CGT talking points for your next family BBQ
With an election looming and cost of living the talk of the town, the housing market is once again the common vernacular bringing Australians together.
The reasons Australia has not built enough houses over the past 3 decades are well documented.
However, there’s one so-called solution to the housing crisis where EVERYONE seems to have an opinion: reform of the CGT discount and negative gearing.
I’ve been addicted to this discourse, devouring everything from impeccably cited academic publications to off the cuff facebook comments. My first conclusion is that there seems to be a lot of water to go under this bridge yet.
Over the past 12-months countless headlines have run a version of:
“The capital gains discount and negative gearing benefit the rich and destroy housing affordability” (The Australia Institute, February 15, 2024).
That statement seems fair enough on first reading. But then if it’s true… why don’t we get rid of it?
The answer turns out to be fascinating (and complex). Without writing a complete economic history of tax reform, here’s my best CGT points to take to your next family BBQ:
There’s more than one CGT ‘discount’. The tax-free capital gain status of the primary home (in practice a 100% discount) is often not discussed as it’s now baked into the fabric of our national economic psyche.
In 1999, the Howard government pivoted to taxing nominal capital gains (e.g. asset appreciation including the inflation component) with a 50% discount if held for a year.
This system created a quirk. Depending on the rate of asset price appreciation, inflation, and how long the asset is held, some investors were better off, some worse.
As we know inflation fell over the next 20 years, and the housing shortage (particularly in capital cities) started to bite.
Alongside this quirk there was also an implicit judgment call. Some forms of investment (e.g. bank deposits) could be eroded by inflation. What’s more, these taxes are payable each year, rather than being deferred until the asset is sold (often timed to minimize tax).
It’s undeniably true that the “capital gains discount benefits the rich”. Treasury estimates from FY21 suggest the top 10% of income earners received over $10 billion in benefits from these expenditures, more than the bottom 90% combined.
While the CGT discount at 50% is generally accepted to be too high, almost all studies show that lowering it (e.g. to a 30% or 20% discount) would have a very small effect on property prices (e.g. a decrease in property prices of 3-4% in the upper estimates).
CGT reform could generate significant C'wlth government revenues, but with most of the benefits in decades to come.
There’s been relatively little research on the best way to unwind the current system (e.g. grandfathering current investments or reducing the rate bit by bit).
The punchline: CGT reform is necessary and justified - just don’t expect it to fix the housing crisis anytime soon.
