The case for reform
Reforming Negative Gearing and the Capital Gains Tax discount would be one of the most effective ways to remove the massive structural inequity in our tax system, to restore fairness to our housing market, and to generate over $117 billion in revenue over the next ten years.
Australia's chronic undersupply of affordable housing is at a crisis point. Years of under-investment in affordable supply has been accompanied by decades of generous subsidies to property investors and speculators which has driven prices up as investors out-compete first home buyers. Our housing market is now one of the most unaffordable in the world.
The Greens' proposal to reform negative gearing and the capital gains discount is based on models outlined in consecutive reports by a wide range of advocates and economists including the Reserve Bank of Australia and overwhelmingly by housing, taxation, and social welfare advocates.
The Greens' proposal
In June 2016 the independent Parliamentary Budget Office (PBO) provided the Greens with updated costings of the combined effect of phasing out the capital gains tax discount and removing negative gearing.
Specifically, the PBO estimated the Greens proposal is to:
- Progressively phase out the 50% capital gains tax (CGT) discount for trusts and individuals for capital gains realised on or after 1 July 2016, by a reduction of 10% each year for five years to be phased out entirely by 1 July 2020; and
- Remove negative gearing for all non-business assets purchased by individuals, funds, trusts, partnerships and companies on or after 1 July 2016, with assets purchased prior to this date grandfathered.
The PBO estimated the Greens proposal would raise $14.426 billion over forward estimates (2016-17 to 2019-20) and a total of $117.3 billion over the next ten years.
Who supports reform?
The Reserve Bank of Australia recently added its voice to the growing number calling for a review of negative gearing and the capital gains tax discount. Its submission to the government's inquiry into Home Ownership in June 2015 highlighted the way they work together to encourage leveraged investment in property and make capital gain-producing assets more attractive than income producing assets.
The RBA concluded: "Given the value Australian and other households place on home ownership, policy should not unduly advantage property investors at the expense of prospective owner-occupier households. Financial stability considerations would suggest that tax and regulatory frameworks should avoid encouraging over-leveraging into property by investors."
This is in addition to an overwhelming number of prominent economists and peak social bodies who have made public statements and submissions to the government's Tax White Paper calling for reform. Many groups pushing for a review of the discount are saying the Australian community should expect to get something significant in exchange for that kind of benefit, and that it's a much fairer place to generate revenue than raising the GST.
Economists including Saul Eslake, and even Tony Shepherd, former Business Council president and former chair of Tony Abbott's Commission of Audit support complete removal of the CGT discount. Mr Shepherd recently said the 50 percent discount was "too generous" and he could see no reason for continuing it:
"I'm personally in favour of bringing the CGT rate up to the income tax rate... I can't see any reason to treat capital gains any different from income gains. I'm personally in favour of putting the rate up to the income tax rate, I can't see any reason for treating it differently, and I think it probably leads in some respects to a greater emphasis on negative gearing".
Those against reform remain limited to those directly benefiting from the current arrangement, most notably property industry peak bodies including the Real Estate Institute of Australia and the Property Council.