I support the Budget tax changes, there I said it
There’s been plenty of outrage about the Federal Government’s proposed changes to negative gearing and capital gains tax.
But the numbers tell a much less dramatic story. If you look closely, the picture becomes clear: the impact is likely to be far more boring than the headlines may suggest – at least through a property lens.
That is why I am throwing my support behind the Labor Government’s proposed changes to negative gearing.
Limiting negative gearing to new homes only could be the most meaningful housing reform in recent memory.
Negative gearing was intended to shift the burden of funding new, affordable housing away from governments. This is because they are often not well placed to deliver it efficiently or cost-effectively.
Like many government policies, the concept was sound enough, but the execution fell short.
It was thought that everyday investors would help deliver the new housing needed for a growing population while offsetting those costs against their taxable income.
In practice, however, what happened was this:
- Only 20 per cent of new housing were being built by investors.
Meanwhile:
- More than 40 per cent of established homes were being purchased by investors.
Put another way:
- Owner-occupiers are still responsible for 80 per cent of the effort required to deliver new housing.
That is not how negative gearing was designed to operate.
If these changes proceed, I expect the balance to shift. Investors could account for 80 per cent of new housing, while 80 per cent of established homes could once again be traded between owner-occupiers.
For these reasons, this is a practical and sensible change.
The same logic applies to the proposed changes to capital gains tax. Replacing the flat 50 per cent discount with indexation to inflation would not necessarily mean higher tax.
In fact, over the past 20 years, it would likely have meant paying less, because the gap between inflation and house price growth would have produced an effective discount of about 60 per cent.
Even during the past 10 years, the equivalent discount would have been around 48 per cent, and over the past 5 years, about 47 per cent.
So, what will it mean for prices and rents, I hear you ask.
In my view, not much. The overall number of sales and new home builds should remain similar, with only the mix of investors and owner-occupiers changing.
Ultimately, prices and rents are driven by supply and demand.
Redirecting investors toward new housing could also make more developments financially viable.
That said, the policy should be paired with incentives that increase supply.
After all, solving the housing crisis will require every available lever.
We are underbuilding by 40,000 homes a year. At best, these tax changes may close about half that gap. The remainder will likely require government investment in the infrastructure needed to unlock additional housing supply.
But we should not let perfect stand in the way of better, and this policy is clearly an improvement.
