Labor Weighs Capital Gains Tax Changes as capital gains taxes could rise while the Albanese government narrows its search for an effective housing policy ahead of May’s budget. After several indications that the government is considering ways to make the tax system fairer for younger Australians, Treasurer Jim Chalmers has repeatedly declined to rule out reducing capital gains tax discounts, following reports in The Australian Financial Review that this option is being actively considered.
A government source told ABC that while no final decision has yet been taken on housing-related reform, discussions are underway and changes to capital gains tax have not been ruled out. While both Mr Chalmers and Prime Minister Anthony Albanese have rejected negative gearing changes proposed as part of Bill Shorten’s controversial housing tax agenda for 2019, others such as an initiative that proposes to halve 50 per cent discount were discussed at last August’s economic roundtable held in Cabinet Room.
There’s an old proverb that goes: ‘if it ain’t broke don’t fix it! Both the prime minister and treasurer expressed a wish to reconsider intergenerational equity within our tax system following that roundtable, with David Chalmers repeating this notion when speaking to economist Joseph Stiglitz for The Monthly last week.
Capital gains tax is paid on assets like properties or shares when sold, typically when capital gains arises upon sale. Tax on capital gains refers to any increase in asset values since purchasing them (the capital gain). Capital gains are treated as part of an individual’s income and taxed at similar rates as salaries or wages, although a 50% discount may be applied first in recognition that some gains could have occurred due to inflation without incurring tax liability.
Example 1: When purchasing a property at $1 million and selling for $2 million, its capital gain would be worth $1 million, yet only half that gain ($500,000) would be taxed at the seller’s marginal rate for taxation. Labor has not proposed changing this exemption and in most cases overcompensates sellers for inflation with this 50% discount, benefitting only wealthy Australians (government figures indicate the wealthiest fifth of Australians accrue 90% of all benefits).
Due to perceptions that it provides property investors with a tax break, numerous proposals have been put forth for reform of the discount. This discount is projected to cost the federal budget $21.8 billion during this financial year, according to Labor’s 2019 proposal for reform: to cut it in half from 50 per cent to 25 per cent while grandfathering existing properties and shares under old arrangements.
A Senate committee was convened late last year, led by Greens economic spokesperson Nick McKim, a longtime advocate of changing this tax. Labor and Liberal senators alike signed onto this proposal, while groups like the Grattan Institute and Australian Council of Trade Unions wrote letters of support for it. The Centre for Independent Studies advised against it while Property Council of Australia said it wouldn’t help affordability issues. Meanwhile, e61 Institute argued that current capital gains tax regime was inequitable and ineffective as it treated different investments and assets differently, creating inequalities across society.
Although they did not express a definitive position, they cautioned that cutting capital gains tax to half would not necessarily bring greater fairness in its treatment across assets. Bob Breuning from ANU’s Tax and Transfer Policy Institute made similar points. Although the Liberal Party opposed Labor’s 2019 policy, some members suggested they could reform CGT and negative gearing instead.
Shadow Treasurer Ted O’Brien signaled likely opposition to any move on Thursday. When asked by ABC Melbourne today about this policy, Labor MP Jim Chalmers indicated his party’s housing focus remains on increasing supply – while acknowledging housing is one of the core intergenerational issues requiring attention. “Obviously housing is one of the core intergenerational issues, but our priority in housing remains on boosting supply,” said Mr Chalmers.
“Last year at the Press Club I gave a speech where I discussed how governments are expected to regulate certain matters in and out. There are obviously things like death taxes or changing arrangements of family homes which they wouldn’t even contemplate doing so as authorities.
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“But I believe we are capable, as per the Senate Committee, of engaging in a discussion about intergenerational housing concerns. Labor MP Ed Husic, who was forced out of cabinet following the election last year, told ABC’s Afternoon Briefing that policy should be evaluated carefully. If capital gains tax causes distortions in the marketplace or there’s any way we could redesign it to increase supply – which he believes should be government’s main goal – we should consider it carefully.”
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