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Housing: Malcolm Turnbull increasingly isolated over capital gains tax

Peter Martin

If only someone had taken the heat out of the property market back in February 2016.

Back then Sydney home prices were climbing 9 per cent a year, Melbourne prices 11 per cent.

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Turnbull won't budge on housing affordability

Prime Minister Malcolm Turnbull is taking a wait and see approach on housing affordability, despite a public warning from the Reserve Bank about rising household debt.

Labor put forward a suite of measures designed to pull things back. Negative gearing would no longer be permitted for newly bought properties, unless they were newly built. The capital gains tax discount available for newly bought assets would be wound back from 50 per cent to 25 per cent.

The Coalition put forward nothing. Since then, and since its election win, Sydney's growth rate has soared to 19 per cent and Melbourne's to 16 per cent.

The Melbourne median price has jumped $83,000 since February 2016, the Sydney median by $128,000. In a year of record low wage growth (1.9 per cent) housing has moved beyond the reach of Australians who might have thought they had a chance.

But not beyond the reach of speculators. For them, buying at a high price makes sense, even if they make next to nothing on rent or make a negatively-geared loss. So long as they believe prices will continue to climb and the government will continue to tax only half of their capital gain, they can make hundred of thousands of dollars when they sell.

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A sudden belief that prices will no longer rise could trigger a collapse as they rush to sell. A measured shaving of the capital gains tax discount could slow price rises more gently. That's why even experts who disliked Labor's proposals the first time round are shifting their ground.

Ken Morrison is chief executive of the Property Council. No relation to the Treasurer Scott Morrison, he attacked Labor's proposals at the time as a "risky intervention". These days he says he would be open to a more modest capital gains tax discount – maybe 40 per cent instead of 50 per cent.

Coincidentally 40 per cent is what was recommended by the Henry Tax Review, for much the same reason. Fifty per cent is more than is needed to compensate for inflation. Forty per cent would make speculating on property moderately, rather than outrageously, attractive. The Coalition's aborted tax review was moving in the same direction. The discussion paper it released before it was wound up because of the imminent election asked this question: "To what extent is the rationale for the CGT discount, and the size of the discount, still appropriate?"

The Business Council has also supported a cut to 40 per cent, arguing that "tax policy should not distort investment decisions". Tony Shepherd, a former president of the Business Council, was appointed by the Coalition to review its finances as soon as it took office. These days he says he'd scrap the capital gains tax discount altogether.

"I'm personally in favour of putting the rate up to the income tax rate," he says. "I can't see any reason for treating capital gains any differently from income tax."

Housing has moved beyond the reach of Australians who might have thought they had a chance.

David Murray, a former head of the Commonwealth Bank and the Future Fund, was appointed by the Coalition to review the financial system. Under the heading "Major tax distortions" he concluded that "the tax treatment of investor housing, in particular, tends to encourage leveraged and speculative investment in housing".

Reserve Bank governor Philip Lowe is thinking along the same lines. He told a parliamentary hearing in February that shaving the capital gains tax discount would "take some of the current heat out of the housing market".

The International Monetary Fund has reached the same conclusion, reporting after a fortnight of consultations that our tax system provides "incentives for leveraged real estate investment that likely amplifies housing cycles".

The Institute of Company Directors wants the discount cut to 40 per cent, arguing that 50 per cent "far exceeds that necessary to compensate investors for the impact of inflation".

The Committee for the Economic Development of Australia wants 25 per cent, in order to "take much of the power out of negatively geared investment strategies".

The Treasury itself has worked up a number of models, not only before the election when Morrison acknowledged a need to curb "excesses", but also in the early months of this year, according to Treasury responses to freedom of information requests.

Morrison's predecessor, Joe Hockey, identified housing taxation as one of the most important things to get right in his final speech to the parliament. He wanted "an incentive to add to the housing stock rather than an incentive to speculate". The NSW Liberal government and the Victorian Labor government agree.

Indeed, it's hard to find anyone, apart from speculators themselves, who doesn't now think that a 50 per cent tax discount is too generous a reward for speculation. And even many of them would probably support a Labor-style move that stabilised prices by protecting their discount while cutting it for those who followed.

By now the only big hold-out is Malcolm Turnbull. Yet he understands the arguments.

Here he is while a backbencher, in a paper he co-authored with Australian National University academic Jeromey Temple: 

"The arguments for taxing capital gains at the same rate as income are compelling ones, especially if the gains are indexed to inflation. The concessionary taxation of capital gains encourages people to invest in a manner which turns income into capital, and, as in the case of negative gearing, allows them to deduct losses at, say, 48.5%, and then realise gains and pay tax at effectively half that rate."

If he is bright he'll begin to shave that discount, using Labor for cover.

If he's not, he'll preside over an unknowable and increasingly frightening future for the most important thing Australians own.

Peter Martin is economics editor of The Age.

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