Likelihood of negative gearing, CGT changes increases

By Phil McCarroll | 15 Feb 2016
The likelihood of changes to tax arrangements such as negative gearing and the current capital gains tax discount seems to be increasing, with both the Federal Government and the Opposition revealing plans to overhaul the current system.

While speculation has mounted in recent months that changes to the arrangements could be made as the government looks to reform the national taxation system, last weekend gave the best indication yet as to what the two major parties are proposing.

Speaking at the NSW ALP conference over the weekend, Opposition lead Bill Shorten announced that under a Labor government negative gearing would only be applicable to investments in new housing.

Shorten claimed the change was aimed at improving housing affordability.

“We're doing this because 30 years ago, houses cost around 3.2 times average income — today it's 6.5 times average income,” Shorten said.

“Labor will help level the playing field for first home buyers competing with investors and we will put the great Australian dream back within the reach of the working and middle-class Australians who have been priced out of the housing market for too long,” he said.

But Master Builders of Australia (MBA) chief executive Wilhelm Harnisch said his organisation believed Labor was folding to a populist, but incorrect opinion of negative gearing.

“Our concern is that Labor’s policy is a populist response to those who demonise housing and negative gearing as primary cause of our fiscal and social problems. Investing in new private rental housing is not evil,” Harnisch said.

“The private rental market is a critical supplement to the public and social housing rental sectors.

The private rental market also provides a valuable role in supplementing the retirement income strategy for mum and dads on low and middle incomes. Housing is an asset class just as shares and just as shares, interest deductibility in investment housing should remain as a tax feature,” he said

While Shorten has publicly stated the Opposition’s stance on negative gearing, the Government’s position is somewhat less clear.

According to a report in the Australian Financial Review over the weekend, the Treasury department is currently considering two options, either a cap on the number of properties that can be negatively geared or a cap on the amount that can be claimed as a deduction through negative gearing.

Though the specifics of the Government’s proposed changes aren’t yet known, Harnisch said the MBA hoped they would be of benefit to everyday investors and the economy.

“What we are looking for from both major parties in the lead up to the Federal Election are policies that add to economic growth, create jobs and enhances the positive role that housing can play and that will at the same time improve the ability of mums and dads make their contribution by providing rental housing and at the same time look after their own retirement strategies,” he said.

The possibility of an overhaul of negative gearing has attracted the most attention, but a victory for the Labor Party at the next election could have even further implications for investors, with Shorten also announcing his party would reduce the current capital gains tax discount for investment properties.

Under Labor, the current discount of 50% would be reduced to 25%.

"It cannot be rationally argued anything else but with a capital gains tax subsidy of 50 per cent, that the whole system is accessibly distorted and overly generous in favour of income from capital instead of income from earnings," Shorten said.

"We will grandfather existing arrangements for those properties so that investors who have invested under the current tax law will not be disadvantaged by the change and a prospective change.”

That proposal has also been met with criticism, with Housing Industry Association chief executive industry policy and media Graham Wolfe claiming it would worsen, rather than improve affordability.

“Yesterday’s announcement by the Opposition that it intends to halve the capital gains discount on investment properties will, in our view, not achieve these objectives. Reducing the CGT discount, which is an important measure to recognise the net present value of an asset, will push investment away from Australia’s housing sector,” Wolfe said.

“The Henry Tax review rightly concluded that addressing the supply side impediments to new housing had to be the priority focus, including: reducing stamp duty; alleviating land supply restrictions; addressing onerous planning controls; and delivering housing infrastructure in an equitable and timely manner,” he said.
 
 

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