Abolishing negative gearing and doubling capital gains tax are Labor dreams

If PM Albanese does not immediately and outright reject Adam Bandt’s demand he ditch negative gearing and double tax on capital it will be a tacit admission a Labor government will succumb in government.

It’s in the ALP’s DNA to want to ditch negative gearing and capital gains tax. Jim Chalmers even asked Treasury in September last year to model removing negative gearing.

AIP Executive Director Graham Young said Bandt is offering Labor a “cheap” deal which they could easily afford, and he would be sure that in the event of a hung parliament Labor would take it.

“It might be a cheap deal for Labor, with these being policies they already favour, but it will be expensive for renters in particular.

“Negative gearing actually provides for more housing by helping investors to borrow more. More leverage means a larger investment pool, more houses and lower rents.

“Capital gains makes investing in real estate worthwhile, because the income returns are generally derisory.

“Abolishing one and doubling tax on the other will drive investors out of the housing market and into tax effective structures like superannuation (something the Labor-controlled unions would also welcome).”

Mr Young said that last time Labor abolished negative gearing, under Paul Keating in 1985, the ban lasted for only 2 years before it was abandoned as rents began rising.

“Abolishing negative gearing would overturn centuries of taxation practice.

“It has always been the case that the owner of a business or investment is entitled to deduct expenses from income before tax is assessed on their income.

“While negative gearing is portrayed as a tax lurk in fact all that happens is that at the end of each tax year the taxpayer pools all their income together from employment, investment, consultancies etc and if the ATO has taken more in income tax than required over the total, the taxpayer receives a refund of that tax, not of his expenses.”

Mr Young said that there were also very good reasons to tax an increase in the capital value of an asset at a different rate to normal income.

“When an asset increases in value some significant proportion of that increase is due to inflation and is therefore not a real increase. So the tax system needs to account for that.

“Sometimes the increase is due to the income from the asset increasing, but then that extra income will be taxed. A CGT would represent double taxation as the value of an asset is the discounted value of its future cash flows.

“Sometimes it is just a valuation effect, but then there is a risk element which has to be taken into account as valuation effects can go in both directions, as we are seeing in the current stock market.

“Charging tax at the taxpayers full marginal rate on 50% of the capital gains is a reasonable compromise that is simple for the taxpayer and the ATO.

“It also encourages investment, and investment is necessary to increase productivity. Without higher productivity higher wages and living standards will also be a mirage, along with affordable rents.”