Australian Government Announces Changes to Negative Gearing and Capital Gains Tax

Nearly 2000 homes are scheduled for auction across Australia this weekend. The federal government’s new tax changes will be a factor for participants at the 1994 auctions set for Saturday and Sunday. The changes include limiting negative gearing to investors who build new homes.

Negative gearing allows property investors to offset losses against their taxable income, a feature of the tax system since 1922. The capital gains tax concession, which has provided a 50 per cent discount since the Howard government, will revert to the pre-1999 structure based on indexing for inflation.

Capital gains and family trusts will also face a 30 per cent minimum tax rate. "We are the party of home ownership. We want more family homes. They want to lock young people out of home ownership," he said. Treasurer Jim Chalmers stated the package would deliver a fairer tax system.

"We all know about first home buyers rocking up to auctions and being outbid by people who might already own multiple properties. We’re trying to level the playing field at auctions," he said this week. The measures were part of the fifth budget delivered by Chalmers.

The budget also included a new $250 working Australians tax offset, a $1000 standard tax deduction, a $20,000 instant asset write-off for small businesses, loss carry-back provisions for firms with turnover below $1 billion, and changes to research and development taxation.

Federal Treasury added 50 pages of analysis to the budget documents arguing for the tax changes, the largest such inclusion since 2010. The analysis stated that the combination of negative gearing, the capital gains tax discount and trust arrangements has encouraged investment in existing housing for tax benefits rather than in productivity-enhancing assets.

"Low effective tax rates on property investments caused by the interaction between the 50 per cent CGT discount and negative gearing create strong incentives for investors to take on highly leveraged housing investments," Treasury said. Sydney’s median house price is almost 14 times the median income.

Australia has five of the 20 most expensive cities in the world when including Melbourne, Brisbane, Perth and Adelaide. The government announced an additional $2 billion to support infrastructure for new housing. A lack of supply remains the primary driver of high prices, according to the report.

The three main tax changes are projected to raise about $100 billion over a decade. Treasury analysis found that over a lifetime the top 1 per cent of Australians, with average incomes above $800,000, receive a net tax subsidy worth more than $700,000 from these arrangements.

The bottom 90 per cent receive less than $50,000. Approximately $22 billion will be returned through the working Australians tax offset. The standard deduction is expected to cost more than $10 billion, and business tax reforms more than $15 billion.

The standard deduction is forecast to save taxpayers $380 million a year in compliance costs. Businesses are expected to save 10,000 hours annually in paperwork from the permanent instant asset write-off. "We’re going to make life hell for this government because this is an assault on aspiration.

It is an assault on hard-working Australians," he said. Macquarie analysts stated that removing negative gearing on existing properties could reduce investor borrowing power by 10 to 20 per cent. Some investors reported reduced borrowing capacity for additional properties following the announcement.