Tax changes will create intragenerational inequity, not intergenerational equity

Today’s Commonwealth budget looks set to further entrench divisions between the haves and the haven-nots, particularly in housing, based on myths about Capital Gains Tax and negative gearing.

The biggest victims will be Gen Z renters, most of whom will find it even more difficult to get into the housing market, unless they have very high incomes, or access to family support.

Tampering with these tax arrangements will do nothing to improve “intergenerational equity”, but it will create “intragenerational inequity”.

The myth is that young home buyers are frozen out of the market by CGT discounts and negative gearing benefits given to investors, and this misconception will be used to justify today’s budget penalties on property and other investors.

The Australian Institute for Progress has released a short paper which is attached comparing the after tax cashflow and investment returns between investors and homeowners which finds that homeowners are substantially advantaged compared to investors, not the other way around.

Institute director Graham Young said that the major goal of property investment is capital gains because the income returns are so low.

“Here the homeowner already gets an advantage over the investor as they pay no tax on capital gains while an investor pays at the rate of 23.5%.

“Property investors also have to pay tax on rents when they receive them, whereas one of the  benefits of homeownership is not having to pay rent at all.

“Taking account of the rent avoided by homeowners and comparing that to the 55% of rentals owned by investors who pay tax of 30 cents in the dollar leads to a difference in outlays each year between each group of only $1,00 to $2,000 per year.

“Even at the maximum rate of tax of 45%, where the benefit to the investor is the greatest, there is around a $5,000 p.a. difference.

Mr Young said that as the mortgage is paid down the cashflow advantage shifts to the homeowner who pays no tax and receives no deductions even as the investor starts to pay tax on the income.

“First home buyers also receive a number of benefits that investors don’t.

“For example, in Queensland they receive a stamp duty exemption, which on a typical first home would come to around $22,000. They may also be eligible for up to $30,000 via the First Home Owner Grant.”

Mr Young said that investors are also often subject to land tax, unlike homeowners.

“I know people who are buying first houses now who are either in high paying jobs or who have family support, but for many the situation is dire and they are forced into the rental market.

“These are the people who don’t need any more obstacles in their way, but by driving investors out of the market, and increasing rents, it will take them even longer to save the money for a deposit, or they may even give up.

“And if investor capital is withdrawn from housing, there will be fewer rental properties available and less capital supporting new supply.

“The result will be a generation with the lowest home ownership for decades and more resulting inequality.

“The government is letting myths and envy drive good policy out, and bad policy is coming in.”

For further information contact Graham Young on 0411 104 801 or graham.young@aip.asn.au