CGT needs a ‘strategic recalibration’, says McKell Institute

The McKell Institute is pushing for capital gains tax (CGT) recalibration to propose a new alternative to the “stagnated” house tax debate to present a new way forwards, have a positive impact on the budget and increase housing supply.

In a report authored by Professor Richard Holden and McKell chief executive, Edward Cavanough, the “strategic recalibration” of the CGT discount included increasing the CGT discount on new attached builds to 70 per cent, retaining the CGT discount on new detached dwellings and all existing investments at 50 per cent and decreasing the CGT discount on existing detached swellings to 35 per cent.

Cavanough said the recalibration had been proposed based on advocates having continuously pushed for CGT reform which had continuously received electoral rejection.

“Labor has resisted change to the CGT discount for too long. It needs to creatively reform this poorly targeted tax concession so it works both in the interests of aspirational Australians and society more broadly,” he said.

“We have to stop seeing capital gains tax as some kind of grand moral question. That approach has caused a stalemate in this country that has stalled the progress we need on fixing the housing crisis.”

According to Holden and Cavanough, this recalibration was designed to boost the supply of housing units, deliver a fairer go for first home buyers, place downward pressure on rental affordability, create more opportunities for ‘mum and dad’ investors, grandfather existing investments and ensure a positive or neutral impact on the commonwealth budget.

This was estimated to generate a 1.2 per cent uplift on supply to help Australia reach its target of 1.2 million homes by 2023, meaning 130,000 additional homes would need to be built.

This proposal was also expected to be revenue neutral within five years and revenue positive to the tune of $1.4 billion within 10 years.

It was noted this strategy would benefit first home buyers, rents, first-time investors and taxpayers, as the revenue lost, or expenditure, on the CGT discount could be oriented towards a productive outcome in line with Australia’s national housing objectives.

Cavanough said the approach aimed to change the “grand moral question” view of CGT in Australians.

“The CGT tax discount is neither good nor evil. But it should be better calibrated to actually achieve our social aims,” he said.

“But it should be better calibrated to actually achieve our social aims. Instead of encouraging property investors to bid up the price of existing housing stock we should be encouraging them to contribute to the construction of new dwellings. Our modelling shows that with a couple of simple tweaks the government could stimulate supply without affecting the budget bottom line.”

Professor Holden echoed this sentiment and said without this adaptation of CGT, the “hard reality is Australia just isn’t going to hit its objective of 1.2 million additional homes by 2030 if we retain existing settings”.

“A key problem with our existing tax settings on property is they orient too much investment towards established dwellings, at the cost of new supply,” Holden said.

“There is nothing wrong with the commonly held desire of everyday investors to secure their future by investing in the housing market. But this desire should be harnessed to achieve our national objectives on housing supply.”