Cutting capital gains deductions opens door to bigger cuts
A broader package of reforms is gaining ground, including a reduction in capital gains tax relief as the centerpiece of Jim Chalmers’ May budget, as well as possible tax cuts aimed at helping young Australians buy their own homes.
A senior government source, who requested anonymity to detail domestic policy discussions, said possible changes to capital gains tax in next May’s budget had not been put forward but confirmed a change had not been ruled out.
Reducing the concession from 50 percent to 33 percent is estimated by Deloitte Access Economics to generate approximately $4 billion in extra taxes annually by 2035-36.
Importantly, Prime Minister Anthony Albanese, who has at times opposed some of the tax changes implemented internally by Chancellor of the Exchequer Jim Chalmers, has not ruled out changes to the tax, the source said.
“The key for housing is more supply, but there are also perceptions about tax,” said one MP.
“Overwhelmingly we look at supply, but we also look at it. [CGT] and budget situation.”
The government is under pressure to use the May budget to both reduce the overall growth rate in spending and find ways to increase the economy’s growth rate without increasing inflationary pressures.
Changes to capital gains tax, the focus of a Greens-led Senate inquiry due to be announced next month, have been discussed within Labor for several months as a way to improve the tax system while helping young Australians enter the property market.
The extra revenue is likely to be channeled into reducing taxes in other areas.
The current 50 percent concession for assets held for at least 12 months was introduced in 1999. At the time, advocates argued it would encourage people to buy shares and provide a boost to listed companies in Australia.
Instead, most investors turned to real estate. Before the change, most homeowners were making money on their investments, but after the concession, most were negatively driven.
This imprint revealed that ahead of the 2025 budget the government asked the Treasury to model the impact of reducing negative gearing and capital gains tax concessions, but later abandoned the proposal.
“I’ve always felt that,” said Labor MP Mike Freelander, who holds the Sydney seat of Macarthur. [the 50 per cent capital gains tax discount] “He is very generous.”
“I’ve benefited a lot from it, so it’s a no-brainer for me. There are good economic reasons for this to be rolled back a little bit,” he said.
“I understand people are worried about the consequences, but I definitely think it needs to be taken into consideration.”
A second Labor MP, who asked to remain anonymous, said housing affordability was “getting worse and the impatience of people being left out of the housing market will grow as more people are left out”.
“I think people overwhelmingly support us building houses, but they think the housing sector is structurally unfair,” they said.
Deloitte Access Economics’ $4 billion estimate is based on reducing the concession for all assets. One option being considered is to reduce the exclusivity over the property and make it inviolable for other assets such as shares.
Another option is to reduce the concession Labor received in the 2016 and 2019 elections to 25 per cent. Other issues being examined include historicizing any changes to ensure that investors purchasing an asset under existing law are not disadvantaged.
One option being studied is to increase the size of income tax cuts, which will begin on July 1.
The current tax break of up to $5 a week is modest; It’s only slightly more than the Howard government’s famous “sandwich and milkshake” tax cuts in 2003.
Chalmers said the May budget would focus on ways to make the economy more productive.
Last week the treasurer said: Monthly magazine said that young people’s inability to buy homes is one of Australia’s defining problems, signaling that further tax reform is on the government’s agenda.
“Any changes to taxes beyond those we have already flagged will be a matter for cabinet as always and will be consistent with the reform directions we set out after the reform roundtable a few months ago,” he said on Wednesday.
“We’ve made it clear that we have other priorities when it comes to tax reform. The focus on tax reform is reducing income taxes.”
In signaling its opposition to a change to the CGT, the Liberal Party is likely to win the support of the Greens, who have long argued that the concession encourages investor speculation in the property market at the expense of young buyers.
Teal independent MP Allegra Spending said Chalmers should use the May budget to deliver real reform, including changes to the federal tax mix and cuts to government spending.
He said policies such as the EV tax deal needed to be cut while NDIS spending growth was still too high.
“True reform must have winners and losers. We are beyond the point where everyone can win,” he said.
The current CGT relief applies to all assets, including shares, cryptocurrencies and those held in pension funds.
In a submission to the current Senate inquiry into capital gains tax, the Association of Australian Superannuation Funds warned that removing the 50 per cent deduction for super funds would increase the tax payable on all unrealized capital gains from 10 per cent to 15 per cent.
The association said the discount was “effective in encouraging pension funding”
Investment in a number of key areas in Australia’s domestic economy”.
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Shane Wright is senior economic correspondent for The Age and The Sydney Morning Herald.Connect with: X or email.
James Massola is the chief political commentator. He was previously national affairs editor and Southeast Asia correspondent. He won the Quill and Kennedy awards and was a Walkley finalist. Connect securely to Signal @jamesmassola.01Connect with: X or email.
