Calls for capital gains tax to boost housing to have impact on housing mix, investors

Capital gains tax changes could be back on the cards in an effort to address the problem of housing supply. But not everyone will be happy.

Reform of capital gains tax on housing could be back on the cards. Picture: Nikki Short/NewsWire

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When the ALP last proposed a change to the capital gains tax (CGT) treatment of investment properties, it lost the 2019 federal election in a landslide.

It was remarkable. Betting agencies had already paid out bets on a Labor victory before election day, because it seemed a Labor win was all but in the bag.

But the message from the electorate was clear – keep your hands off capital gains tax changes on investment properties.

Yet, hot off the heels of a resounding victory at the recent federal election, CGT reform could be back on the cards. This time the push is not coming from the Labor party itself, but from a think tank named after former Labor NSW premier and Australian governor-general William McKell.

The McKell Institute has put forward a report which it calls a “circuit-breaker proposal” to change the CGT discount rate. It wants to see a greater level of housing supply, which in turn will promote a greater level of housing affordability, particularly for younger Australians.

“Labor has resisted change to the CGT for too long, it needs to creatively reform this poorly targeted tax concession so it works both in the interests of aspirational Australians and society more broadly,” McKell chief executive officer Edward Cavanough said.

Under its proposal, if you buy a brand new apartment as an investment and if you hold it for at least 12 months before selling, you will get a 70 per cent discount on your capital gain, a lift on the current 50 per cent discounted CGT rate.

However, if you purchase an established house as an investment, when you go to sell you will only get a 35 per cent reduction on your capital gain, under the McKell proposal. Existing investments would be grandfathered at the current 50 per cent discount rate.

“The CGT tax is neither good nor evil. But it should be better calibrated to actually achieve our social aims. Instead of encouraging property investors to bid up the price of existing housing stock we should be encouraging them to contribute to the construction of new dwellings,” Mr Cavanough said.

McKell Institute CEO Ed Cavanough.

As a result, the McKell Institute hopes that by incentivising people to purchase brand new apartments instead of established houses, an extra 130,000 additional properties could be built by 2030, helping to ease the housing crisis and allow more first-home buyers into the market.

According to the report, one of the main reasons that first-home buyers and first-time investors find it hard to buy properties is due to the cohort of older Australians who love buying up established houses as investments.

“Because the (CGT) incentive makes no distinction between existing properties, newly built properties, or attached/detached dwellings, it funnels a large proportion of all investment into established, detached dwellings. These are the highest capital growth assets, which are attractive to speculative investors,” the report states.

To make brand new apartments more palatable to investors noting their lower long-term capital growth, the McKell Institute recommends turning up CGT concessions on new apartments and turning down CGT concessions on new and established houses.

The Greens want to take it even further by scrapping the CGT discount altogether. Their view is that CGT discounts are an unfair perk for the rich. Greens senator Barbara Pocock said the CGT discount was “a gift to wealthy investors that’s helped turn housing into a speculative asset, rather than a human right”.

“This is also a tax break that increases levels of homelessness, which have increased by 10 per cent under this government since it was elected in 2022.”

Sydney-based accountant Caxton Pang, from Linton Advisory Group, has more concern regarding the flow-on impact of any change to CGT rather than the change itself.

“Focusing too heavily on apartments also risks narrowing our housing mix. Not every community suits high-rise apartment blocks, some need townhouses, others need detached homes.

“A one-size-fits-all incentive could distort the market instead of unlocking the right kind of supply. If the government wants private capital to step up, it needs to streamline the entire build-to-sell process, not just offer a sweetener at the finish line,” Mr Pang said.

Another accountant, Luke Star from Star & Associates, echoes this view and warns investors not to chase tax breaks when investing in property.

“If more investors start purchasing new apartments due to better CGT relief, history shows us that tax-driven investment decisions typically backfire as investors do not have full regard for the fundamentals. In this particular case when it comes to new apartments, careful attention needs to be paid to the location, build quality and rental demand,” he said.

Whether the McKell Institute report is enough to reopen the door on CGT changes to investment properties is yet to be seen, but unless people’s views have drastically changed over the past five years, any change that reduces CGT concessions is likely to be met with a substantial level of voter backlash at the next federal election.

James Gerrard is principal and director of financial planning firm www.financialadvisor.com.au