By Matthew Cranston
Former Treasury secretary Ken Henry has urged the Albanese government to scrap the capital gains tax discount, saying its “neither fair nor efficient” and that he “hates” the idea of grandfathering changes insisted upon by investors.
As Jim Chalmers weighs up changes to the CGT discount for property investors in his upcoming May budget, Dr Henry said his generation “squealed like wounded pigs” paying just twice their annual income for a house.
“The prospect of paying out 2.5 times average earnings to buy a house was truly terrifying,” he said. “Today it’s six times. At 2.5 times we squealed like wounded pigs.”
“I cannot imagine how anybody on the salary I had back in the mid 1980s as a senior Treasury adviser, could possibly contemplate buying a house of six times average earnings. I just cannot imagine.
“And so I think there is a loss of opportunity there that does great injustice to younger generations of Australians.”
Speaking at a Senate hearing on the capital gains tax discount, Dr Henry, who penned the Henry Tax Review commissioned by the Rudd government, said property investors had been encouraged to invest in part due to the discount and that the discount was “neither fair nor efficient.”
Asked by the committee’s chair, Greens Senator Nick McKim, whether the pursuit of neutrality in the tax system would best be served by having the CGT discount removed entirely, Dr Henry was unequivocal.
“Yeah, absolutely,” he said.
Asked whether he had a view on grandfathering, where people who owned applicable assets before the change are exempt, he was also direct.
“I hate it,” he said. “You can grandfather things thinking that you’re doing people a favour, but the tax system itself is a pretty complicated animal.”
Wilson Asset Management’s Geoff Wilson, the architect of a campaign against Labor’s failed 2019 franking credits policy and the Albanese government’s super tax, also appeared at the inquiry on Wednesday and insisted on grandfathering.
Mr Wilson backed a reduction of the CGT discount for existing housing on the proviso it was revenue-neutral for government with incentives to be lifted for investments in businesses.
He also said the discount should stay for newly built housing and that all assets were grandfathered.
“If you keep changing the tax rules, and the people that have sort of done the right thing … if the carpenter who’s building the house or the plumber say ‘I’ve got to get some of that capital to work whether I buy shares or whether I buy an investment property’, and then he’s done all the hard yards, and then you go say, ‘Oh, well, look, I’m changing rules on it’,”
Mr Wilson said that did not encourage “trust in the system”.
The CGT discount, introduced by the Howard government in 1999 following the Ralph Review, applies to any asset held for at least 12 months. When the asset is sold, the capital gain on which tax must be paid is reduced by 50 per cent.
The architect of the CGT discount, John Ralph, warned Labor last week that there would be consequences if they changed the CGT for a revenue grab.
Dr Henry said the discount created distortions in the property market – “it’s the very definition of a distorted market”.
“It’s going to happen whenever investors’ expectations of asset price growth are sufficiently optimistic, and those investors have got the knowledge that they’ve got a great big tax break waiting for them,” he said.
Dr Henry also dismissed the government’s attempts to introduce unrealised CGT last year, saying that when he was considering that in Treasury “wiser heads knocked some sense into us”.
Before Dr Henry shared his views, independent think tank E61 Institute presented research that shows a “fairer” way to treat CGT.
E61 chief executive Michael Brennan and senior research manager Matt Nolan suggested gains made on an asset should have inflation deducted from them to give a true sense of what the gain should be for taxation.
Mr Brennan noted that once the true gain had been calculated, investors could then have that taxable gain spread over time.
“There are principled ways to mitigate these issues: By providing a general allowance for the inflation component of capital income, and by spreading the capital gain over multiple tax-years,” he said.
“A discount-based system offers simplicity, but at the cost of significant inequities and distortions.
“A system that aligns tax liabilities with real economic income offers greater fairness and efficiency, but requires more sophisticated information and administration.”
The Property Council of Australia, Housing Industry Australia and Real Estate Institute of Australia, who attended the inquiry, also discouraged removing the capital gains discount, as did the Centre of Independent Studies and the Prosperity Institute’s Mark Humphery-Jenner.
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