Quit the tax threats and give property investors a break

The speculation around a government plan to pare back property tax concessions never stops – it’s time for a fresh approach.

The Central Coast NSW beach property bought by Anthony Albanese and his fiancee Jodie Haydon for $4.3m.

Anthony Albanese has courted controversy with his $4.3m property purchase. Predictably, people have lambasted his purchase as being out of touch with everyday Australians.

There are reports that the ALP is once again considering raising property taxes to reclaim the narrative, and if not now, then when the Prime Minister moves on.

The fundamental issue, however, is that investing is the only way to achieve freedom in Australia. Everyone should aspire to invest, and invest as much as possible. Albanese used his investment to buy his dream home. This is an aspirational and laudable outcome. We should celebrate such success, not tear it down.

What’s more, every Australian should do the same. Wages do not keep pace with inflation. This is especially so on an after-tax basis as bracket creep seizes an increasing slice of earnings. Workers often find themselves in a never-ending cycle of working harder to achieve less. The only way to avoid being an indentured servant to your corporation is to invest.

Thus any attack on investing is an attack on individual liberty and freedom. It constitutes an attempt to render people slaves to the corporation and to the state.

Governments should encourage everyone to get ahead, not tear them down for doing so. Governments should try to grow the economic pie, not look to steal from one person to give to another. Unfortunately, Albanese, Jim Chalmers and the ALP have taken the shallow and divisive path, launching an attack on ambition and hard work.

The latest flashpoint is negative gearing and the capital gains tax discount. Albanese has been inconsistent about changing these, despite having clearly benefited from them. He has suggested he is not looking at, or intending to, change these rules. And the federal Treasurer has assured us the government is “not going that path”. But where have we heard that before?

This should concern people whether or not they have an investment property. After all, all Australians should aspire to have as many investments as possible; investing is the way to get ahead in this country. There should be more investments, not less.

And let’s be clear: much of the rhetoric over investing presupposes people buy the perfect property in the perfect location with a high deposit. In reality, you can invest in a small apartment with less than 10 per cent deposit. You just need to ask a good mortgage broker for advice. It’s all about starting the journey.

Any attack on negative gearing is duplicitous. Politicians pretend that negative gearing is a subsidy or a gift from the government. It is not a subsidy. It is not a credit. It is not a benefit from the government. It is a pithy term for what is standard practice.

The concept of negative gearing merely involves deducting expenses from revenues to look at the overall net profit. In no other context is it remotely controversial to deduct an input cost from revenue. Businesses do this routinely as a matter of course.

Similarly, any attack on capital gains tax discounts is disingenuous. There is a strong argument for reducing taxes on labour but there is no argument for increasing taxes on capital gains.

After all, when an individual invests, they have invested their own after-tax money into an asset. They have already been taxed. The government is double dipping. The capital gains tax discount should be closer to 100 per cent and should most certainly not be reduced.

Increasing CGT also would have unintended consequences; it would significantly reduce transaction volumes. This is because a seller would have less capital left over after selling, deterring them from doing so.

Suppose an investor has $500,000 equity in a $1m property. If they sell, they keep about $375,000 of the gains. If the CGT discount is reduced to 25 per cent, they keep only $312,500. This reduces the capital for a future purchase, deterring them from doing so. In turn, transaction volumes would fall. Ironically, as we have seen in the US, this can support prices as more owners stay put and supply falls.

When an individual invests, they take the risk and make the sacrifice of putting forward their capital. When they do so, they tie up their capital. They could have used that money for entertainment. But they sacrificed.

They also risk losing money. Perhaps the property requires extensive maintenance. Perhaps it is in a bad area and falls in value. Perhaps a tenant trashes it. They also bear the risk of financial distress if their financial situation changes. Gains from deploying capital are different from gains from working.

Such problems are only one part of the story: attacking negative gearing and increasing capital gains tax will only worsen the housing crisis. This is because the population is growing faster than is housing supply. If you want more housing, you need more construction. But construction is expensive. And builders must charge enough to stay solvent. Ergo, you need investors.

But if investors’ after-tax cash flows fall, so will their willingness to invest in new builds. The drop in investors will result in a drop in construction, which will result in an ultimate increase in rents.

Restricting negative gearing to new builds is not a solution. Any investor in a new build will consider what future buyers will think after they sell. Thus, it will not incentivise investment in new builds because investors are not myopic or foolish.

Mark Humphery-Jenner is associate professor of finance at UNSW Business School