The unelected, neo-liberal biased International Monetary Fund, one among many technocrat groups which try to impose top-down advice based on their underlying philosophy, recently released their latest advice relating to Australia. Their concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country.
This time the IMF gave a mixed assessment of recent government budgets and whether Treasurer Jim Chalmers and his state counterparts were helping the RBA to tame Australia’s worst inflation outbreak in decades, because they warned the federal and state governments that any further unexpected rise in spending will force the Reserve Bank to keep interest rates high, and that future cost-of-living relief needs to be targeted.
We are certainly seeing some evidence of that in our household surveys, the findings of which I will discuss on Tuesday on my live show at 8pm Sydney time. Some are benefiting from the payments, despite having strong cash flow and savings, whereas for those under financial pressure, the rebates are hardly touching the sides, creating a more unequal story financially speaking. Indeed, One in four mortgage holders have had to skip paying for another expense to prioritise keeping a roof over their head, according to Finder.
This is an important point, because its Dr Chalmers and Finance Minister Katy Gallagher have hinted that they plan to announce another round of household subsidies before the next federal election, as Labor tries to placate voter anger over high inflation.
They also called for a complete overhaul of Australia’s tax system and suggested the government phase out $52 billion of superannuation tax concessions and the $19 billion capital gains tax discount to fund a reduction in personal income and company tax rates.
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I caught up with accountant, Allan Mason, who was Kerry Packer’s accountant and is the best-selling author of “Tax Secrets of The Rich”. As the tax year looms, its important to take charge of your tax affairs, and we discuss some of the main issues to consider.
Interesting to see the momentum now turning to discussion of whether the Government intends to tackle negative gearing having U-turned on the tax cuts.
As The Conversation put it, there are two things the prime minister needs to get into his head about tax. One is that saying he won’t make any further changes no longer works. The other is that negative gearing doesn’t do much to get people into homes.
Australia’s Treasury has begun publishing estimates of the cost of the present unfocused system of negative gearing. Its latest, released last week, puts the cost at $2.7 billion per year, to which should probably be added a chunk of the $19 billion per year lost as a result of the capital gains concession.
Albanese is normally cautious. But as he is showing us right now with his rejigged Stage 3 tax cuts, there are times when he is not. If he really wants to throw everything he has got at building more homes, he knows what to do.
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Today’s post is brought to you by Ribbon Property Consultants.
Lots of noise this week about the revamped stage 3 tax cuts. It’s worth remembering first that 2 in five Australians pay no tax because they do not earn enough, so this is change is certainly not going to impact every household.
Anthony Albanese had repeatedly committed to delivering stage 3 as legislated by the Coalition – but told the National Press Club on Thursday, “When economic circumstances change, the right thing to do is change your economic policy. That’s what we are doing.”
At one level of course this is another broken promise – just like the superannuation tax cap which came in last year. Presumable the calculus is more people will benefit than not, and it’s a long time to the next election, so people will forget. We will see.
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The Australian Bureau of Statistics (ABS) has released the June quarter National Accounts, which were an unmitigated disaster and confirmed that Australia is in a deep per capita recession.
The economy as measured by real GDP grew by only 0.2% in the September quarter, driven by increased government consumption and capital investment over the quarter and badly missing economists’ expectations of a 0.4% print: Growth over the year was 2.1%, less than population growth over the same period. While the population surge earlier in the year has supported demand overall, it is now rolling over and will not provide the same support in 2024. Or as Luci Ellis, at Westpac put it The Australian economy limped along in the September quarter.
Real per capita GDP has fallen for three of the past five quarters, with the March quarter revised up to flat. Accordingly, GDP per capita fell 0.3% over the year. Expenditure by households was dead flat over the September quarter and would have fallen by around 0.7% per capita. By contrast, growth in both household consumption and GDP over 2023 slowed due to sustained cost of living pressures and higher interest rates. Household consumption would have fallen even further had the savings rate not fallen to just 1.1%, which is the lowest level since December 2007.
The savings rate is now well below the ‘par’ of 6.5% and notionally implies a draw-down on the ‘additional savings’ accumulated during the pandemic – estimated at around $260bn – running at about $12bn a quarter. In total, about $43bn, or 16.5% of this reserve now looks to have been drawn down. Of course these are not equally spread across households, with many now having no buffers at all.
As Westpac put it. the policy drag on Australian households is clearly biting.
Join me for a live debate between Senator Gerard Rennick and Economist John Adams as we examine economic and monetary policy, debt, and the role of the RBA and other regulators. How can we improve the economic outcomes for Australia, and Australians? Who is to blame for high inflation and home prices?
The latest edition of our finance and property news digest with a distinctively Australian flavour.
Our property market is littered with failed legislation to guard against money laundering, despite promises from Government. No surprise perhaps, but that is not the point!
Go to the Walk The World Universe at https://walktheworld.com.au/
The latest edition of our finance and property news digest with a distinctively Australian flavour.
In today’s show we look at changes to strata law which allows pets across New South Wales, how some are seeking to take advantage, the latest on property search, and the continued pressure from the Industry to abolish stamp duty.
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As part of a major review of New Zealand’s tax system, the government’s Tax Working Group recommended a comprehensive capital gains tax. New Zealand is one of few countries without a capital gains tax, and the proposal has generated outrage, via The Conversation.
Digging deeper beyond the headline-grabbing rhetoric, some commentators have expressed concern the proposed tax will have a detrimental impact on the economy
by distorting investment decisions and creating an excessive
administrative burden on taxpayers and the Inland Revenue Department (IRD). There are also claims about the lack of fairness in taxing “hard earned gains” that have been built up for retirement.
Missing from the debate is the fact that a capital gains tax should reduce income taxes for most New Zealanders.
A fair tax system
The debate strikes at the heart of two essential elements used to assess the quality of a tax: equity and efficiency.
In order to be equitable, a tax should treat people with similar
economic situations in a similar way. This is called horizontal equity.
Equally, taxation should fall more heavily on those who have the ability
to pay. This is referred to as vertical equity.
These are the principles set out by the great Scottish economist Adam Smith in his 18th-century magnum opus The Wealth of Nations.
In order to evaluate the tax proposals, New Zealand’s Tax Working Group
used Smith’s principles of fairness alongside two distinctly New
Zealand frameworks: Te Ao Māori (Māori worldview) and the Living Standards Framework.
These two frameworks have been developed to guide policy makers toward
the objective of inter-generational well-being, including the effect of
policy on growing inequality and non-economic factors such as social and
environmental capital.
Not taxing capital gains results in a failure to achieve both horizontal and vertical equity.
Taxing passive gains
Currently, in New Zealand, some income is taxed and some is not. The
income that is taxed is typically derived from personal services (“hard
work”) and from investments of capital (interest, rent and dividends).
The income that is not taxed is typically derived from market movement,
such as capital gains on assets.
On the whole, we have a counterintuitive approach to taxation in New
Zealand where we tax “hard work” and fail to tax gains that accrue
passively. Two people in similar situations are taxed differently. A
person who invests in a small business that produces goods and services
pays tax on all their profits, while another who invests in property
that accumulates passive gains, does not.
Statistics provided by the Tax Working Group indicate the taxation burden is flat across all income groups.
This means our tax system does not operate according to Smith’s
ability-to-pay principle. We have progressive tax rates but those in the
highest income deciles enjoy much of their income in the form of
tax-free capital gains. New Zealand’s failure to tax capital gains is
inequitable.
Tax efficiency
The claims that a capital gains tax is inefficient centre around
administrative issues and investment distortions. The first claim has
some merit – new taxes usually result in additional administration,
especially early on. The second has no merit whatsoever.
For New Zealand’s economy to thrive, greater investment in the
production of goods and services is required. However, these investments
are often risky. And they are taxed when profitable. Hence it is a far
more attractive investment proposition to invest in low-risk assets that
attract little or no tax, such as land.
Contrary to popular belief, land investment, in itself, is not a
productive activity. The land is there regardless of who owns it.
Someone may conduct productive activity on the land, such as farming or
building houses, but the ownership itself does not produce goods or
services. A capital gains tax would reduce distortion in investment
choices, not increase it.
If tax applies to gains on investment in assets as it does to
business profits, it will encourage investment decisions based on where
the greatest return can be made, not where tax-free gains are derived.
The lack of capital gains tax has been distorting investment decisions for decades.
Impact on economy
In the longer term, it would be a positive outcome to attract some
investment out of property and into production of goods and services,
regardless of any possible adjustments that might occur in the short
term.
And the tax cuts? Missing from this debate entirely has been
recognition of the Tax Working Group’s recommendation that the
additional tax collected from a capital gains tax should be used to reduce income taxes. This is not a “tax grab” but a reallocation of the tax burden.
If the government were to implement the recommendations of the Tax Working Group report, most New Zealanders would find themselves with an increase in their after tax income. Greater equality would seem to be more consistent with kiwi values than the status quo.
Author: Alison Pavlovich, Assistant Lecturer in Taxation, Massey University
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.
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.”
