With the federal budget just five weeks away, a new capital gains tax ‘discount rate’ of 33 per cent is now widely assumed to be on the cards along with a potential limit of two negatively geared properties per person.
As the government refuses to comment on speculation, property analysts suggest the government will use inflation patterns from the last decade to justify an effective CGT rate increase by cutting the so-called discount – offered to investors who hold a property for longer than 12 months – from 50 per cent to 33 per cent.
“Headline inflation over the last decade is up about 33 per cent – and the typical holding period for investment property is considered to be 10 years – so I do wonder if that is the basis on which they come up with the number,” independent housing analyst Eliza Owen told The Australian’s The Money Puzzle podcast.
Sources inside the market now say the 33 per cent figure is ‘baked in’ for the federal budget on May 12 on the basis that it fits with Treasurer Jim Chalmers’ wider concept of intergenerational fairness.
Meanwhile, a range of tax alternatives are now seen as much less likely including cutting the discount rate to 25 per cent or returning to the pre-1999 system of cost-based indexing which allowed for annual changes to account for inflation.
“For investors it’s usually more advantageous to have the 50 per cent discount, especially for short-term speculative property investors. They get taxed far less than if we had the old indexation method,” Ms Owen said.
“(Otherwise) the old indexation method does seem fair from an investor perspective, but I do think a meaningful adjustment that disincentivises property investment could be fairer from a intergenerational wealth perspective.”
It is widely assumed across the property industry that any changes to either CGT or negative gearing will be restricted to property and grandfathered. That means even after the new changes are announced, those who already own property can continue to operate under existing tax arrangements until they sell.
Many market analysts also believe there is also a strong chance the CGT change will be accompanied by a long-anticipated limit to negative gearing that will come in the form of a hard cap on the number of properties an individual can gear. The cap is most likely to be two properties per person.
In common with recent wealth tax changes – such as the new 30 per cent super tax for high-net-worth investors – the government may face a long battle to get any legislation through the Senate, academic and tax adviser Dr Adrian Raftery said.
“The timetable for the introduction of any changes will be crucial,” Dr Raftery said.
As The Australian has already reported, both CGT and negative gearing changes have been modelled by federal Treasury but industry stakeholders such as Housing Industry Association chief economist Tim Reardon are warning any adjustments must be put in the context of the wider tax system.
“If they were really looking to try and make the CGT arrangements more fair they could simply go back to the cost-based indexing arrangements that were in place before 1999,” Mr Reardon said.
As for negative gearing, Mr Reardon said there should be an attempt to offset any limits through better capital depreciation terms for new home building.
In terms of tax capture, any reduction of incentives around CGT will be one the most significant items in the May budget given it is a $32bn item annually in the national accounts.
Investors are already facing higher interest rates in the residential market which have been reflected in softer clearance rates especially in the major cities. According to Cotality Australia the preliminary clearance rate over the Easter weekend was the lowest since July 2022.
Net rental yields of just 2 to 3 per cent in the major cities mean any change to CGT is highly significant because capital gains is the only game in town for most investors. A higher CGT will almost certainly tempt investors to invest outside the city centres into outer suburbs and regional towns where rental yields are higher.
A limit on negative gearing activities to two properties would create enormous complexity for investors who may have several properties where the line between being positive or negative geared on each property may be constantly changing.
“The devil will be in the detail. I do hope they have modelled anything they are planning very carefully,” Mr Raftery said.
Original article published here in The Australian.