By Matthew Cranston
The Albanese government’s moves on negative gearing and the capital gains tax discount will bring in less than $5bn across the next four years and economists expect they will have only a small impact on intergenerational equity, productivity and new housing supply.
The policy, as revealed by The Australian, of scrapping negative gearing for existing properties and replacing the 50 per cent discount on capital gains tax for inflation indexation could leave loopholes and allow people with several properties still to take advantage of interest costs.
A proportional adjustment to the capital gains tax could also be in store, where those with assets held before budget night would retain the 50 per cent discount and any post-budget gains would be subject to inflation indexation.
Negative gearing, which allows people to offset their investment property costs against their income, is currently set at an unlimited number of existing or new houses or apartments. The independent Parliamentary Budget Office estimates the measure is worth $7.9bn in forgone revenue for the federal government in the 2027 financial year.
However given arrangements are being made to grandfather the changes, The Australian understands they would bring in less than $1bn over the next four years.
Part of this is due to the fact that existing investors who negatively gear could simply refinance their current home when the loan is nearly paid off and offset the new loan’s interest expenses against other profitable housing investments.
Housing Industry Australia chief economist Tim Reardon said the policies were unlikely to boost productivity growth that much, especially given the loopholes.
“Doing away with negative gearing disadvantages the smaller mum-and-dad investors but not those with bigger portfolios, because you can write off the losses of other properties in your portfolio,” Mr Reardon said. “Whereas for the mum-and-dad investors who don’t have other properties they can’t write it off against their income.”
Given likely grandfathering arrangements – which allow existing investors to maintain current rules – the policy changes would be unlikely to have significant impacts on either the budget, Labor’s 1.2 million new homes policy or the broader economy. “I think you’d have to have some very favourable assumptions to get even that much from this policy change,” Mr Reardon said. “We would expect a small positive in the supply of new homes but these changes would not have a material impact on the 1.2 million target.”
Cotality head of research Tim Lawless said: “If these policies are not about budget repair then it’s probably just about intergenerational equity … but if you remove negative gearing entirely for existing property, you have to wonder how popular that would be with investors.
“At the moment more than 80 per cent of investors buy existing properties, so I just don’t think (limiting negative gearing) is a particularly strong outcome for new housing.”
Westpac chief economist Luci Ellis questioned whether the tweaks to negative gearing and capital gains tax would boost productivity. “Is it really reform?” she said. “Reform really depends on what you’re solving for. If you’re trying to lift productivity does tweaking CGT or negative gearing really help? Probably not much. If I’m going to try to lift productivity I wouldn’t look at tax reform; that would be the last place I’d look. I’d start with regulatory reform.”
“CPI indexation is an unfortunate choice. It is more complex to calculate than a 2.5% annual indexation rate and is imprecise because CPI is only published monthly, and previously quarterly.”
Ed Cavanough, chief executive of progressive think tank the McKell Institute, said he thought the changes were critical to addressing intergenerational inequity and much-needed reform for the economy. “CGT is certainly the higher reform priority if the aim is to meaningful improve intergenerational equity,” he said. “But negative gearing remains a powerful incentive. I still believe these incentives should be oriented towards our housing objectives – building new homes – rather than against them, which the status quo maintains.”
The Australian revealed on Saturday that the CGT change would be across all assets and would likely come with partial or proportional treatment.
Wilson Asset Management chairman Geoff Wilson said he thought proportionally grandfathered indexation was a good policy but the existing discount should be used for productive assets. “Indexation of property is sensible as investors get taxed on real returns,” he said, “Unfortunately Australia has a productivity problem, and taxing productive assets more heavily is a big negative. Keep the 50 per cent discount for productive assets and you have the most economically coherent design.”
On Monday, the Treasurer’s office declined to comment on the policies.
Opposition treasury spokesman Tim Wilson said changing negative gearing and CGT would prevent wealth creation.
A report from economic research institute E61 concludes that younger people would be unlikely to end up worse off than their parents, despite the surge in property values over the past five years and applying current investor
“Slower income growth and delayed entry into the housing market have fuelled concern that they will accumulate less wealth over their lifetimes,” E61 said.
“But the data suggests this may be more a story of delay than decline. While income growth has slowed for those under 30, it remains strong later in life. This is partly because today’s young Australians have tertiary education rates more than double those of their parents’ generation, delaying their entry into the workforce but likely raising their lifetime earnings.”
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