House rules

An unremarked property tax change in the recent Budget aims to change how housing is supplied


Amid all of the post-Budget debate, one measure that nobody seems to have noticed was a change to tax treatment of some investment properties.

Currently, if you own an investment property for more than 12 months and make a capital gain when you sell it, the tax on the capital gain is discounted by 50%. Alongside negative gearing, this is one of the factors that make property investment so attractive. The change proposed in the Budget would increase this discount to 60%, under certain conditions.

Most economists would say that if we want to do something about housing affordability for new home owners, we should be cutting the capital gains tax discount, not increasing it. A cut would make property a less attractive investment, removing some investors from the market, thereby reducing upwards pressure on prices.

But this particular Budget measure has some other very interesting features.

For a start, it doesn’t apply to all investment properties. For a property to attract the additional concession, it has to be offered to tenants on low to minimum incomes, at less than market rent. This makes it a targeted measure – aiming to increase supply for those facing the greatest challenges in the rental market.

A property also has to be held by the owner for at least three years – presumably intended to provide some stability in supply of rental housing, and to discourage investors from turning over properties rapidly to realise short-term capital gains.

Perhaps the most interesting feature is that it has to be managed by a community housing organisation. This goes to the heart of one of the problems in the tenancy market: that the supply of housing is fragmented into millions of individual investors, who then turn to real estate agents for help. As CHOICE’s research shows, this far too often results in a poor experience for tenants.

Housing is the only essential service that we are prepared to allow to be managed in this way.

The government has thought about how to better organise provision of housing for defence force personnel – through Defence Housing, which allows private investors to buy properties that are then centrally managed – but until now has failed to work out how to do this for the broader population.

On the whole, it’s hard to support this change to capital gains tax because any increase in tax concessions will exacerbate generational inequality – making it easier for people with property and wealth to accumulate more, while making it harder for younger people to enter the market.

But I hope that it’s the start of some creative thinking about how to better organise the supply of rental housing, especially for people on low incomes.

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I did note the measure the announced and it made me recall the capital gains tax system prior to the current 50% discount introduced by Howard/Costello government.
Back then the tax was discounted for the affects of inflation, there was a calculation was done to remove the asset price growth simply due to inflation and then you were taxed on any gains at your marginal rate after inflation. That system was effectively neutered with the 50% discount method, but back then a typical rental property was between $100-130K in Melb.
Then the price growth was normal not pumped up on the steroids of low interest rates which have increased borrowing power staggeringly and allowed many self managed and funded super investors to chase investment properties.
For buyers who purchased investment properties many years ago they could now be facing paying CGT if they sell on figures of around $300,000 to $500,000 or more with no discount for the affects of the inflation over those years except the 50% discount.

The point I am making is I am not sure the 50% discount is better or worse than the previous system for investors, but without some CGT discount there would be simply a lot less rentals around and rents would be much higher because if the investor can get no discount for the affects of inflation over the period of ownership then they would either take greater returns during the ownership period by very high rents or they would chose to not invest at all in this sector.
Now it is arguable that less property investors means cheaper houses but a lot more people who may never be in a position to buy would be living in sky high rents or forced into share houses, living homeless or other difficult circumstances.

To paraphrase an old quote “The road to hell is paved with the best intentions”. The unintended consequences of short term decisions to alleviate one problem often cause untended longterm greater problems.

IMO the real problem with the overheated syd/melb housing market is the rocket fuel of record low interest rates, and when they return to more normal levels (and they will) those two housing markets will return to longterm averages of affordability. Whether it happens painfully by sudden drop or by long periods of stagnate price growth, it will happen, as the natural laws of supply and demand can only be defied for only so long.

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That is interesting @tndkemp. But as a devils advocate, with the 50% discount supplanting inflation indexing, wouldn’t that encourage property investors to churn properties every 12 months for a fast dollar with its discount and to avoid theoretical tax impacts due to inflation during a rapidly rising market in an inflationary period?

It probably does come down to “name your poison” and pick those you wish to benefit, and those you don’t care about, and play with taxation, and super, and everything else, accordingly.

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I don’t think it does in practise because of the high level of state taxes levelled on property transactions.

Although in the current overheated east coast market I’m sure there as some punters who are doing just that.
I used the term punters deliberately because they are not investors just speculators.

That’s exactly right. The problem with the ‘housing affordability’ debate is that it’s often unclear which aspect of affordability we are trying to address.

If you want it to be more affordable for first home buyers to enter the market, then reducing tax incentives to take investors out of the market is a good idea.

If you want the rental market to be more affordable and fair for tenants, then you need to increase housing supply, which requires some form of government subsidy - either through direct funding or through incentives that encourage more institutional investment in affordable housing (eg by super funds).

It’s also important to remember that the current tax incentives (negative gearing and CGT discount) are effectively government expenditure–so the question is whether they represent money well spent, or whether we could do more to help tenants and/or first home buyers by using those funds in other ways.

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The house we live in has just gone on the market three years after the owner purchased it for $365 K, they are now seeking $465 K a $100 K increase in 3 years. Who but the rich and investors can afford to buy in that sort of market?

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Many longterm property investors do not get the sort of tax advantages that the media suggests. Most longterm investments are now positively geared and therefore they pay income tax on the rents received (minus expenses) and as they often use the net rental proceeds to fund their retirement, for these investors selling at a profit is not even considered option.

We are all in agreement that government policies do influence the both the rental and property market.

But Australia has a long history of government housing policy machinations, with varying degrees of success and failure. In the early 20th century public housing was the flavour with most western governments. Now that is seen as inefficient and the responsibility of supply in Aust has been largely been abdicated for most rental housing to the private sector through tax concessions and other mechanisms.
Neuter those concessions too much and the private sector will fall away and public housing will be in greater demand and a represent a far greater burden on the tax payer.

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I think the future lies in generating more affordable housing that is owned by private investors, super funds etc rather than the public. This requires well targeted tax concessions that encourage the development of new affordable housing, as well as mechanisms to make rents more affordable for people on low incomes and ensure that housing is properly managed. That’s where the budget measure I mention is interesting…

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Yes I do totally agree that good policy should help in some areas of affordability both for purchase and rents.
Unfortunately I don’t see anther 10% discount to GST being a carrot that will appeal to many longterm investors because it only takes affect when a property is sold.
Most long term investors and self funded super fund motives are to invest in property to earn a indexed to inflation income. Also state taxes are so high on property churn that it discourages it.
In my opinion a to encourage lower rents any government policy needs to be more targeted in the frontend of investment property ownership.

From my own experience a good tenant who does not cause neighbourhood problems and keeps the property tidy and pays their rent always on time is the best way to earn cheaper rent, I have allowed my rent to be well under the market for years because my tenant is so good I don’t want to loses her, it can be sometimes a very ‘symbiotic’ relationship.

Conversely I sometimes wonder that maybe sometimes Landlords raise the rent just to drive away a troublesome tenant/s.

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I have never understood the focus on “individual investors”. In the US large apartment complexes from basic to very luxe are built as corporate businesses ranking up there with retail, building, energy, and so on. They have on site superintendents, some are fenced with 24 x 7 security, carports / garages / carparks, pools, playgrounds, and gardens.

One example in Houston.

The only thing I could imagine stopping it are our zoning restrictions or population density in places but, Developers routinely get the tick to build high rises, including in traditional residential locations, and sell them off individually to investors, so why haven’t corporately owned complexes happened? Is there a ground floor opportunity?

Certainly a better way to target and help than the proposal today on TV lifting by 15% the payment for rental assistance to inner cities for Newstart. Which seems to be trying for same aim lower rental costs.

Targets and also puts it in one basket for renters to find. Saves tenants to be slogging round myriad of RE agencies filling in forms.