The Budget looms, and leaks are spreading. Chalmers appears set to reshape negative gearing and capital gains tax rules, but existing landlords could be grandfathered. Here’s what we know.
It’s leak time in the run up to the Budget and one of the best leak detectors is Samantha Maiden from news.com.au. This award winning journalist tells us that Chalmers is going to play Mr Nice Guy for most landlords. Whether it was an accident or not, the news sounds promising for existing property investors.
Here’s what Maiden has detected from utterances from the Treasurer:
- There will be changes to negative gearing.
- There will be changes to the capital gains tax (CGT) discount.
- Because changes will be phased in, the Government won’t collect billions in the short run.
- Some form of grandfathering for existing landlords is to be expected on May 12.
Grandfathering investments allows those currently enjoying tax breaks to continue to do so. But in the future, new rules will apply for new investments. Grandfathering can come with restrictions of access, so the Treasurer could say allow these concessions to only those with one or two properties and they might have to have been owned before 2026, to catch out those who have been buying properties this year to beat the new budget rules.
Maiden also reveals that the Budget is likely to give tax incentives for those wanting to buy new homes, which would be a ‘carrot’ to encourage a greater supply of housing over time, which is the core problem behind the country’s house price crisis.
Maiden points to the 2015 recommendations of the Labor-oriented McKell Institute, which argued in favour of restricting negative gearing to new properties only.
Importantly, the Institute’s research showed that only 7% of the negative gearing subsidy goes to new housing, doing nothing to increase supply.
Another suggestion from the McKell Institute is to increase the CGT discount on new attached apartments to 70% from the current 50%, while cutting it to 35% for detached rental properties!
Meanwhile, the Government hasn’t ruled out returning to the old tax deduction claiming process, which preceded the 50% tax discount on capital gain.
I hope Chalmers doesn’t opt for this more complex method, which would net him more income tax but would mean most people would need their accountant to work out what their discount would be. Here’s how Wikipedia explains the old CGT discount: “In calculating the capital gain, the cost of assets held for 1 year or more was indexed by the Consumer Price Index (CPI), which meant that the part of the gain which was due to inflation was not taxed. Indexation was not used if an asset was held for less than 12 months or a sale results in a capital loss. Also, an averaging process was used to calculate the CGT. 20% of a taxpayer’s net capital gain was included in income to calculate the taxpayer’s average tax rate, and the average rate was then applied to all the taxpayer’s gross income (i.e., including the capital gain in full). So, if a large capital gain was to push a taxpayer into a higher tax bracket in the tax year of sale, the bracket was stretched out, allowing the taxpayer to be taxed at their average tax rate.” Normal people are probably thinking this is clear as mud!
I hope Chalmers is more impressed with the work of the McKell Institute because we want more homes built more than Jim getting more tax. That would be a Nice Guy Treasurer, showing he understands that the housing crisis is more important to fix than his budget deficit.
