Capital gains tax changes

Reading this article - Budget 2017: Plans to cut the CGT concession? Not likely

Anyone think if they remove or reduce the 50% discount on housing......that they will still apply the 50% discount for shares and investments other than property?
(eg only 25% discount on property investments for 12-60 months increasing up to 50% on property investments more than 5+ years)

Thoughts?

 

If you believe it they said after this media article last week that it wasnt a Coalition policy to touch CGT discounting.

Personally, if I was betting I would suggest the following as odds. Keeping in mind that the recent increased price growth of some property (Sydney, Melb etc) would support the increased tax (ie you already made the profit). The other issue is that for taxpayers generally increasing taxes on property profit seems palatable as it targets those who have made money from property growth so it seems fair.

1. No change to CGT 30%
2. Loss of CGT discount on residential property 60%
3. Phase-out for the CGT discount on property 10%

I dont believe the Coalition would broaden CGT to the home.

 

wow

"2. Loss of CGT discount on residential property 60%"

I never even considered they would remove discount on property.....but for residential ONLY property.

Talk about threading the needle.......

Here I was thinking it was bad enough they were going to steer investors away from residential property into equity (especially with low Australian share yields....) but to steer out of residential with a preference for commercial......I think there would and should be a riot.

 

Treasury are continually modelling all sorts of things good and bad.

Removal of the resi CGT discount may not be as bad as many think. Many times smart property owners use the absence rule or pro-rata the gain anyway and choose wisely when selling. Removing the discount has a lot of "benefits" as it closely relates the possible tax impact against the economic benefit of the profit. ie The property owner that enjoys the gain pays the tax. Its also far more palatable to the electrorate who want all profit tax concessions to be ended.

- Simplicity for issue of developer v's investor and intentions. Seeking to profit and seeking to use CGT concessions becomes a non-event as self corrects a likely substantial aspect of avoidance that exists already that is very complex to identify and tax.
- Catches OTP profit takers
- Focusses loss of CGT discount on the key area of non-exempt homes - A macroeconomic outcome could be achieved to make housing more affordable if there was less gain driven spec ownership.
- Business property stimulus assists employers and commercial trade growth where resi solely provides limited new construction and employment growth when OTP lags and other aspects are excluded

A riot ? Sure many unhappy people but its easy to argue that you only lost what other taxpayers were funding. Thats a very easy problem to sell the electorate. And a CGT profit is only triggered by a CGT event. Choosing a exempt gain or deferring a gain by not selling remains a taxpayer choice. Whats the choice for the election ? The alternative is shortens view of taxing the gain AND taking away the neg gearing.

 

I think the CGT discount is the most attractive for residential property because of the impact of gearing.

Residential property can be highly geared so the benefits of capital gains tax concessions are amplified.

I think the way the law is currently structured so that all CGT assets are taxed the same (generally) is wrong.

Mind you careful anti-avoidance rules will be needed. Lots of people will try to use another form of ownership for residential property and try to access the full discount that way.

 

For people starting out, perhaps. But for investors with more mature portfolios, it is relatively easy to take out loans secured by residential property and invest the funds in the share market. There is no real logic as to why shares should have a 50% CGT discount but resi property should not.

 

For all these years the government has purposely propped up property prices with generous incentives, migration and easy credit. Now it's bubbled to a point that needs serious attention as many are struggling to buy a home in Syd/Melb particularly.

I have sold an investment prior to 5 years, made some cash with plans and permits offloaded many years ago. Sometimes people need to sell for what ever reason prior to 5 years.
Now imagine 25% discount instead of the 50% currently. My returns would be crap, I would rather invest into other assets as there's better returns. I would rather put that cash into my own ppor or play with shares as the returns are better.

 

And if this goes through, shares will have better tax incentives than property. What will that do to the stockmarket?

 

Be in the same scenario we are in now regarding property.

 

Probably nothing.

Real estate investors won't sell to "get out" of property. It would trigger tax.
People would invest in shares depending on the investment views. I would argue it wont cause much of a change other than some REITS...The investors in those may or may not be excluded.

 

I agree nothing. The reason I raise this is because there is a whole industry that claims the current catastrophic housing bubble has been caused by low interest rates and tax incentives.

Logically then, if shares have tax incentives but resi property does not, investors will flock to shares and the tax incentives, in combination with low interest rates will cause a catastrophic share price bubble that will destroy personal wealth when the bubble bursts.

Of course it's all nonsense. If the changes are made, first books by the end of the year.

 

I disagree Paul, eg the current APRA requirement of pricing all debt at 7.5% means that we've probably purchased our last IP in Australia and in the future will be purchasing US and European equities (Australian equities offer less return).

Govt can dramatically influence investment direction however I think its a terrible idea for capital gains taxes to be increased during a time that the rest of the world is reducing them to encourage long term investment.

 

Correct and why it may occur. You wont sell what you have but you wont parlay into more property. That is one factor that is pushing / holding prices up. If investor demand was reduced, purchase demand falls for some who depart the market as buyers. I dont think a single arm of Govt would oppose that.

Shares, currency movements and property are different markets and if anyone thinks all property investors would correlate a sell down of property and then buy up local or foreign shares then the people who do that are not investors - They are speculative profit takers. Why should taxes be concessional for that ?

I think the question that Treasury are pondering is why is there a 50% CGT discount ? and what economic benefit does it bring for the cost ?

In my own case I have found a non-property alternative. 30% ROI

 

That's an interesting observation.
Australian equities offer dividends that are no match for the US or EU markets. Are you then talking about capital growth?
Sure the US market has had a boom for the past few years and is now at all times high. But the income it generates is not even comparable to what you get in Australia. And of course the ASX accumulation index is at all times high too.
Curious to see how you draw this conclusion
.

 

Reduced demand will lower prices if supply remains constant. If the CGT concessions are grandfathered, investors won't want to sell those assets which will affect supply. By how much is unknown but it is a risk.

 

Removing the 50% CGT discount would remove an incentive to invest. The economic benefit is increased investment. The economic cost of removing is reduced investment.

There is a 50% CGT concession because:
- before 1985 there was no CGT
- until 1999 real capital gains, adjusted for inflation, were taxed at personal rates
- the indexation method was replaced by a concession to tax 50 per cent of capital gains, to encourage greater investment in "innovative, high-growth companies"

The indexation method works when there is low inflation but strong capital growth in property prices. The indexation method doesn't work well when there is high inflation.

Really, the government should have switched back to the indexation method when Australia hit low inflation.

The easiest solution would be to abolish capital gains tax.

Next would be to formulate a policy whereby capital gains are taxed but not at a level that discourages investment.

 

Dream on...The easiest solution would be to abolish capital gains tax.

Love the quote from the Business Tax Review : the indexation method was replaced by a concession to tax 50 per cent of capital gains, to encourage greater investment in "innovative, high-growth companies."..I have highlighted the final words which explains why retention of discount for shares may be a good thing and why the present property discount is contrary to policy intentions back in 1999.

Property investment can be argued to be over stimulated for some time and tax concessions are fueling that and its contrary to nation interest for home ownership and savings through owner occupied housing at present. Removing neg gearing has many poor outcomes for the economy - ie reduction in housing for rental and rising rents possibly.

Subjecting the capital growth to full tax and allowing the tax benefits may be a palatable compromise for any govt. After all the ALP choice is loss of neg gearing (excepting new construction investment) AND the general CGT discount. Here is what they say ....

Furthermore, these tax subsidies have an interaction effect as investors can get tax subsidy from losses over the course of ownership, and then access a significant tax subsidy at the point of sale. As shown below, the introduction of the CGT discount in 1999 accelerated claims significantly.



I estimate since that change taxpayers have funded $100b in property concessions made for the apparent access to a half rate tax.

The ALP policy is interesting reading : Positive plan to help housing affordability (toward end of page is a good summary)

 

I can dream!

The ALP policy is interesting reading. I note the title is to help housing affordability but when we get into the guts of the policy it clearly states:

Capital gains tax

Labor will halve the capital gains discount for all assets purchased after 1 July 2017. This will reduce the capital gains tax discount for assets that are held longer than 12 months from the current 50 per cent to 25 per cent.​

It makes me wonder how reducing the capital gains tax discount for shares that are held longer than 12 months from the current 50 per cent to 25 per cent will help housing affordability.

By applying the policy to shares and all other asset classes, this part of the policy looks like a tax grab and nothing more.

 

Do you think now it's low inflation again, they should just switch back to the index method?

If you look at the current policy, 50% or the Labor policy 25%, what is the logic behind 50%, what is the logic behind 25%? It seems very arbitrary. At least the index method was logical in a way.