NSW targets capital gains as property tax fight erupts By John Kehoe
The NSW Liberal government has proposed curtailing tax breaks for capital gains to reduce investor speculation and curb housing prices, splitting with the Morrison government and embracing a position federal Labor unsuccessfully prosecuted at the last two elections.
NSW also requested federal payments to fund a yet-to-be-finalised proposal to gradually transition from stamp duty on property purchases to an annual land tax, so states were not inadvertently penalised on their GST distributions.
NSW Planning Minister Rob Stokes’ department said the 50 per cent discount on capital gains caused “significant” purchases of investment homes rather than accommodation for owner-occupiers such as first home buyers.
“The federal government should review taxation settings, including the capital gains tax discount of 50 per cent on properties held for over 12 months and consider reforms to ensure an appropriate balance between the purchases of properties for owner-occupied and investment reasons,” the NSW government said.
“The continued upward growth in housing prices would be lessened to some degree”, it would “reduce speculative pressures in the housing market” and there would be a “small relative shift back to benefit first home buyers from the current high focus of investment purchases”, it said.
The proposal was made in a submission to a federal parliamentary inquiry into housing affordability and supply being chaired by Liberal MP Jason Falinski.
Mr Falinski said on Friday the housing affordability problem was caused by state and local government planning and zoning rules crimping the supply of new homes, and he called the NSW submission “very disappointing”.
“Instead of focusing on their own reports that show they’re short 100,000 houses in Sydney and they need to be building 40,000 houses a year just for the problem not to get any worse, they talk about federal government issues like capital gains tax and requesting more money to transfer from stamp duty to land tax,” he said.
“With low interest rates in the bond market there’s never been a better time for states to borrow to fund scrapping stamp duty themselves.”
‘Dumbest tax break’
National median dwelling – houses and apartments – prices climbed at their fastest annual pace since 1989, jumping 20.3 per cent over the 12 months to September 30, according to Corelogic.
Sydney soared 23.6 per cent to a median dwelling value of $1.06 million, Canberra surged 24.4 per cent to $838,904, Melbourne jumped 15 per cent to $775,142, Hobart surged 26.8 per cent to $659,622, Brisbane rose 19.9 per cent to $625,291, Adelaide rose 19.1 per cent to $529,376, Perth increased 18.1 per cent to $524,589 and Darwin rose 20.2 per cent to $481,767.
The RBA told the inquiry that Australia’s fast-rising housing prices are a consequence of low interest rates and people’s ability to spend more on homes.
Increased supply of new dwellings would reduce the growth in prices but would not be enough to offset the greater spending power coming from low interest rates, the RBA said in September.
The RBA also said in “combination with the concessional treatment of capital gains”, negative gearing creates an incentive for leveraged investment in property and adds to demand for housing.
Corinna Economic Advisory principal Saul Eslake congratulated the NSW government for exposing the CGT discount, which he said was the “one of the dumbest tax breaks in history”.
The CGT discount was introduced by the Howard government in 1999, replacing the inflation indexation of capital gains, in response to a business tax review recommendation by John Ralph who wanted to boost entrepreneurialism and increase share ownership.
“The CGT discount turned us into a nation of property speculators,” Mr Eslake said.
“It had the effect of turning negative gearing from deferring tax when a property was sold, to permanently reducing tax paid.”
Of the 2.2 million taxpayers owning at least one rental property, 1.3 million declared a net rental loss in 2018-19, according to the Australian Taxation Office data.
Complex mix of factors
Centre for Independent Studies chief economist and a former RBA official Peter Tulip said his review of about six economic papers on housing found that the combination of the CGT discount and negative gearing contributed only a small 1 per cent to 4 per cent increase in dwelling prices.
Mr Tulip’s analysis is that zoning regulations contribute to 42 per cent of the average detached house price in Sydney, 41 per cent in Melbourne, 29 per cent in Brisbane and 35 per cent in Perth.
“Increasing supply and lifting zoning restrictions could have a huge benefit,” Dr Tulip said.
At the 2019 federal election, Labor’s then leader Bill Shorten campaigned on reducing the CGT discount to 25 per cent for investments such as housing and shares held for longer than 12 months and to scrap back negative gearing except for new-built dwellings.
The Morrison government campaigned against the “housing taxes” and Labor lost the election. Labor has since dropped the policies, in favour of a $10 billion social and affordable housing fund.
Australian National University economic and social researcher Ben Phillips said the major recent contributor to high house prices was low mortgage rates.
The tax-free status of the principal place of residence, tax breaks for investors, zoning and planning red tape, strong population growth pre-pandemic and demand for detached homes during COVID-19 from Australians trapped inside the international border and not spending overseas had also contributed, Mr Phillips said.
“People often oversimplify these things when it’s a combination of a whole lot of things, led by interest rates putting upward pressure on asset prices,” Mr Phillips said.
The prudential regulator moved this month to take some heat out of the housing market, raising the “serviceability buffer” that banks use to assess loans, which it says will reduce the maximum borrowing capacity for the typical borrower by about 5 per cent.
The Australian Prudential Regulation Authority told banks to increase the interest rate buffer by 0.5 percentage points, from 2.5 per cent to 3 per cent by October 31.
Mr Eslake said all levels of government had contributed to ever-escalating housing prices for decades because politicians knew that more voters benefited from higher house values.
“For all the crocodile tears which politicians of all persuasions routinely shed about the difficulties facing those wishing to get their first foot on the property ladder, deep down they know that there are far more people who already own at least one property and who therefore have a very strong interest in policies which result in continued property price inflation,” Mr Eslake said in an earlier submission to the inquiry.
“And, sadly, there’s no reason to think that political calculus is going to change.
“Nor, therefore, are the housing policies which have resulted in created the housing system which Australia has today.”
Mr Falinski said Australia had a productivity problem and the big reform levers to fix it rest with state governments.
“There is a very strong argument for compensation and incentives to the states to make reforms,” Mr Falinski said.
“Frankly though, stamp duty to land tax is not one of them because the benefits overwhelmingly flow to state governments.”
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