The housing tax
dodge that makes negative gearing look like small fry
Jason Murphynews.com.au
IT IS time to
kill negative gearing.
Paul Keating got rid of it once, when
he was Treasurer, but he brought it back to see if it might encourage cheaper
rent.
Instead it put a rocket under
speculative housing investment and helped lift house prices, which made rents
go up. It has been a dud and it needs to come to an end.
But negative gearing is not
the only bad guy in the story. Even if it is killed, a bigger villain is likely
to slink away.
Capital gains tax has been a
huge factor in rising house prices, and it brings the richest parts of society
even more advantages than negative gearing
The next two graphs show who
benefits from each policy and if you think the negative gearing one looks
skewed to the rich, the capital gains tax discount graph is going to blow your
mind.
HOW THE HECK DOES IT WORK?
If you make a profit
onselling an investment that’s called a capital gain. And yep, you would pay tax
on it like income … if you owned the investment for less than a year. If you’ve
owned it for more than a year, you get a big tax discount of 50 per cent.
So If I buy a painting for
$1000, and sell it for $2000 two years later, I made $1000. But I only pay tax
on $500. So I pay less tax on investing than if I earned $1000 cleaning
toilets!
Why does the tax system reward investment like that?
Partly it’s because of
inflation. If you own a painting for 35 years and it goes up by two per cent a
year, it doubles in value (roughly). But that’s not a “real” profit, because
inflation also went up, say, two per cent a year. The buying power of $2000
when you sell it is equal to $1000 at the time you bought it, so taxing that
$1000 as profit is silly.
The capital gains tax
discount helps compensate for this problem. It says, ‘hey, we know it’s unfair
to put a huge capital gains tax on things that partly went up because of
inflation. You can pay a bit less.’
But it’s a stupid way of
doing it, because the full discount kicks in after just a year, so it gives the
same advantage to someone whether they own an asset for a year and a day or for
50 years.
A
CAPITAL IDEA
Labor has a policy for
changing CGT. But its simplistic policy to cut the CGT discount from 50 per
cent to 25 per cent is even more unfair for anyone who plans to own an
investment for a really long time.
A better idea is to cut to
the chase and tax profit above inflation. And — it turns out — we did that for
a while back in the 1980s and 1990s. But then in 1999, the rules were changed.
We moved to the current 50 per cent discount rule on capital gains tax.
Now, I don’t want to say that
this one little change is responsible for the rise in house prices, but check
out what happened after 1999.
This story has been brought to you by the Emerald Chamber of Commerce Inc.
(Ph: 07 4982 3444)
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