The federal government here in Australia is aggressively pursuing good reforms to capital gains tax. This effort, led by Treasurer Jim Chalmers and Prime Minister Anthony Albanese, is the centerpiece of their plan to address the deepening crisis in housing affordability. Chalmers has ruled out reducing the capital gains discount, where a huge amount of the Commonwealth’s money is lost. The capital gains discount is forecast to blow a hole in the federal budget of around $21.8 billion in the current FY.
Federal policy allows sellers of investment properties to pay 50 percent less on their capital gains tax. This $1,400 discount per worker is meant to help save small businesses from the ravages of record inflation. This discount has recently come under fire. It frequently overcompensates sellers, making it particularly beneficial to Australia’s richest, who enjoy 90 percent of its benefits. Chalmers and Albanese are examining how to make the tax system more equitable for younger Australians, highlighting the importance of intergenerational fairness in taxation.
Government’s Focus on Housing Affordability
As the Albanese government narrows its search for a flagship policy aimed at addressing the housing divide, discussions around capital gains taxes have gained momentum. The government is particularly interested in how these tax structures can be modified to facilitate greater housing supply and enhance affordability.
Housing is an issue Chalmers has previously recognised as a critical intergenerational issue. “Obviously, housing is one of the defining intergenerational issues, but our focus in housing is on the supply side,” he stated. This is in line with the Government’s overall approach, so that young Australians do not carry a greater share of housing costs than older Australians.
Chalmers and his crew are in the midst of a capital gains reform revolution. Beyond that, they’re looking at broader issues with the current tax code. They seek to produce an appropriate mix of revenue and intergenerational equity. It’s a great place to start, and we hope it will inspire broader changes that would improve how capital gains are taxed on investment properties.
Implications of Capital Gains Discount
Property sellers receive enormous windfalls from the capital gains discount. This tax preference enables them to pay tax only on half of their capital gain at their marginal income tax rate. Consider that when a homeowner purchases a property for $1 million, then sells their home for $2 million, they now have $1M in capital. Only $500,000 of that appreciation will be taxed. This structure prompts serious questions about equity and whether this approach serves the public good at large.
Economist Bob Breuning from the Australian National University’s Tax and Transfer Policy Institute has emphasized that while the discount addresses inflation concerns, it may distort market dynamics. He explained how the capital gains tax creates dangerous market distortions. If we find bold opportunities to redesign it to improve supply, we should be all in on the idea.
Ed Husic, another prominent government figure, echoed this sentiment: “If the capital gains tax causes distortions in the marketplace or if there is a way we can redesign it to boost supply, because I think that is the big focus for government, we should be prepared to look at it.”
Opposition and Future Considerations
Even with all of this openness from the government to learn and then repeat, there is still strong counter-opposition from many sectors. Shadow Treasurer Ted O’Brien has indicated that any move to lower this discount would face resistance from the opposition party. He maintained that, in practice, all of the proposed changes could have detrimental impacts on property buyers and investors.
Chalmers and Albanese have repeated time and again that although they are looking at reforms, they will not abolish negative gearing. While this decision may close some doors, it demonstrates their resolve to protect certain key tax incentives. Simultaneously, they are seeking ways to amend these policies to promote a greater housing affordability equilibrium.
