Will there be a crackdown on capital gains tax concessions?

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On Wednesday, The Australian Financial Review reported that the Turnbull government was planning a crackdown on capital gains tax concessions for property investors in order to “seize the mantle” on housing affordability and provide revenue to help replace soon-to-be-abandoned budget cuts.

The government’s policy backflip was scheduled to be unveiled in the May budget and comes after more than a year of attacking Labor’s proposal to halve the capital gains tax discount. The policy would be confined to property investment, and will not apply to all investments.

Options in the works include following Labor in halving the 50% discount on capital gains tax to 25%, or reducing it by another amount. The other option is to adopt a phased model in which the discount would increase the longer the property was held. Following this model, a property would have to be held for several years before the investor was eligible for the full 50% discount.

Currently, a capital gains tax discount of 50% applies as long as the investor holds the asset for at least 12 months.

“Given most property investors are benefiting more from rising capital gains than offsetting costs from negative gearing, this is a significant change of tune,” said Martin North, principal at Digital Finance Analytics.

On the other hand, a contradictory report was released by The Real Estate Conversation the following day. In the second report, Prime Minster Turnbull and Finance Minister Mathias Cormann dismissed AFR’s report.

“We do not support the Labor Party’s plans to increase capital gains tax,” Turnbull said during a press conference. He also said the government was not considering outlawing negative gearing.

Amid these contradictory reports, the Property Council of Australia has urged caution.

“Increasing capital gains tax runs the risk of reducing the incentive to invest at a time when Australia needs to build new housing to cater for our growing population,” said Ken Morrison, chief executive of the Property Council of Australia. “While there are conflicting media reports …we urge the government to be extremely cautious if it is considering changing the CGT discount,” he said.

Morrison pointed out that the capital gains tax discount is intended to compensate for natural growth in the price of assets due to inflation. “The CGT discount is recognition that you should not tax people for inflation …inflation-driven capital growth is not real growth and investors should not be taxed for it,” he said.

Related stories:
Tax Q&A: Your Questions On Capital Gains, Answered
Negative Gearing 101: How Would You Cope If It Were Nixed?


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