Treasurer Jim Chalmers’s fifth budget is certainly the most ambitious of the Albanese government’s budgets so far. In fact, it is probably the most consequential budget since the Abbott government’s first, in 2014 — although, unlike that budget, most of the measures in this one are likely to pass through parliament.
Chalmers’s centrepiece tax reforms are of course nowhere near as comprehensive as those introduced by Bob Hawke and Paul Keating in the mid-1980s or by John Howard and Peter Costello in 2000, and they don’t involve as many dollars as Scott Morrison’s three-stage tax reforms of the late 2010s and early 2020s. But they represent the most adventurous set of tax reforms seen so far this century.
For all that, there were almost no surprises in the treasurer’s speech last night. To a greater extent than in any recent budget, almost all of the “announceables” had been leaked — intentionally or otherwise — in the preceding weeks. That’s given both supporters and opponents plenty of time to construct and hone their arguments for or against the major measures.
Needless to say, the most attention-grabbing elements — and rightly so — were the changes to income tax. As widely foreshadowed, the government will prevent purchasers of established residential properties from offsetting net losses on their investment against other income after 1 July next year. This “negative gearing” will be retained, however, for purchases of new dwellings (and for shares and other assets), and existing property investments will be grandfathered.
Capital gains accruing after 1 July next year will no longer be taxed at half the applicable marginal rate (as has been the case since 1999) but instead subjected to the full marginal rate less an allowance for the impact of CPI-measured inflation on the cost base of the asset (the system that applied between 1985 and 1999). This change will apply to existing investments, including those acquired before the capital gains tax was first introduced in 1985, though only to capital gains accruing from July 2027. But investors in new residential properties will still be able to access the 50 per cent discount on nominal gains if they prefer.
Capital gains will also be subject to a minimum tax rate of 30 per cent to prevent investors from reducing their tax by crystallising gains in years when their marginal rate would otherwise be less than that figure.
The government says these measures will improve the prospects of younger Australians seeking to own their own home — a gaol that has become significantly more difficult over the past thirty years as prices have increased at multiples of the growth rate of incomes.
Treasury modelling suggests these measures will slow the rate of house price increases by around two percentage points a year and enable around 75,000 more Australians to buy their own home over the next decade. But it also suggests the slower rate of increase in house prices will result in 35,000 fewer homes being built than would otherwise be the case — although it asserts that this will be more than offset by the budget’s additional funding for infrastructure in new housing estates.
The opposition will no doubt seize on this latter element of Treasury’s modelling to support its assertion that “if you tax something more you will get less of it.” In one sense they’re right — the budget measures do represent an increase in the tax on (prospective) investors in existing residential property. But getting less of that would actually be a good thing. That’s because investments in established properties (which account for over 80 per cent of the money lent to property investors) do nothing to increase the supply of housing. All they do is add to upward pressure on housing prices and on the demand for rental housing (by out-bidding would-be home buyers).
Although it’s not guaranteed, there’s a reasonable chance that restricting tax breaks for investors in established housing while retaining them for investors in new housing will encourage new builds, which would also be a good thing. And I’m not persuaded that the prospect of slower price rises will dampen the demand from owner-occupiers — who account for almost 60 per cent of lending for new builds — in the way Treasury seems to assume.
So although the budget’s tax changes won’t solve Australia’s housing crisis on their own, over time they will make a meaningful contribution towards solving it.
The proposed 30 per cent minimum tax on distributions from family trusts reinforces the budget’s inter-generational dimension. According to the latest available statistics from the Australian Taxation Office, only 4.4 per cent of taxpayers under thirty-five report capital gains, compared with 8.6 per cent of fifty-five to sixty-fives and 14.3 per cent of those aged sixty-five or over. That latter group — the sixty-fives and over — accounts for 62 per cent of all capital gains, compared with only 4.2 per cent for the under thirty-fives.
In fact, just 3 per cent of taxpayers aged under thirty-five are negatively geared property investors, compared with 10 per cent of those aged between forty-five and sixty-four, who account for almost half of all reported net rental losses. And almost 19 per cent of taxpayers in the top tax bracket are negatively geared property investors, compared with just over 6 per cent of those who are not in the top tax bracket.
The budget also introduces two small tax breaks directed at people earning wages and salaries: the working Australians tax offset and the $1000 instant tax deduction (in lieu of documented claims for work-related expenses). In no way do these represent a substitute for the indexation of the tax thresholds, which many observers have called for, although the first of these measures is likely to be the primary vehicle for delivering future income tax cuts. But they do represent an attempt to narrow the differences between the way income from labour and capital are taxed.
The government may well pay a political price for breaking its promise not to make changes to negative gearing or the capital gains tax. But if it can convincingly articulate the strong arguments for these changes — as they did when they re-jigged the Morrison government’s “stage three” tax cuts despite having promised to “deliver them in full” — then that price may turn out to be both small and ephemeral.
If this turns out to be the case, then I’d like to think the government will feel emboldened to break another promise it should never have made — to keep giving Western Australia up to $7 billion a year of GST revenue more than its government needs to provide its population with the national average level of public services while levying the average level of state taxes. That’s something a government professing a commitment to equity and responsible fiscal management shouldn’t be doing. •
