In Brief
- The government has faced criticisms for grandfathering changes to CGT and negative gearing.
- The new measures hope to shift investor behaviour towards new builds.
Reforms to the tax system announced in the budget are no "silver bullet" for Australia's housing crisis, but hope to shift investment to newly built homes and boost supply.
The Albanese government has made structural reform to housing tax discounts that, over two decades, have drastically changed Australia's housing landscape.
However, the government faces criticism over "grandfathering" some of the changes, with some arguing they don't go far enough and could have generated more revenue.
On Wednesday, Treasurer Jim Chalmers defended the changes, believing Labor had struck the "right balance" while honouring the investment Australians had made in housing.
"We’ve balanced respecting and recognising those former investments at the same time as we’re changing the system for the future, so that we continue to provide a discount in the CGT system, but calculated in a way that minimises some of these other distortions," he told the National Press Club.
Here are all the key terms and what the budget changes are aiming to do.
What are the changes to CGT and negative gearing?
The capital gains tax discount allowed Australians selling assets held for at least a year to only pay tax on half of their profits.
This will be reduced to allowing a discount in line with inflation, otherwise known as the real gain, a measure closer to the Keating 1999 model.
Investors will also be forced to pay a minimum of 30 per cent on any additional gains from July 2027. Anyone building a new property will be able to choose between the old 50 per cent CGT discount or new arrangements.
From 1 July 2027, negative gearing, the ability of an investor to offset any income from an investment against any losses or costs involved in maintaining it, will apply to newly built residential properties.
Both changes will be grandfathered, but more about that later on.
Independent economist Saul Eslake said these changes aim to reduce or eliminate the tax concessions enjoyed by investors who buy existing homes, seeking to funnel them into building or buying new homes.
"It might disincentivise investors from spending borrowed money buying properties that already exist so that they can rent them out to people who can't afford to buy them," he said.
He told SBS News that investors buying existing homes does two things; puts upward pressure on house prices and increase demand for rental housing when they outbid potential first home buyers at auctions.
Eslake said the changes are not a "silver bullet" but make a "helpful contribution to reversing the slide in home ownership", but realistically won't have an adverse impact on supply or rents.
Should CGT and negative gearing be 'grandfathered'?
Grandfathering means that old rules will apply to investments bought under the old system.
This means homes currently negatively geared are unaffected, allowing owners to continue to write off losses until the property is sold.
The new CGT changes will only apply to gains made from July 2027.
Dr Pradeep Philip, an economist at Deloitte Access Economics, argues that this shifts some of the integernational fairness that has locked young people out of the housing market, while dealing with the practicality that some people bought a home under different rules.
"There are people who already own houses, and you don't want wealth destruction to take place at too great a rate, and so that's why the government has struck this middle ground by grandfathering," he told SBS News.
"But over time, these changes, along with changes in building approvals, technology, skills, recognition and labor supply, these things together, including activities by the states and territories, should make this easier for Australians to get into their homes."
Eslake sympathises with criticisms around grandfathering, stating it "privileges people on the basis of birth order", favouring those who invested before the budget.
But like Philip, he highlights some may find it unfair for the government to change the rules.
"I'd prefer to have them grandfathered and the changes made, than to have no changes made at all, and that's obviously the choice that the government felt it was confronted with," he added.
What are new builds?
The reforms are geared towards boosting the supply of new homes by incentivising investors to buy new builds instead of established properties.
New builds eligible under the negative gearing changes will be homes not previously sold, including those built on vacant land or bought off the plan.
Where a property is demolished, it will only be eligible if it is replaced with a greater number of homes, therefore increasing the overall supply.
A granny flat on an existing property, a renovation that adds bedrooms or a home replacing an older home, will not count.
Who will get tax perks under the scheme?
Eslake said the main winners will be investors who put their money into new builds. Not only will they be able to negatively gear but they can also choose which CGT regime applies when they sell their property, allowing them to pay more tax.
With additional reporting by Rayane Tamer.
For the latest from SBS News, download our app and subscribe to our newsletter.
