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AFJ77 14/05/08 1:40PM

Based on this article, a "working family" (whatever this essentialist term means!) who purchased a house in 1990 for $100,000, worked really hard to pay it off and now tries to sell it for say $400,000 should be slugged more tax? Given that the most substantial investment that many Australians make is in purchasing a home, an increase in CGT will cause significant devaluing in the housing market which will have serious negative externalities for those who have taken out home loans since around 2000.

Secondly, people dropping out of private insurance may lead to increased demand for public services which will required increased government investment. This article does not factor this in as a consideration.

Finally, increases in superannuation taxation will lead to increased investment in shares and off-shore projects which will make it more difficult for the ATO to capture this income. Again, this article does not factor this in as a consideration or draw an international parallels.

It’s all good and well to perpetuate the rhetoric of "class war", "the housing affordability crisis" etc but in the absence of cogent counter-proposals it really just sounds like an undergraduate intro to micro economics tute paper.

GraemeF 14/05/08 3:06PM

CGT does not apply to the family home so that stuffs that line of argument.

A bit of reverse "class war" could do with more facts and not sound undergraduate blah de blah like those right wing idiots at universities who spend all their time looking for bias not facts.

AFJ77 14/05/08 4:09PM

Graeme F, obviously I was referring to families who over a period of time, pay off their family home, move out, rent it and then decide to sell it to reinvest for retirement.

It’s actually a not uncommon Australian experience to sell the once-family home after it has been paid off, everyone has grown up and moved out and then got sick of renting it.

Increasing CGT will hardly encourage investment in Australia. particularly when just across the ocean it doesn’t exist at all in NZ.

ben.eltham 14/05/08 5:14PM

AFJ77 - echoing GraemeF’s comments, CGT does not apply to the family home.

Secondly, most Australian working families are not in fact renting out their home or buying investment properties. The majority of poorer Australians, of course, are renters.

Thirdly, there are a range of other tax breaks for this kind of investor including negative gearing and income splitting, all of which are excacerbating the housing affordability crisis by inflating housing asset prices.

Finally, I don’t think you are addressing my fundamental point - which is, that by taxing capital gains at a lower rate to marginal income taxes, we are penalising those whop predominantly earn their incomes from wages compared to those who own their income through investments.

I do have a cogent counter-proposal, based on ACOSS research: tax capital gains at the normal marginal income tax rate for that taxpayer’s bracket. I sincerely doubt this will cause a massive outflow of capital investment to New Zealand.

denise 15/05/08 9:28AM

I believe your strategy is wrong Ben, because the health system is straining under undue financial pressures already without inducing more private drop-outs.
The way to go is to do as you almost suggest yourself, reduce the welfare income barrier to $120,000 combined income a year. As it is the high income earners who are largely responsible for inflation.
And just a point about the family home, it should never be seen as an investment, or if it is, it is an investment in the family’s welfare and security.
And finally it should be the government’s responsibility to ensure adffordable adequate housing for the entire population, a goal I believe this government is slowly but surely heading towards.

AFJ77 15/05/08 12:08PM

Ben,

I want to unpack some of your rhetoric, but first some factual corrections:

1) Once you move out of the family home and rent it out it is no longer assessed as the "main residence" - ie. incurs CGT. If you are going to quote tax policy, then you should at least try to get it right! http://www.ato.gov.au/individuals/content.asp?doc=/content/36887.htm&pc=…

Let’s take an example of a (stereotypical) family with kids. They struggle for 20 years to pay off the family home. The kids then move out. Family home is now too big for the couple. Couple buy a small unit/townhouse somewhere (taking out a second mortgage) and rent out the family home. The couple hopes that the rent will be enough to finish paying off the family home with occasional top up from one or both salaries. As retirement approaches (a common experience for many baby boomers at the moment!), the stress becomes a bit much and they decide to sell the former family home. Will they pay CGT? Yes! Under Ben Eltham they will pay even MORE CGT. Keeping in mind the second mortgage and the necessity of putting money aside for retirement, Mr Eltham tax increase won’t exactly encourage indepedence post-retirement!

2) "…most Australian working families are not in fact renting out their home or buying investment properties. The majority of poorer Australians, of course, are renters." Ben, what’s a "working family" and what does "poorer Australians" refer to? What is the correlation between "working family" and "poor Australians"? This sounds VERY much like rhetoric to me! Sure, most "poorer" (whatever that means!) probably do rent. But then again a significant percentage of "poor" Australians also live in government housing where the rent is paid directly to the government. How will increasing CGT or any of your tax proposals help them? I would rather guess that these "poorer" Australians don’t have a housing affordability crisis at all as many are not immediately interested in buying a house. Rather, their immediate concern is paying the rent and holding down a job! Ben, your implicit association of "working families" with "poor Australians" is sneaky rhetoric and tries to use classist language to marginalise those who aren’t poor enough to be considered to be classed as "working" in your language. The trouble with this is that it is precisely those Australians who don’t fit your sneer of being "poor" enough that pay the lions share of tax in Australia!

3) "Thirdly, there are a range of other tax breaks for this kind of investor including negative gearing and income splitting, all of which are excacerbating the housing affordability crisis by inflating housing asset prices."

Where is the evidence that negative gearing and income splitting is causing a housing affordability crisis or inflating asset prices! If you abolish those measures, how will you negotiate the negative externality of working families locked into high mortgage payments over the medium term faced with a prospect of a collapsed housing market? Examples? Japan in the late nineties.

4) "by taxing capital gains at a lower rate to marginal income taxes, we are penalising those whop predominantly earn their incomes from wages compared to those who own their income through investments."

No, we are instead encouraging Australians to save and plan for their future rather than hoping that the pension will be sufficient to cover their life costs for what may be 20+ years post-retirement!

A better and more effective idea would be to crack down on tax avoidance/minimisation measures for those earning higher-end incomes. In particular reducing the PAYG top rate to a level more equivalent to the company tax rate of 30% will start to stop high earners burrowing their wages through company service entities in order to avoid high tax burdens. If it was reduced to say 35% then man y high earners would simply switch to PAYG in order to avoid the bureaucratic annoyance of funneling income through an entity that needs to be separately accounted, pay BAS etc.

ben.eltham 15/05/08 1:52PM

AFJ - I’m really glad we’re having this discussion as I think it helps to illuminate some of the issues of tax, welfare and inequality in this country.

Let me address your points one by one, and so perhaps engage with your "unpicking."

1) You are correct, CGT does apply to the family home once it is no longer the main place of residence. But there are many exceptions, for instance if a family member lives in it for free. And you are only assessed for CGT if you sell the property AND if that sale realises a profit. In other words, once you earn income from the sale of your investment property.

My point (and indeed the ATO’s point) here is a simple one: this is income, and so you are eligible for taxation on that income. I would simply like to see that income taxed at the same rate as other forms of income, like wages. I don’t believe this is manifestly unfair. What seems far more unfair to me is that income from wages should be taxed at higher rates than income from investments.

2) There are some reliable recent statistics available concerning housing affordability, particularly those published by the Australian Housing and Urban Research Institute. AHURI’s paper published here discusses the issue:
http://www.ahuri.edu.au/downloads/NRV3/NRV3_Research_Paper_3.pdf#namedde…

I quote from the paper:

"Data from the 2002-03 Survey of Income and Housing show that, of the 7.6 million households in Australia, 1.2 million or 15. 8 per cent of all households in Australia paid 30 per cent or more of gross household income in meeting their housing costs. Of these, 862,000 of these were lower income households in ‘housing stress’."

Let me leave aside your contention that "working families" don’t correlate with poorer Australians for a moment, and the rest of your attempt to try and call me "classist" (whatever that means). Shall we abandon the term "poorer", if that upsets you so much, and use the term "low-income"?

The AHURI data allows us to actually drill down into the data for low-income households. Let me take the 862,000 lower-income households in housing stress identified by the Housing Survey.

Of those 862,000 low-income households in housing stress, there were:
* 367,000 working households.
* 347,000 either owned their home outright or had a mortgage
* 460,000 private renters
* 40,000 public renters

So that quickly destroys your argument that a "significant" number of low-income Australians live in public housing. In fact, Australia has some of the lowest levels of public housing provision in the OECD.

What really irritates me, as the statistics demonstrate, is your "guess" that renters "don’t have a housing affordability crisis at all."

Wrong. As the statistics show, in 2003 there were 460,000 low-income households - many of whom do work and do pay taxes - who spend more than 30% of their income on rent. Actually AFJ, I’m one of them. And that was in 2003! Rents have increased by nearly 100% in many Australian suburbs since then. Meanwhile the owners of that housing pay less tax on their investment income than those households pay on their income tax.

3) There is a wealth of evidence that negative gearing worsens housing affordability by bidding up the price of housing assets.

Here is a paper from the Journal of Australian Taxation.
http://www.austlii.com/au/journals/JATax/2005/4.html

Here is a paper from Deakin Law Review:
http://www.austlii.edu.au/au/journals/DeakinLRev/2002/17.html

Here is an excellent paper from the Democrat’s Andrew Bartlett on the issue:
http://andrewbartlett.com/data/Taxation_NegativeGearing_2007.pdf

I quote Bartlett’s paper here when he discusses the combined affects of CGT and negative gearing:

"[The] CGT exemption, combined with negative gearing was a tremendous boost for investors who, logically, ‘priced in’ the value of this tax concession, thereby explaining in part, the dramatic upward shift in house prices."

AFJ - thanks for allowing me the opportunity to discuss these issues more fully.

AFJ77 15/05/08 3:22PM

Ben,

1) I think that your approach to CGT is based on considering the sale of house as "income" in the same way that wages are "income". What you aren’t factoring in is the amount of interest that said family has paid to a bank over a 20+ year period. Let’s take a family who took out a loan for $200K to buy a family home. Over the life of their mortgage they may end up paying almost $100K in interest. If they sell their home for a $150K profit, we must keep in mind the interest already paid to the bank may be equivalent to $100K. So factoring in inflation and interest the capital gain may not be substantial at all in REAL terms. Given this, the only reason I can see to increase CGT is to dissuade property investment - which seems to be an invitation to move capital offshore to me!

2) I use the phrase "housing afordability crisis" to refer to the intention of BUYING a home. And I continue to maintain that just because over 50% of those on low-incomes rent from a private owner, this does not necessarily correlate to a crisis. What percentage of those 500,000 households have a significant desire or plan for home ownership? Is there any data on that? While housing and shelter may be a fundamental human right, is it a fundamental human right to OWN a home?

When you say: "there were 460,000 low-income households - many of whom do work and do pay taxes - who spend more than 30% of their income on rent (…) Rents have increased by nearly 100% in many Australian suburbs since then. Meanwhile the owners of that housing pay less tax on their investment income than those households pay on their income tax."

Sure, those owners do pay less tax on their investment income - if indeed there is any. Many also make substantial mortgage repayments and top them up with their own salaries. I’m really keen for you to demonstrate to me that increasing CGT and discouraging property investment (which is what your proposals actually do!) will lead to greater housing affordability rather than just a batch of mortgage defaults and asset shrinkage?!

3) I will check out the articles on negative gearing in the academic journals when I have time, however please be aware that statistics can be spun to various effect. For some positive research see:

www.reiaustralia.com.au/documents/REIAPolicy_on_Negative_Gearing-5Apr06…. (Sections 18-29)

"Quarantining Interest Deductions for Negatively Geared Rental Property Investments - [2005] eJTR 4; (2005) 3 eJournal of Tax Research 65"

http://www.austlii.edu.au/cgi-bin/sinodisp/au/journals/eJTR/2005/4.html?query=^negative%20gearing%20affordability

"On closer examination, and as an appropriate starting point for analysis, it appears that two fundamental assumptions underlie the major arguments in the current policy debate on negative gearing.

1) Negative gearing increases house prices.
2) Negative gearing increases housing stock.

A core problem in the debate is that these assumptions have not been adequately tested. If they are wrong then the arguments that rely on them are misinformed and the direction of the policy debate has been misguided. If we are to have a meaningful debate on tax reform, we need to be reliably informed and make a choice between sound arguments based on correct and reliable information rather than on false assumptions."

Taxation Institute of Australia, ‘Tax Reform: Let There be no Half Measures’ (1998) 1 Tax Specialist 185, 204 - [subscription only]

"Negative gearing increases the supply of rental property." p.185

"Negative gearing decreases the rents charged by landlords." p.204

I agree that this is an important debate to be had with your proposed changes having very real (and I would argue deleterious) effects on the housing debate.

GraemeF 15/05/08 3:51PM

Only about 5% of negative gearing applies to new dwellings so the ‘new housing’ argument is a little lame.

What you have is cashed up investors with great tax concessions competing with first home buyers who can’t claim the costs off their income. This gives investors an unfair advantage.

Perhaps it should be the other way around. First homebuyers should be able to negative gear their own home and people who already own a home can pay in full for their second. Even restricting negative gearing to building new stock would be a good move.

ben.eltham 15/05/08 3:58PM

AFJ - thanks for the links - I will check them out.

I think we may, to some extent, be arguing at cross-purposes on the issue of housing affordability. I am referring to the ability to afford shelter, which in Australia means either buying a dwelling, renting a dwelling or being provided with a dwelling by the government or a charity.

There’s no doubt we face a considerable supply issue for low-cost housing both in terms of house prices and rent, and this is the crisis I refer to.

I take your point about the interest the average family pays in mortgages. However this is another area where the average owner-occupier is at a tax disadvantage compared with investors - who can write off their interest against their tax.

I’m not suggesting, by the way, that negative gearing and CGT are the sole or even major cause of housing unaffordability. It’s a complex issue related to Australia’s growing populationdriven by high levels of immigration, historically low levels of interest rates in the early 2000’s, state and local government planning red tape and Australia’s very high levels of urbanisation (80% of our population in fice capital cities).

I do believe, however, that there are much better and more efficient ways to subsidise affordable housing -than negative gearing and CGT - for instance, direct subsidies to landlords who povide affordable rental housing - and the Rudd Government has made a start here. Much more needs to be done.

One final point - I don’t think it’s a fundamental right to own a house. Indeed, for a whole generation of poorer Australians, that dream is now impossible. But when housing becomes unaffordable, that imposes costs on all sections of society. Australiaa’s house asset price boom since 2000 has seen a massive transfer of wealth from renters and mortgagees to landlords and banks. If you are spending 50% of your income on paying rent, that;s money you can’t spend in the rest of the economy, or save for the future.

As the CEO of Stockland pointed out on Lateline on Tuesday night, there is a crisis, and we need to act far more quickly to address it.

jnightin 20/05/08 6:37AM

I’m a bit late joining this discussion, but there are a couple of points that could be emphasised.
The first is that our taxation treatment of the family home, combined with the popularity of superannuation lump sum payouts, particularly before income tax was abolished for super income, has resulted in Australia over-investing in one form of housing, owner occupied housing, at the expense of more productive investment or rental housing. This phenomenon was extensively discussed in the academic literature way back in the 1980s, a number of my colleagues contributed to this. Has the abolition of super income tax, now cemented in Rudd’s Dictat that the tax review not touch it, had the unintended consequence of shifting this balance ever so little? Incidentally, Rudd’s Dictat has to rate with Jo B-P’s abolition of death duties in Q’land as a populist and regressive piece of politics that may be impossible to undo.

The second is that, given the pusillanimous nature of the ATO over the past 40 years, the truly rich have no need of tax relief, as they pay it on a voluntary basis. Tax Commissioners past, under the sway of Treasurers of all stripe, have avoided confrontation with the tax avoiders. High Court judges such as Barwick, who made his fortune creating tax avoidance schemes, saw no problem in judging his own schemes come back to the Court. Wickenby is, I’m reliably informed, simply a tiny piece of publicity for ‘cracking down on tax dodgers’, while the truly mighty scams are ‘too hard’, the argument being that the ATO can never win in the courts because the inhabitants of the courts are part of the scamming lot, and they don’t cut off their own. But this is simply a culture grown over those decades we are all familiar with, in which income taxation became the plaything of wealthy families within business, politics and the law.

So I would have to say that a working family that had done well and got to earn more than the threshold, and loses a benefit, is simply not the genuinely wealthy non-working family that hides its real income and doesn’t bother about income tax. At least they pay GST! Or do they just import their stuff at manipulated prices… ?

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