A major business lobby group, the Australian Institute of Company Directors (AICD), has called upon the government to implement a systemic tax reform program which includes a review of negative gearing and capital gains tax (CGT) benefits.
The group’s recommendations have been laid out in the second edition of its national reform agenda, entitled Governance of the Nation: A Blueprint for Growth 2017.
“The AICD recommends that the government examine the unfortunate nexus between the treatment of negative gearing of investment losses on housing and the current discounted capital gains tax arrangements,” the group wrote.
While negative gearing is part of many Australian’s investment plans, the AICD said the practice has led to distortions in the housing market.
“The current tax arrangements encourage investment in relatively unproductive assets, like existing residential property.”
While low interest rates and a shortage of supply have played a part in today’s housing affordability crisis, the AICD argues that present taxation arrangements have also played their part.
“Negative gearing should be reformed so that it applies only to productive assets. Government should examine all options for reform of negative gearing (eg the tax deductibility of losses) on housing.
“The AICD recommends, in particular, that the government examines the nexus between negative gearing and the capital gains tax discount (introduced in 1999), which the Reserve Bank believes ‘may have the effect of encouraging leveraged investment in property’, particularly in an environment of low interest rates.”
CGT concessions have helped inflate after-tax returns from investment in existing residential property, a trend which fails to add to the productive capacity of Australia, the group wrote.
“The current 50% on capital gains tax (CGT) liability far exceeds that necessary to compensate investors for the impact of inflation, which was the intention.”
The CGT discount should be reduced from 50% to 40% as recommended in the 2010 Henry Tax Review.
“This change would further improve the balance between the current sub-optimal tax burdens carried by labour income. The estimated boost to the Budget from this reform is material at $6.4bn over four years.”