Yet Another Nail In The Investment Property Coffin

The AFR has reported the Turnbull government is planning a crackdown on capital gains tax concessions for property investors to seize the mantle on housing affordability and provide revenue to help replace soon-to-be dumped budget cuts.

Given most property investors are benefiting more from rising capital gains than offsetting costs from negative gearing, this is a significant change of tune.

The policy backflip, to be unveiled in the May budget, comes after more than a year of savaging Labor’s proposal to halve the capital gains discount as an assault on badly needed investment.

It is understood the policy being worked on within government would be confined to property investment, and not apply to all investments such as shares, as Labor’s plan would. Neither would the Coalition policy target negative gearing, as Labor is doing.

Options being worked on include following Labor in halving the 50 per cent discount on capital gains tax to 25 per cent, or reducing it by another amount. The other is adopting a phased model in which the discount would increase the longer the property was held. A property would have to be held for several years before the investor was eligible for the full 50 per cent discount.

However according to the Real Estate Conversation, such a move is unlikely.

This morning Malcolm Turnbull and finance minister Mathias Cormann dismissed the reports.

“We do not support the Labor Party’s plans to increase capital gains tax,” the Prime Minister said in a press conference.

Turnbull also said the government was not considering to “outlaw negative gearing.”

The Property Council of Australia urged caution amid the conflicting reports.

“Increasing capital gains tax runs the risk of reducing the incentive to invest at a time when Australia needs to build new housing to cater for our growing population,” said Ken Morrison, Chief Executive of the Property Council of Australia.

“While there are conflicting media reports this morning, we urge the government to be extremely cautious if it is considering changing the CGT discount,” he said.

Morrison pointed out that the capital gains tax discount is intended to compensate for natural growth in asset prices due to inflation.

“The CGT discount is recognition that you should not tax people for inflation – inflation-driven capital growth is not real growth and investors should not be taxed for it,” he said.

Morrison said the construction cycle is already past the peak, and any disincentive to build should be considered carefully.

“The industry has passed the top of the construction cycle,” he said.

“The risk for the government is that if it moves too far, it runs the risk of tightening housing supply and adding further pressures to housing prices.”

Author: Martin North

Martin North is the Principal of Digital Finance Analytics

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