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Don’t listen too intently to the racket around Labor’s latest tax changes: it’s about time the government did something that ruffled some feathers.
The changes don’t look good for me, but I’m a pretty happy camper. Why? Because they’re exactly what we need – and what I’ve been asking for.
A few years ago, shortly after moving out of home to live in one of the most expensive capital cities in the world – and realising exactly how unaffordable housing was – I started writing about what we need to do to fix our property market. Chief among the changes I’ve pushed for has been the winding back of the tax concessions we give to property investors.
As one of the lucky ones to have bought my own home, the tax changes Labor has brought in aren’t very useful for me. In fact, they probably put me in a worse position going forward if I’m looking at it from a purely personal perspective.
Although the primary residence – the home you own and live in most of the time – is still exempt from the capital gains tax, if Labor’s changes work as they should, growth in the value of homes should slow. That’s because the tax changes aim to push investment into new homes, increasing the supply of properties in Australia which should reduce price growth.
For people hoping the value of their properties rise – making them wealthier – that’s not good news.
But for those who are struggling to find a way into home ownership, slower price growth is exactly what’s needed.
It’s not just a fight between the “haves” and the “have-nots”, either. We always knew investors would be irked at having to pay more tax.
There are also supporters of a less heated housing market, though, who think the government has worsened the situation.
They argue the tax changes do little to slow down the growth in house prices and that they make it harder for people who have been trying to build up their wealth outside the property market.
That’s because the government has taken away the 50 per cent capital gains tax discount (where anyone who buys an asset, such as an investment property, and waits at least a year before selling it can pay tax on just half of the profit) not just for property, but also for shares. From the middle of next year, shareholders and anyone investing in an existing property will only get a discount in line with inflation.
The argument is that for people who have been locked out of the housing market and decided to start building wealth through shares (many in the hopes of eventually buying a home), the reduced capital gains tax discount makes them worse off. Why? Because they’ll have to pay more tax – at least 30 per cent – on gains they make on share portfolios they’ve built up and no longer be able to claim a 50 per cent discount when they decide to sell and cash in their gains.
It’s true that some of these people will be worse off. But it’s important to remember a few things.
First, there are not actually a large number of people struggling to afford a home who benefit significantly from the capital gains tax discount.
Half of the benefit of the capital gains tax concession has, in recent years, lined the pockets of the top 1 per cent of income earners, and more than 80 per cent of the benefit has gone to the top 10 per cent of income earners. These are not the people struggling to afford a home.
Second, if we exempted shares from the new capital gains tax rules, we would see less investment in new homes.
Remember: the government has not only made this change to discourage people who already own a home from buying up more of our limited supply of homes (which, as we know, pushes up overall demand, and therefore prices, for first home buyers who get stuck renting). The changes are also meant to encourage more investment in building new homes which help boost supply.
That’s why, under the changes, investors in new homes will continue to have the option of receiving a 50 per cent tax discount on capital gains.
If the government had kept the rules unchanged for shares (meaning investors would get the same 50 per cent tax discount on shares as new property), we would have ended up with a system that encouraged more investment in shares. That’s not a bad thing in itself. But it would mean some investors who might otherwise have chosen to invest in new property, would instead park that money in shares because they could get a tax advantage.
By only allowing the 50 per cent capital gains tax discount to be applied to new properties, the government is looking to push more investor money towards building new homes.
The changes to negative gearing – a tax deduction for landlords who don’t earn enough rent to cover their expenses, such as mortgage interest repayments and maintenance costs – similarly, are more likely to help than hinder aspiring home owners.
Under the new policy, the ability to negatively gear will, from the middle of next year, be limited to investors who buy newly built homes – not to existing homes that investors might snap up.
The main argument against getting rid of negative gearing has been that it could lead to landlords charging more rent. Why? Because if they can no longer claim a deduction on their taxable income when they make a loss on their rental property, they might be tempted to lift their rent so they don’t make a loss.
But here’s the thing. Most landlords who are making a loss – and benefiting from negative gearing – aren’t doing so out of the goodness of their heart. Sure, some who buy a property mostly for the capital gains (and are being a bit complacent about lifting rent because the loss they make can partly be clawed back through lowering their income tax) might decide to charge their tenants more rent.
But most negatively geared landlords are making a loss simply because they’re not able to charge more rent. That is, no one is willing or able to pay enough to cover the costs of the landlord owning that property.
Wouldn’t it be such a shame if that landlord had to sell that property and an owner-occupier had a better chance of buying it?
Of course, if that landlord was willing to invest in building a new home that added to the country’s supply, they’d be more than welcome to claim negative gearing on that property.
And remember, the policy change only applies to properties bought after July next year. For investors whose properties are already negatively geared, there’s no change until that property is sold.
That is also a weakness, though. Grandfathering these changes means their effect on house prices is watered down – and will take longer to show. It could also lead to existing property owners being reluctant to sell because they will lose their existing tax discounts. Ideally, the changes should be phased in for existing properties over a period of time, rather than grandfathering them indefinitely.
There’s no doubt that these policies will come at a cost – including to some aspiring first home buyers who are hoping to use share investments as a pathway to building wealth. And it’s part of a much wider set of changes – including stripping back zoning laws and increasing government spending on building houses – that are needed to make housing in Australia more affordable, and the tax system fairer.
But we can’t shy away from making changes just because some people are worse off. The latest moves are a win for the vast majority of home buying hopefuls.
Like many other Australians, there are costs I’ll bear from these changes. But if they bring housing affordability into reach for more Australians, there’s plenty to gain from that, including lower spending on welfare services, better social cohesion, and renewed hope and drive to work hard for those who may have given up. Those are wins for everyone.
Unlike the supply of homes in Australia, there will never be a shortage of changes we need to be striving towards when it comes to fixing our housing market. But the latest tax overhaul lays the first bricks for rebuilding the country.
The Market Recap newsletter is a wrap of the day’s trading. Get it each weekday afternoon.
Millie Muroi is the economics writer at The Sydney Morning Herald and The Age. She was formerly an economics correspondent based in Canberra’s Press Gallery and the banking writer based in Sydney.Connect via X or email.From our partners
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