Federal Government urged to dilute capital gain tax discount immediately ahead of May Budget announcement

The Federal Government is being urged to wind back capital gains tax discounts retrospectively without grandfathering the concessions for existing property investors.

A Greens-chaired Senate select committee into the 50 per cent capital gains tax discount kicks off three days of hearings on Monday with a report due by March 17.

While Labor ruled out changes to the policy ahead of the 2022 election Treasurer Jim Chalmers has hinted at changes in the upcoming May Budget in the name of inter-generational equality.

The Australian National University’s Tax and Transfer Policy Institute argued any changes should be retrospective with no grandfathering arrangements for existing property investors to avoid a flurry of home buying ahead of a tax change start date.

“In our view, any change should be applied to everyone, immediately, with no grandfathering. This would avoid large lock-in effects that grandfathering would likely generate,” the institute’s director Professor Robert Breunig said his submission.

Australia’s top marginal tax rate of 45 per cent for those earning more than $190,000 means the wealthy can sell an investment property, owned for 12 months or more, and only have to declare half of it on tax.

Someone making a $100,000 capital gain would only have to declare $50,000 of that on their taxable income for that financial year.

Professor Breunig argued diluting the capital gains tax discount would reduce the strategy of investors buying residential properties as a way of reducing their income tax burden.

“Reduce the incentive to reclassify labour income as capital gains,” he said.

“Shift the tax mix towards savings income and away from labour income, which improves the inter-generational balance of the tax system.”

The Australian Manufacturing Workers Union, aligned with Labor’s Left faction, wants the 50 per cent capital gains tax discount removed but grandfathered for two years.

“This would signal to the market that housing is not an asset to be used for wealth accumulation,” its submission said.

“The distortion in the housing market favours investors and speculators. This is the mechanism by which the CGT discount impacts inequality in Australia.”

The ACTU is calling on the Federal Government to reduce the capital gains tax discount to 25 per cent, despite Labor losing the 2016 and 2019 elections with this policy.

Under the union movement’s proposal, applying to second or subsequent investment properties, someone making a $100,000 capital gain would have to declare $75,000 of that on their tax return.

The ACTU is proposing to limit the 50 per cent capital gains tax discount to one investment property.

“Young workers are being locked out of home ownership, affordable rentals and are facing deepening inequality in Australia. It is long past due for major reform of Australia’s approach to housing,” its submission said.

NSW Treasury said the capital gains tax concessions had put up property prices, calling out flaws in the policy despite being the key beneficiary of higher stamp duty revenue in a State containing Sydney, Australia’s most expensive property market.

“The CGT discount can have major implications for housing markets and economic equity,” it said.

“While intended to encourage long-term investment, the discount has contributed to increased investor demand for property, placing upward pressure on housing prices and exacerbating affordability challenges.”

Social housing group Everybody’s Home argued the CGT discount “benefits higher-income households and wealthier investors, contributing directly to widening wealth inequality”.

The 50 per cent capital gains tax discount debuted in September 1999 and replaced a system that had existed since 1985 where capital gains were indexed for inflation.

The conservative Centre for Independent Studies argued that halving the 50 per cent capital gains tax discount would “result in a more burdensome CGT than Australia had before the 50 per cent discount replaced cost base indexation in 1999”.

“In many cases, the 25 per cent discount system would impose tax on purely inflationary gains as well as real gains,” it said.

Greens senator Nick McKim, who is chairing the committee, went to the last election as the party’s treasury spokesman with a plan to scrap the 50 per cent capital gains tax discount but grandfather it for the first investment property bought before the start date.

The Coalition is opposed to changing the capital gains tax discount.