The changes to Australia’s taxation system announced in last week’s budget were controversial and have prompted a variety of claims as to who will be affected and how – and with what consequences. Some of those claims are misleading. Here we attempt to correct misleading assertions.
Will the changes negatively impact renters?
First, it’s been widely asserted that the changes to negative gearing and capital gains tax announced in the budget will lead to an increase in rents – as it has often been asserted that the temporary (as it turned out) abolition of negative gearing between 1985 and 1987 did. I’ve previously described those assertions as a modern-day equivalent of the saying that if a lie is big enough, and repeated often enough, it will become accepted as the truth.
In one sense, Angus Taylor and Tim Wilson are right when they argue that “if you tax something more, you will get less of it”. That’s the main motivation, apart from revenue-raising, for imposing high taxes on alcohol and tobacco products.
But when it comes to investment in established residential properties – which accounts for over 80% of all the money lent to property investors – having “less of it” would actually be a Good Thing. That’s because investment in established dwellings does nothing to increase the supply of housing. Rather, it serves to push up the price of established dwellings and – by outbidding prospective owner-occupiers – adds to the demand for rental housing by as much as it adds to the supply of it.
So to the extent that the curtailment of negative gearing and the 50% CGT discount for prospective investors in established properties results in less investment in established properties, the impact on the supply of and demand for rental housing will be equal and opposite. And as such, there should be no impact on rents.
Moreover, renting is not a “cost plus” business. Landlords charge in rents “what the market will bear”, which is largely determined by vacancy rates. Landlords didn’t reduce rents last year as interest rates fell. And since existing investors in established properties have been “grandfathered”, they’ve got no reason to put rents up, even if they could.
Contrary to what the Treasury modelling reported in the budget papers suggests, it’s possible that the combination of retaining tax breaks for investors in new builds while removing them for prospective investors in established dwellings will prompt a shift in investor demands towards new builds.
If that turns out to be the case – although it’s not guaranteed – then the net impact of the tax changes in the budget could be to increase the supply of housing, rather than reduce it by 35,000 as the budget papers suggest. And if that does happen, then the tax changes in the budget could result in rents coming down – or at least, not going up by as much as they would otherwise.
What about ‘rent-vestors’?
It’s been argued that the changes to the CGT discount proposed in the budget will harm younger people’s prospects of getting into the housing market by reducing the incentives for “rent-vesting” – that is, buying one or more investment properties (or in other assets such as crypto and ETFs) while continuing to live with their parents, or in rental accommodation.
It’s true that the number of young people reporting capital gains has increased over the past dozen or so years. But in 2022-23 – the latest year for which data is available – only 4.4% of taxpayers aged between 18 and 34 reported capital gains, compared with 14.3% of taxpayers aged 65 or over. And they accounted for only 4.2% of the total value of capital gains declared by all taxpayers, compared with 62.4% of the total value of capital gains declared by people aged 55 and over.
And the number of young people who are negatively geared property investors has declined substantially over the past decade. Just under 166,000 taxpayers aged 18-34 reported net rental incomes to the tax office in 2022-23, down from almost 260,000 in 2011-12 – whereas the number of taxpayers aged 55 and over reporting net rental losses rose from 248,000 to 294,000 over the same period. Fewer than 13% of taxpayers aged 18-34 were negatively geared property investors in 2022-23, compared with 42% of those aged between 45 and 65.
And of course these tax breaks do nothing to help those young people who save for a deposit in the most common way that aspiring first-time buyers seek to accumulate a deposit – through saving in the financial institution which they hope will eventually give them a mortgage.
Is the budget bad for small businesses and startups?
It’s been widely suggested that the tax changes in the budget are “bad for small business” and in particular for “startups”. I’ve never been persuaded that people who run small businesses (of whom I’ve been one for the past 11 years) should, for that reason and that reason only, pay less tax on a given amount of income than people who earn the same amount of income in different ways – such as wages and salaries.
But there is a valid argument that the reversion to the pre-1999 system of taxing capital gains at full marginal rates less an allowance for inflation does not offer any offset to the effects of inflation on those whose assets start with a value of zero – as is typically the case with “startups”. And that observation doesn’t just apply to the founders of startups – it also holds for their employees who typically accept equity in the business as an offset to lower-than-usual wages or salaries.
So between now and the commencement on 1 July next year of the changes to the CGT regime announced in the budget, the government should consider provisions designed to ensure that investors in and employees of startups are not unduly penalised by those changes compared with other investors and businesses. To that end, they could perhaps consider some form of “averaging” similar to that available to farmers, sportspeople and entertainers.
Has the government introduced a ‘death tax’ in disguise?
It’s been asserted that the imposition of a 30% minimum tax rate on distributions from discretionary trusts, including discretionary testamentary trusts, amounts to a covert “death tax”.
In this context it’s important to note that this minimum tax only applies to new discretionary trusts; and that it does not apply to other forms of trusts, including in particular fixed trusts (where the distribution of income to beneficiaries cannot be altered by the trustee from one year to the next).
But to the extent that this change will result in tax being payable by some deceased estates (or their beneficiaries), this is not necessarily a Bad Thing – especially when viewed in the context of the more than $5tn which is anticipated to pass from the estates of baby boomers to their children – who will likely be in their 50s or 60s when they receive their inheritances – over the next two or three decades.
Australia is one of only 12 OECD countries that doesn’t have any form of tax on deceased estates or inheritances. In particular, the US and the UK – whose tax systems are most commonly cited as points of comparison for Australia’s – do have taxes on estates or inheritances: and neither Ronald Reagan nor Margaret Thatcher ever sought to abolish them, even though they could have done had they thought it appropriate to do so. Nor, for that matter, did Sir Robert Menzies during the 19 years that he served as prime minister of Australia.
The tax reforms announced in last week’s federal budget aren’t perfect. And they are nowhere near as comprehensive as the reforms introduced by John Howard and Peter Costello in 2000, or by Bob Hawke and Paul Keating in the mid-1980s. But they represent material improvements to the tax system which we now have: and for that reason are to be welcomed.
• Saul Eslake is a vice-chancellor’s fellow at the University of Tasmania and an independent consulting economist
