RBA argued that negative gearing – the ability to deduct legitimate expenses incurred in the course of earning income – was "an important principle in Australia's taxation system, and interest payments are no exception to this".

"It is worth noting, however, that the interaction of negative gearing with other parts of the taxation system may have the effect of encouraging leveraged investment in property," it said.

"In particular, the switch in 1999 from calculating CGT at the full marginal rate on the real gain to calculating it as half the taxpayer's marginal rate on the nominal gain resulted in capital gain-producing assets being more attractive than income-producing assets for some combinations of tax rates, gross returns and inflation.

"This effect is amplified if the asset can be purchased with leverage, because the interest deductions are calculated at the full marginal rate while the subsequent capital gains are taxed at half the marginal rate. Since property can usually be purchased using higher leverage than other assets that produce capital gains, property is especially affected by this feature of the tax system."

On Monday, Labor moved a motion in Parliament demanding the government adopt its policies on negative gearing and CGT. Shadow treasurer Chris Bowen said the housing affordability crisis had worsened during the past year under Mr Turnbull's leadership, with house prices increasing 16 per cent in Sydney and 12 per cent in Melbourne.