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In a special pre-election Budget analysis, we have compared the Opposition’s key policies and announcements against those of the Government.
After a week of defending tax cuts destined to create a bigger budget deficit with no perceptible benefit, the Federal Government has gone back to debating itself and virtually every one else on policies to improve housing affordability. Meanwhile, the States and Territories, directly responsible for supply and indirectly responsible for stymieing the freeing up of existing housing stock through the imposition of stamp duty have remained largely out of the fray. That alone may mean any action taken by the Federal Government without the support of the States and Territories will fail.
A few proposals on housing affordability have been mooted and ditched just as quickly, including:
Meanwhile, at least the banking sector is tightening up lending for investment purposes and some States and Territories are imposing additional taxes on foreign investors which helps to soften the demand-side impact on housing affordability. However, the impact of these measures have been barely noticeable.
For some unknown reason, everyone is focused on finding the silver bullet. Surely the answer is more obvious – we need a mix of measures on both the demand-side and supply-side to make housing (both ownership and rental) affordable.
In this blog, we look at the impact of two tax-related issues on housing affordability.
When the CGT discount was introduced, the logic was astoundingly simple. Prior to the change by the Howard Government, investors had to index their cost base (increase it by inflation). This wasn’t a particularly onerous calculation, but it was removed and the CGT discount introduced in its place for simplicity and equity.
The impact was dramatic – whereas with indexation you might only get a 3% or 4% benefit after holding an asset for 12 months, you now get a 50% benefit as an individual in the same period. Whereas with indexation there was probably little incentive to shift investments such as cash savings to property (since indexation and interest rates ran fairly parallel to each other), this changed overnight with the introduction of the CGT discount.
In an environment where wages growth is low to non-existent, when interest rates are incredibly low globally, with high volatility in other investment sectors such as the stock market, there is already a rational incentive to pursue the stable, steady growth in the property market. In addition, the CGT discount:
Negatively gearing an investment means losing money on the investment. It only makes sense because of the tax deduction for the loss in the expectation of making a capital growth that is taxed more favourably (with the CGT discount). In simple terms, a $100 loss gives a 49% benefit; a $100 capital gain eligible for the CGT discount is only taxed at 24.5%.
Negative gearing (like the CGT discount) is available to other types of investments, such as shares. For the same non-tax reasons, there is a preference to property – people fell they understand it and prices have been growing steadily and stably.
The fear of the government is that any change to these tax measures will cause housing prices to drop significantly and cause other issues.
Let’s ignore the fact that a drop in house prices is exactly what the housing affordability measures should be designed to do! Instead of making drastic changes to these rules, there are many options available to the government including combinations of the following:
|Demand Side Measures||Supply Side Measures|
In part two of this blog, we will look at the potential impact of other housing affordability measures.