Abolish capital gains tax discount: Australia Institute
In their submission to the House of Representatives Standing Committee on Economics, the Australia Institute state not only is current tax treatment putting upward pressure on house prices but are also encouraging speculative behaviour and increasing the chances of property bubbles and financial instability.
"Negative gearing has been a part of the Australian tax system from early last century. In the context of residential housing investment it allows property investors to write off any losses against their taxable income from other sources. This effectively means that the tax payer is paying for some of the loss.
"The CGT discount was introduced in 1999 and means that for assets held for more than a year only 50% of the capital gain is taxed. This decreased the amount of CGT paid, and means capital gains become increasingly important to property investment."
The effect of the GCT discount can be seen in the Net rental income table 1995-2013.
"After the introduction of the CGT discount net rental income collapsed. Investors were willing to take on significantly larger losses at a time when they could keep a larger slice of the capital gain.
"In a normal investment market if the return on the asset was going down because the price of the asset was rising then this would be a signal to investors that it could be overvalued and would decrease the interest in investing.
"But an interest in capital gain means that a rising price is a signal to enter the market because future capital gain is likely. Such a situation makes speculative bubbles more likely.
"While middle and lower income households are being increasingly shut out of home ownership, most of the benefits of negative gearing and the CGT discount flow to high income households.
"Modelling done by NATSEM for the Australia Institute shows that 55 per cent of the benefits of negative gearing and the CGT discount flow to high income households, while 50% of families only get 13% of the benefit. Figure 3 shows the income distribution of the negative gearing and CGT discount benefits.
The Australia Institute does not believe that changes made to negative gearing would decrease investment and increase house prices. AI claims that there is already little investment into property with just six per cent of investment finance going to new housing.
"The other 94% is spent on existing stock. If the objective of negative gearing is to encourage new housing then this could be achieved by restricting negative gearing to apply only to new housing.
"The Australia Institute proposes that negative gearing is restricted to new housing stock and only for a period of 10 years.
"The CGT discount replaced a system where capital gains were discounted by the inflation rate. The argument for the CGT discount is that it is a simpler method for calculating and taxing the real capital gain.
"The broader question that should be considered is why we tax real capital gains but level all other taxes on the nominal gain. For example, interest earned on money is taxed at the nominal interest rate rather than the real interest rate.
"Given that all other taxes are levelled on the nominal gain and not the real gain there is little justification that capital gains should be taxed differently. The Australia Institute proposes that the CGT discount should be abolished.
"These changes will have a number of effects. It will decrease demand for housing and hence put downward pressure on house prices as potential investors pick other investment opportunities.
"It creates a bigger incentive for new housing. It reduces the speculation in the residential housing market, making property bubbles and financial instability less likely. Finally it will raise $7.4 billion a year in revenue at a time when the government is trying to decrease the budget deficit."
The Australia Institute report outlined the case for abolishing the capital gains tax discount – not capital gains tax as previously headlined.