Chalmers leans toward scrapping Howard-Costello tax discount
A return to the original method of taxing capital gains from property under the Hawke and Keating governments is gaining ground as the centerpiece of the May budget, with Chancellor Jim Chalmers preparing the final version of his fiscal plan.
This imprint may reveal that Chalmers is leaning towards a return to the pre-1999 system rather than reducing the current 50 per cent deduction on capital gains; Critics claim this has contributed to a surge in property investor activity and pushed prices out of the reach of younger homebuyers.
The move would likely result in a small increase in the tax and dampen investor activity, which has reached record levels in parts of the real estate market dominated by first-time and low-income homeowners.
Chalmers promises a tax package focused on “intergenerational equality” in his May 12 budget. Earlier this month, Prime Minister Anthony Albanese said the government would support hard-working people with a particular focus on “Australia’s great desire for homeownership”.
Capital gains tax (CGT) reform and new incentives for housebuilding have been on the government’s radar since last year’s economic roundtable. This has been further strengthened by the Greens-led Senate inquiry into the tax, which has argued that the CGT concession is contributing to the country’s housing crisis.
Aside from a host of potential changes, senior Labor sources who are unable to speak publicly have told this imprint that a return to the original CGT system is now the government’s preferred position.
While treasurer, Paul Keating introduced capital gains tax, which applies to all assets, including property and shares, in an overhaul that included cuts to personal and income taxes in the mid-1980s.
Under the original CGT the value of assets was adjusted for actual inflation and the tax only applied to the “real” jump in value. This required people to track inflation from the time they bought an asset until it was sold.
He was replaced by Peter Costello in 1999 and the current 50 per cent tax relief on capital gains was introduced to make Australia more attractive to investors, especially in terms of the share market.
It was intended to attract more investment into equity markets, but critics argue that the way the discount interacts with negative gearing makes it a huge incentive for property investors. During a period of low inflation, the discount was so large that it provided asset owners with significant windfall gains.
Before the change, most homeowners were moving in a positive direction; then the majority was negatively oriented.
A return to the Keating-era regime would generate some extra income, but is unlikely to provide a major financial windfall.
Under the current CGT system, for example, a person who realizes a capital gain of $750,000 on the sale of an investment property bought for $1 million in 2015 and sold for $1.75 million in 2025 will pay tax on $375,000. Under the Keating-era calculation, the same investor would pay taxes on about $420,000 of the capital gain.
There were concerns that another option, which would reduce the concession rate from 50 per cent to 30 per cent, could spark a fear campaign in the housing industry, which claimed that any change to the CGT concession would increase prices and reduce house building.
There appears to be popular support for changes to the CGT.
A Resolve poll conducted between April 13 and 18 found that 42 percent of 1,807 respondents supported reducing the 50 percent franchise. The opposition rate was only 9 percent, while 39 percent were undecided.
The overhaul of negative gearing (43 per cent) remains one of the better supported tax changes open to Chalmers, along with an increase in taxes on mining companies (51 per cent) and the removal of taxes on banks (54 per cent).
Chalmers, who spent part of last week at International Monetary Fund meetings in Washington, is weeks away from announcing the budget, which he claims will be the most important since the government took office.
In the coming days, decisions will be made on spending cuts, tax reform and policies to increase efficiency.
Before these decisions, around 30 interest groups representing businesses, agriculture and the university sector had made a final call for Chalmers to cut the red tape.
Groups representing companies that employ millions of people want the government to commit to reducing “unnecessary regulations” by 25 percent by 2030.
Business Council chief executive Bran Black touched on burdensome bureaucratic issues across the country, saying cafe owners in Victoria needed 37 separate licenses before they could open, while a Queensland plumber had to pay hundreds of dollars in permits to repair a tap in NSW.
“This type of red tape increases cost, slows things down and makes it harder to move goods and stock shelves. Given that global volatility is already driving up prices, reducing this duplication will help reduce costs for Australian households and businesses,” he said.
Cut through the noise of federal politics with news, views and expert analysis. Subscribers can sign up for our weekly Inside Politics newsletter.
Shane Wright is senior economic correspondent for The Age and The Sydney Morning Herald.Connect with: X or email.
