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TRANSCRIPT
Since 1999, the Howard government's 50 percent capital gains tax discount has enabled individuals to pay tax on only half of the profit from investment properties owned for more than a year.
More than a quarter of a century later, an inquiry into the capital gains tax is taking place.
Former Council of Trade Unions secretary and veteran trade unionist Bill Kelty told the inquiry that slashing the capital gains concession is vital to fixing a system he describes as 'cruel' to younger generations.
Mr Kelty told the inquiry that the disconnect between the government and the next generation is reaching a breaking point.
“I need the parliament of this country to unequivocally to stand up and say they're on the side of young people. Because that is the source of the frustration. That is the source of the alienation. Because young people do not believe you're on their side. And where do they go? They go where they always go. They go to extremities. They go to parties of hate. They go to the parties of division. And it is not just a bad thing for the Liberal Party. It is actually a bad thing for this country.”
Mr Kelty’s core argument is about the gap between the tax on labour and capital.
Simply put, labour covers income earned by working, while capital is profit generated by owning things that grow in value, such as property or stocks.
He points out that while a wealthy investor might pay just 23 per cent on capital gains, a young worker can face a tax burden of up to 60 per cent on their labour.
“I'm a young person... my effective marginal tax is 48-60%. So you asked me the two questions, is this fair? Is this capital gains tax discount fair? Well, if I'm paying tax at 23% and I'm rich, they're hardly fair compared with a young person paying an effective total marginal tax rate of 48 to 60%, that's not fair. It is simply not fair.”
Finance expert Alan Kohler says the data shows exactly when the market broke.
In the year 2000, the year after the discount C-G-T discount was implemented, house prices began rising at double the rate of incomes.
Mr Kohler says the tax discount gave investors a powerful weapon to outbid young families.
But the timing was disastrous.
Six months after the tax change, the global dot-com bubble burst.
With the share market suddenly looking dangerous, Mr Kohler says Australian investors took the tax discount and poured it into the one thing they felt was safe: bricks and mortar.
“I think it certainly increased demand for property and probably more importantly, increased what investors were prepared to pay for property. So it increased the amount of money that investors were prepared to bid at auctions.”
The Australian Council of Trade Unions is advocating for a staged reduction of the capital gains tax discount.
ACTU President Michele O’Neil says that in the 25 years since the 50% discount was introduced, home prices have surged from six times the average income to eleven.
Ms O'Neil says that their modelling suggests that reforming the capital gains concession could boost home ownership by as much as 4%.
“Senators. This is why we are recommending limiting current tax arrangements to just one investment property and ending negative gearing and reducing the capital gains tax discount to 25% for all others. This is going to help more renters become home buyers and it's going to reduce the really unfair advantage that we see for professional landlords…and recent research that we code in our submission models a similar policy suggesting home ownership could rise by up to 4 percent from this change. Our proposal is targeted, it's fair, and it focuses on restoring the principle that the tax system should support homes for people not speculation for profit.”
The Grattan Institute’s Brendan Coates says that the 50 per cent capital gains discount is excessive.
However, he is arguing that the primary benefit of reform is to the federal budget rather than house prices.
Mr Coates says that while the reform could potentially reduce private housing stock by 10,000 dwellings, the government can offset this impact by reinvesting a portion of the budget savings directly back into public housing.
“What's clear from our research is that the existing discount of 50% is too high on capital gains that are held for more than one year. We recommend it should be reduced to 25%. That would raise 6.5 billion a year for the federal budget and better balance these competing objectives that I've outlined. But the dominant rationale for this reform is the economic and budgetary benefits money that could be used either shore of the budget, reduce other more economically harmful taxes and lower the tax burden on younger Australians or pay for more support for low-income renters, whether through boosting rent assistance or social housing.”
For people like Danielle Hooper, this is about survival.
Ms Hooper told the inquiry that despite working full-time, she ended up homeless after an investor chose not to renew a lease.
“After five years, nearly six years, we were told that he wasn't going to renew the lease. I ended up homeless at like 45 years old, still trying to work in that time. I had applied for over 60 houses. I still worked full time. I going through 60 houses, taking the time out to look at them and do the applications, doing all that just to, because each showing, sorry, there was probably a dozen people looking to rent as well because the Port Macquarie area, it is growing and quite quickly. “
The Senate inquiry in the Capital Gains concludes on Wednesday, shifting its focus toward the widening gap of income and wealth inequality in Australia.
At this point, Treasurer Jim Chalmers has not ruled out capital gains tax reform as part of the upcoming May budget.
