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Misc and Other Fun Stuffs

(Opinion) Property Taxes Are The Answer

Date: 02/02/2017

property-tax

I noticed today that the REIA put out a press release that, in essence, urges the Federal government to forget about negative gearing. They say that if you want to tinker with something, change property taxes.

The notable observation is not the specifics of what was said, but rather that the national body representing real estate agents is calling for change.

In other words, there is industry acceptance that change is coming. Have you reached the same conclusion?

The simple truth is that, as a nation, we are spending more than we are earning and using debt to fund the shortfall. This is not sustainable. Consensus on how to fix it is the problem.

One political side advocates ‘less taxes means more tax’, believing that stimulating business will lead to higher profits and, ultimately, higher taxes. That’s a bit like saying you should lose weight by eating whatever you like.

On the other side you have the ‘increase taxes, especially on the rich’. The problem here is that an orange only has so much juice, and once it is squeezed dry then what do you do? Australia has a welfare system that it can’t afford, and too few people to pay for it.

It seems the best way forward would be to combine a little from both: reform the way property is taxed, and at the same time, wind back the concessions made to capital gains when times were better.

Just about every economist’s opinion I’ve read says that stamp duty is a poorly devised tax. It is paid once, and it makes a property transaction inefficient. The better idea is to roll land tax, and stamp duty, into a new ‘property tax’ that would be levied annually depending on the value of your home (much like a council levies rates).

The problem is that there would be political fall-out, because voters who have paid stamp duty (i.e. everyone who owns a home), and especially recently, would be rightly crying out that they are being double taxed.One solution is to offer a credit for some or all of the stamp duty paid against the property tax levied for a finite amount of time.

In regards to capital gains tax, a 50% concession on the basis that you own an asset for a year is something we simply can’t afford anymore. You could change it to a tiered system, where you get a 5% discount for each year you have owned the asset, up to a maximum of 50%. You could do lots of different things. That said, at the same time as reducing the concession, you have to add indexation back in so that taxpayers are not being taxed on the equivalent of investment “bracket creep”.

Other options include taxing capital gains on the family home above an indexed amount (say $500,000 per property, also indexed), and at the same time allowing a tax deduction for interest paid on the home mortgage to improve affordability. This is probably a step too far though for the navel-gazers in Canberra.

Whatever happens, two things are certain: we can’t afford the current way things are going, and while we wait, the debt we owe is growing bigger and bigger. Change is coming, I hope.

So, what do you think? Would you prefer a new annual property tax, a reduced capital gains tax concession, or perhaps something else? Post your preference here.

– Steve McKnight

Profile photo of Steve McKnight

By Steve McKnight

Steve McKnight, the founder of PropertyInvesting.com, is a respected property investing authority as well as Australia's #1 best-selling business author.

Comments

  1. Toni L

    I have heard it said the negative gearing does not impact on tax collected enough to make much inroads to providing tax dollars into the coffer. However I am not so sure. What are your thoughts on this?

    • Profile photo of Steve McKnight

      Hi Toni,

      I’m not sure what the numbers are, but maybe Treasury or some other agency has done the research?

      In any event, it would probably be more political then economic to make the switch, which is why you have Labor saying they will do it (at least in opposition, whether they followed through in government may be another matter), and Liberal saying they won’t.

      The point I am trying to make is that our current system is not sustainable, as if we keep the status quo then we will get more and more into debt. Reform is needed, so we might as well embrace it and get something that works rather than a Frankenstein of tweaks that adds complexity without much real substance.

      – Steve

  2. Marilyn McKenna

    It depends if you’re addressing housing affordability or revenue raising. Housing affordability can only be addressed by discouraging investors. Many councils already charge a premium of 20% on rates for properties not owner occupied, that’s just passed on to tenants. High Vacant house tax on holiday homes and houses not occupied would contribute as would reduction in capital gains. I wouldn’t like to see higher property taxes, it would contribute to families struggling to meet mortgage repayments and bills making housing affordability an even greater problem.

    • Geoff

      “Housing affordability can only be addressed by discouraging investors”
      You are way off the mark there !
      It’s simply supply and demand, atm there is not enough supply and that’s pushing prices up.
      More land, more houses, more rentals equals lower prices and rents.
      The market is tight due to lack of supply not excessive investors.

    • Profile photo of Steve McKnight

      Thanks for the comment Marilyn. I’m not sure how a vacant property tax could be legislated, let alone administered or collected. Also, as a civil right I think it is dangerous to tell and owner what s/he can or can’t do with their property. You are right about affordability, and that would be something that would need to be considered, but at the moment we (as a country) are going broke while we muck around. We all need to pay more in tax, or we need to wind back the welfare we provide and lose some of our standard of living.

      – Steve

  3. John Baragwanath

    Hi Steve
    I simply have too much respect for you to say you are wrong – and I go back to the days when Dave was with you. However, I think your direction is incorrect.
    Currently, I am advised, that to make housing more affordable – or even available in Victoria we need 40,000 more dwellings and 70,000 in Australia overall. I have several quality rental properties that will assist me to move towards retirement. That mean I will never receive a pension – saving the Government money for the rest of my life. That includes my wife too!
    I also pay people to maintain my properties – basically 1 person fulltime at present. That person pays tax so I am contributing again.
    However, as the property value grows the rental return drops as a percentage – the only way I can get extra funds to buy more is the refinance to gain the equity – which means higher payments etc etc.
    If I sell I am up for 50% of the net gain so that is a disincentive (or even a show stopper) to buy another property.
    Look at what happened last time Labor removed the tax deductibility available to investors – development virtually stopped overnight. They had to put it back to house people!
    As Victoria has the highest growth rate in Aussie right now (expected to be 70,000 this year), the only place to house them is for either private investors to build more homes or the Government to do them. We private folks will not build if we have our profits ripped away from us & the Government has no money to build.
    Yet there are millions of $$’s afloat in the community. I am involved with an office building development at present. If the builder we wanted was chosen it would have been completed in November 2017. We were virtually forced into selecting another builder (highly unionised) and the building will now be completed in May 2018 – solely because of that unionisation!! This will cost us more funds to build and we loose 7 months rent too!
    I heard on the radio this morning the kerfuffle because Malcolm Turnbull gave $1.7 Millions to the Libs election campaign! Yet the unions gave $5 Millions to Labor and then spent another $15 Millions themselves! Much arrived at in the same manner as afore described in the building scam I mentioned.
    Every day business people go “broke” leaving millions in debts behind them and one that I know has done that 5 times! He has 5 Melbourne apartments valued at over $1.5 millions each and several exotic cars. Yet his solicitors can “hide” this wealth behind companies.
    Property equity is an easy target. I am not rich. I drive a 12 year old car and although I live in Brighton I bought in a long time ago. Think of older folk (I am only 66) that sell their homes when “Dad” dies as they need to go into care. Bought one of those places lately? $500,000 will buy you not much at all and if you start taxing 50% of the capital gains realised on a house someone has lived in for 40 years where will they go?
    I do not have all the answers but I am so sick of hearing the cry to tax property investors – we are such an easy target yet if I sell my properties (and pay all the blood money tax) they people that buy them will not be impoverished families but well off ones!
    One factor not looked at is the incredible amount of money the State Government in Victoria is making when you buy a property. The more expensive it is – the more they make! Where is that going? Into housing projects? No way – consolidated revenue to prop up the unions in Victoria. Make those funds be put on the table as low cost loans to developers to build higher density housing on Crown Land. The State is lousy with it lying idle!
    Anyway, enough of my rant.
    Best Regards
    John Baragwanath

    • Cec

      I think John and a lot of people have the incorrect understanding on the taxing of capital gains held more than twelve months. The 50% capital gain is taxed at your marginal tax rate not at 50% of the capital gain. Depending when you sell (hopefully when you have retired and you are on a lower marginal rate of tax) this helps in reducing the impact of tax. When a property is joint names (50/50) the effect of the tax has often less of an impact as both have the benefit of the first $18,000 tax free.
      When it comes to someone selling the family home after living in it 40 years which takes us back to 1977 there is no tax on the capital gain. If bought after 19 September, 1985 the capit gain is not taxed as it is or was the principal place of residence. If the owner dies and the property passes to the beneficiaries, capital gains tax is payable on the sale price less the value at date of death. Any gain in the previous years is tax free. Therefor in these days of high valuations, the capital gain is unlikely to be that great. It will depend in part on how long the property is held from date of death
      Regards,
      Cec

    • Profile photo of Steve McKnight

      All good points John, but can we agree that doing nothing is simply going to take our country backwards as we continue to spend more than we earn?

      The US has a property tax that seems fairer than what we have in Australia, and it makes buying and selling far more efficient than crazy stamp duty costs of $40,000+ that gets gobbled up into consolidated revenue.

      I agree that it will be an issue to ‘compensate’ those who have paid stamp duty to ensure they are not double taxed. I would propose it be amortized over 20 years against the annual tax bill, with the balance refunded when the property is sold (or a tax credit offered).

      Anyway, this is just a discussion…

      – Steve

      • Norman

        Steve, if stamp duty and other transaction costs are lowered, people who have paid it should not complain. There will be a bigger market when they decide to sell, because buyers will not have to find the stamp duty as well as deposit etc.
        The sellers will also have more flexibility to look at alternative investments if the turnaround costs are lower, leading to a more liquid market.
        The group that may be squeezed is tenants, as landlords will need to fund a regular tax outgo as opposed to a transaction tax that can be avoided by doing nothing.

  4. Dean Collins

    Nil, the existing system is working fine.

    Australians just need to make the decision to quit trying to live in Sydney and Melbourne and finally venture into a brave new world where they live in more than just two big cities.

    Until people live in Nowra,Goulboun,Bathurdt,Port Macquarie and its seen as normal……then we will always be paying over the odds for property.

    • Michael

      Dean, I live in Port Macquarie and it’s expensive. It also ranked in the top 3 most searched for localities on realestate.com.au in 2016, and it ranks in Demographia’s top 20 most unaffordable cities IN THE WORLD every year. The housing bubble in Sydney has pushed prices up here dramatically.

    • Axel Peeck

      Dean, what will people actually do in those places? Until they provide jobs that are equal or better than what the big cities offer there is very little benefit of moving to a ‘cheaper’ housing area if you are unemployed.

      • Dean Collins

        Axel,
        Until people move….rural will NEVER be self sustaining.

        People need to move and the service jobs will follow.

        Some of it can be initially “rich retiree led” like on the north coast where service/medical/handyman/construction led jobs are paid for on the backs of rich retirees and while orange/mudgee are jockeying for the foodie crowd its unlikely anyone is “living in Nowra for the gastronomy”.

        At the end of the day Sydney/Melbourne will always be expensive while everyone is too timid to relocate.

    • Henry

      Here here!!! Well said Dean. There was applauding when Badgerys Creek airport was announced. In my opinion, this to me represents failure on so many fronts. What is the opportunity costs of such a project. If the money ~$5 billion)was allocated to invest in satellite cites there would be a reduced impact on existing infrastructure, people could have a life and property prices would stabilize.

    • Profile photo of Steve McKnight

      This can’t happen until regional cities get better infrastructure Dean, nor can it happen until there are more jobs in those areas. The simple fact is that people want to live where they can work, and work where they want to live. There is no land shortage in Australia, but there is a shortage of dwellings in areas where people want to live (and that is not a 2+ hour commute to and from work). The system is broken. Let’s admit it and have an adult conversation about we can do about it.

      – Steve

      • Profile photo of DeanCollins

        Steve arent you are living in an “retiree” driven economy (in Florida I think?)

        Apart from drug money in the 80’s I think that the majority of Florida’s economic development is solely driven by nest eggs moving south (whether for snowbird winters or permanently)based on discussions I’ve had with residents there (though may be biased as both work in the medical field).

        Living in the USA has opened my eyes to how myopic Australians are living in 2 big cities and 5 country towns then complaining……its expensive.

        • Profile photo of Steve McKnight

          I’ve been told that the two big industries in Florida are retirees and real estate. I think tourism should be added in too. When you understand how cold it is in Northern America during winter, you can appreciate why older folks migrate south for several months each year.

          You also need to understand just how many people live in the US. Florida’s permanent population is only a few million less than Australia’s total population.

          – Steve

  5. Peter Glenn

    The key issue is to make the cost of first homes and associated loans cheaper.
    One measure would be to defer the stamp duty until the first home is subsequently sold (paid from the proceeds that exceed the sale value- but if no gain then no stamp duty-must be at arms length).
    The second measure would be to allow first homebuyers a tax deduction for the interest (based upon a scale of their taxable incomes)for a period of say 3 years and that tax deduction be taken into account by lenders in assessing capacity to service a loan.
    Both LVR and capacity to pay would benefit first homebuyers giving them a great leg up into the property market..

    • Profile photo of Steve McKnight

      Interesting points Peter. Thanks for making them. I think the government has learned that initiatives like the FHOG only resulted in a redistribution of wealth to investors and owners as it pushed prices up.

      Some kind of personal tax deduction for first homebuyers would be an interesting scheme though. In the US taxpayers can deduct the interest paid on first and second mortgages up to $1,000,000 in mortgage debt (the limit is $500,000 if married and filing separately). Any interest paid on first or second mortgages over this amount is not tax deductible.

      There is CGT on the family home though. As I understand it, individuals can exclude up to $250,000 in profit from the sale of a main home (or $500,000 for a married couple) as long as you have owned the home and lived in the home for a minimum of two years. Those two years do not need to be consecutive.

      – Steve

  6. Matt

    Currently the stamp duty is a deterrent for many who are struggling to get on the ladder so I think the annual property tax is a good idea, as long as it isn’t too much of a burden, or else there will be a lot of defaults.

    In the case of defaults – if they lead to foreclosures, we should avoid a US style system of passing on any unpaid property taxes to the next owners. Previous owners should still be under an obligation to resolve them since declaring bankruptcy does not absolve you of debts in this country (as seems to be the case in the US).

    I’m more sceptical about removing the Capital Gains discount… it’s a common enough trick that dodgy investors nominate a property temporarily as a principal place of residence, untenanted, for long enough for it to be exempt from Capital Gains for the subsequent 6 years. So removing or diminishing the discount may not be as effective in those cases.

    Despite being an investor myself I’m against negative gearing in general. I try and invest to make a profit, and any losses are usually minimal compared to the gains made by a rising housing market. I think the current system is too rewarding and unnecessarily incentivised.

    Great post Steve!

    Matt

  7. Bianca

    I am a bit over this talk re scrapping negative gearing…how about you put a cap on the number of properties you can negative gear like everything else associated with our tax system – put a limit based on the property value. Why should some people be able to buy 10 investment properties whilst some can’t buy one. Cut the tax benefits out after a certain threshold and you will see property investors find elsewhere to put their money. No one needs 10 or 15 properties to their name to see them through to retirement. But gee it would be great if some had two..to take pressure off the welfare system in their old age and to support their children… a bit of logic re this discussion would help both parties I would think.

    • Profile photo of Steve McKnight

      Thanks Bianca. Logic and politicians are not usually a happy marriage, unfortunately.

      There is an inbuilt restriction on the number of negatively geared properties an investor can own, and that is the amount of their taxable income. Once that has been wiped out, there is not current year advantage to the tax losses, although they can be carried forward. Without the tax shield, the full cash component of those losses must be funded from savings, or more debt.

      – Steve

  8. Michael

    I think a Land Value Tax (AKA Georgism) would really shake things up. It would force landowners to actually do something productive with land instead of just land-banking and paying next to nothing in taxes for years on end. Meanwhile, the taxpayers pay for new infrastructure and eventually the land is worth 10 to 100 times as much. Then it gets subdivided and sold back to the poor taxpayers.

  9. Duncan

    Introduce a land tax? Evidently no Queenslanders here… as we are already paying it. https://www.qld.gov.au/environment/land/tax/

    Also paying the rates, stamp duty, levies, and whatever else the varied levels of our government can think of. Strange how some of these were supposed to go when the GST was introduced, but never did. I would be very cautious suggesting any new tax. History shows the new tax is introduced, and the old ones seem to stay.

    Time to focus on reducing spending.

    • Profile photo of Steve McKnight

      Yes, there is a land tax out there, but it is a product of a tax grab to fund prior world wars (mainly), and was never taken away once introduced. Times have changed though Duncan, and instead of land tax, stamp duty, rates, etc. we need one broad based taxation of property to make it simpler, fairer and more transparent. Can we trust the politicians to devise such as scheme though? I doubt it.

      – Steve

  10. Tim

    affordability, cost of construction is also going up. Spoke with a builder today, and they said that it’s difficult finding tradesmen, and with so much demand, they can charge more, no matter what type of build. Simply not as many people going into trades today.

  11. Jo Lindo

    Re: A yearly property tax…My view is that this is another drain on the fixed or diminishing pension incomes of the elderly…. Many people create their wealth for funding their old age via their homes which they access when they downsize to supplement their cash flow. Not everyone has superannuation especially if they have had a small business, that is the reality. If you can afford to buy a house then paying stamp duty is reasonable but the amount of stamp duty maybe not.

    We are now having to pay for the fiscal mis-management of successive governments but let us make sure those that can least afford it do not get hit. They have done their bit for the country. How about tackling corporate taxes instead to recover the billions that are being taken offshore to tax havens. I notice this has not be discussed.

    • Profile photo of Steve McKnight

      Yes Jo, those without the means to pay a new annual fee would need to be considered. Perhaps the government can provide a quasi reverse mortgage program / HECS concept, where they could lend the money to the taxpayer at a set interest rate, to be paid when the property is eventually sold.

      – Steve

  12. Karen

    Balancing the books is not just about income but also expenditure. The government needs to reign back on it’s welfare spending, particularly on the long term unemployed. You only have to visit many ideal locations where people move to that have minimum employment and surf beaches. Some families there are moving past three generations of welfare recipients and have NEVER worked a day in their life. Maybe we need to employ a system that only allows people to receive benefits for a certain amount of time and then they cut out. Or the amount they receive is dependant on how much tax they have paid. The Tax department could also chase the multi national corporations who are trading here and do not pay tax here, or minimal at most. Our tax laws are a joke and international corporations and miners come here and legally steel from all Australians via our tax laws. I also think it is wrong that people who buy investment properties, especially in tight rental markets, who then lock them away and do not rent them out, receive the same tax benefits as another investor who is adding a solution to the rental crisis. These locked up houses decrease available rental stock which in turn increases rents, yet they still get the same tax benefits. The government should look more closely at where it an make money rather than picking on what is essentially middle tax payers retirement funds, because if Mum & Dad investors decide to take a loss and get out of the rental market en masse then cheap properties will be snapped up by cash rich mega traders who will then increase the rents for all of us. The government would have a huge social crisis that would take generations to fix. And I haven’t begun to mention the crime rates. The problem is huge, but getting middle income Australia to pay for it is the wrong solution!

    • Profile photo of Steve McKnight

      As a nation we scorn the dole bludger who is surfing the waves at Byron on the public purse. But how many are there that really fall into this category? I think it is at the margins, not the mainstream. Yes, welfare is probably unsustainable based on current entitlements, but are we willing to compromise our standard of living?

      At the moment property is taxed massively, once, on purchase, and taxed concessionally, once, on sale. We need a new system that smooths this out so that the government can get a more reliable income stream.

      – Steve

      • Peter Henery

        I challenge your assertion that property is taxed ‘concessionally, once, on sale’. The current 50% CGT discount is not a concession. It was/is an attempt to simplify the previous cumbersome indexation system. To be clear, yes, property acquired prior to Sept. 1985 is free of CGT on sale and yes, is taxed concessionally. But all property purchases after that date are, in effect, fully taxed, on sale, taking the effect of inflation into account.

        • Profile photo of DeanCollins

          AGREE Peter, I don’t understand why people feel its a discount……when you look at capital gains around the world (eg 15/20% here in the USA if Australia did offer this discount you are paying 40% on income tax….then some of which you manage to save away…..you would be paying another 40% on :(

  13. Profile photo of Benny

    +1 for Duncan’s comment:-

    “Strange how some of these were supposed to go when the GST was introduced, but never did.”

    Hmm, and Land Tax takes on a whole new persona if ever you choose to utilise a Trust in Qld – I found THAT out the hard way, but fortunately, that one is now sold. I paid yearly Land Tax of over $5k within a Trust, as opposed to $500 if a PPOR. That is the difference – and that difference adds $100 a week to our costs.

    Tenants didn’t like to have to pay an extra $100 a week either…. funny that !!!

    Benny

    • Profile photo of Steve McKnight

      This is a valid point. When GST came in stamp duty was slated for removal, but it never happened. Why? Because spending increased even more than GST revenue. When you think of all the extra cash from GST, speed cameras, etc. that didn’t exist 20 years ago, you have to conclude that governments had to be more fiscally responsible.

      I am not talking about more tax, so much as a fairer tax that will also create a more efficient property market.

      If we want our kids to have the hope of owning a home, and if we want to enshrine our standard of living for future generations, then we can’t just kick this problem down the road.

      Regardless, with the current political deadlock it is unlikely anything as big as this kind of reform will be considered. It’s a political Groundhog Day… 4 more years of dithering.

      – Steve

  14. Jaron

    Land banking occurs in the southern states too, except its called Primary Residence exemptions. Young families can’t afford to buy bigger homes while retirees can’t afford to downsize to invest elsewhere or else they’ll pay tax and get less government concessions.

    Bring in the Property Tax (with Stamp Duty paid concessions) and make negative gearing the same as for the share market I say.

    • Profile photo of Steve McKnight

      Hi Jaron,

      Negative gearing is not just available to property investors. It is also available to any asset class (share traders who borrow, businesses who borrow, etc.) where there is an intention to make a profit (to earn assessable income).

      – Steve

  15. Lindsay

    Cec’s comments were what you might expect if you went to an accountant for advice. John was addressing reality. Also remember there are huge numbers of migrants coming into the country.Migrants will compete with first home buyers and significantly impact housing trends. The other factor is that I believe there are many purchasers of houses by Chinese that are being done under the radar.One agent told me he had an order to buy 40 houses for a client based in China. The State Govt is squandering money big time. Have you been caught by the highest collecting speed camera in Victoria?[near Holmesglen on Warrigal Rd] Where are all those funds going? Only realistic solution is to send migrants to regional areas or stop migration.

    • Profile photo of Steve McKnight

      Migrants can’t usually borrow, and unless they have large sums of cash, are forced to rent. Foreign money is another issue. Vancouver recently placed a substantial tax on foreigners, and that has flat lined their growth. Job done, unless you are trying to sell.

      You only get caught by a speed camera if you speed. Seriously, the roads over here in the US are unsafe – with people speeding, talking on mobiles, etc. I will never, ever, ever, complain about fixed safety devices now I have seen what happens without them.

      – Steve

  16. Roger Friend

    Steve, I get what you are trying to do with your suggestion on Stamp duty. However, how would a property be valued that is not on the market. Its bad enough with land value being used for rates. You know that the value of a property is often only in the buyers and sellers mind. Very subjective and also very dependent on the parties needs and wants. Are you going to penalize a house owner for well maintaining or improving a property? Reminds me of the old idea of the “Window Tax”.

  17. Jerry

    Horrible Idea is to further involve government into the equation. Let supply and demand sort it out. When there is an oversupply of housing prices and rents will drop. That will be a great thing for people and the economy. The problem is the credit rating of the country is tied up in the big 4 banks who cannot help themselves but keep on lending and keep their little monopoly alive and earnings alive to prop the share prices. They want the government to screw over the small investor so they will have less volatility. Capital flowing into tan essential service like housing is great for the people…so leave it alone. If it becomes a huge problem…then invest in more infrastructure and let more immigrants in.

    • Profile photo of Steve McKnight

      Okay, let supply and demand sort it out, but let’s create a fair playing field and remove the incentives / concessional provided by government that are no longer affordable.

      What other business endeavour is incentivised for making a yearly loss that is partially repaid by the public, only to make a later gain that is concessionally taxed in return?

      The public purse ought not to be for investors who ought to fund their own losses.

      – Steve

  18. Profile photo of Benny

    Hi Steve et al,

    Steve said>>> “It seems the best way forward would be to combine a little from both: reform the way property is taxed, and at the same time, wind back the concessions made to capital gains when times were better.”

    I have a problem with that last bit – “wind back concessions made when times were better”…. See, I recall when the “50% discount if held more than 12 months” came into play. It coincided with the shelving of the Indexation system (but remained optional for those already owning property to use whichever system suited them – all good there so far).

    The 50% discount was a trade-off as we would no longer be able to claim the effects of inflation on any so-called “gains” made. If any new rules were to negate the 50% discount, then I believe Indexation in some form should return.

    If it didn’t then I would have to consider the Govt to be “double-dipping” themselves. Why should we all pay CGT on double the gain, when much of that gain is inflation?

    We already pay for inflation by having the cost of goods going up, with GST steadily rising via inflation. Of course, investors get a benefit via inflation too, but if any Govt were to cull the 50% discount WITHOUT re-introducing Indexation, then I would think many investors might rethink getting into property and may instead turn to other asset classes, leaving the Govt with the old “not enough rental housing available” problem.

    1986 anyone?

    Benny

    PS For those who wish to dig further, keep in mind that doubling of the Capital Gain might be MUCH worse than simply doubling the CGT. A lot depends on just how long a property has been owned and the profit made. Properties bought before Sept 1999 MAY still use the Indexing method – but those bought AFTER that date are locked into the “50% discount” scheme. It is these latter ones I wish to shine a light on:-

    e.g. bought IP in 2000 for $200k in Sydney (say). Sold in 2017 for $1million. Capital Gain $800k (less expenses, so let’s agree on $700k)
    50% of that is $350k which is added to your other Income and then taxed as though you earned it all in one year. Someone on average wage would be paying (roughly) $20k per year in Tax – add $350k as more Income, and they would be up for an extra $150k+ of CGT.

    Now, TAKE OFF that 50% discount, and you can add a further $175k in CGT for that same sale. So, $325k in CGT instead of $150k? Sure, there is still profit in there, but then, why would one not look to “do better” than to pay double to a Govt who is taking away an old benefit? 1986 threatens if they go that way methinks…..

    • Profile photo of Steve McKnight

      Hey Benny!

      Maybe you missed what I said, as I agree with you about indexation…

      “That said, at the same time as reducing the concession, you have to add indexation back in so that taxpayers are not being taxed on the equivalent of investment “bracket creep”.

      Cheers,

      – Steve

      • Profile photo of Benny

        Hi Steve,
        Hmm, I was concentrating on your earlier comment – about ” wind back the concessions made to capital gains when times were better” – and, I admit, that had me thinking you were looking at doing something with the 50% discount.

        But then, were there other concessions you had in mind? To me, that discount was the biggie – and with all of the current political hoopla going on, it is the one most heavily reported right now.

        So yes, I was concentrating on pointing out (for those who were not aware of investing in 1986) just how badly things could go if new laws are enacted without much thought of the ramifications.

        Back to you though, Steve – it was great to read your reply comments to many of the other posters above. I always enjoy hearing your perspective on things in the investing world.

        I also enjoyed reading some of the other “alternative ideas” that came through in some of the posts. Certainly, this article has revved up many of us. Great subject choice!!

        Benny

        • Profile photo of Steve McKnight

          Here’s an idea…

          1. Bring back indexation. I think the government made a huge mistake offering the 50% discount and then an era of low inflation emerged.

          2. No CGT discount for 24 months (i.e. double the current 12 month period).

          3. After 24 months, you get a 5% CGT discount per year you own the asset (i.e. 3 years = 5%, 4 years = 10%, etc.) up to a maximum 25% (i.e. half of 50%).

          – Steve

  19. Peter Henery

    I am certainly NOT in favour of ANY increase in taxes nor new taxes. We already pay too much tax. Don’t forget, the GST was meant to eliminate Stamp Duty. Look how well that worked for us! GST was NEVER to increase above 10% ….but we all know everynow and then 15% is mentioned. Land taxes keep increasing with ‘bracket creep’ and have to be paid each year along with ever increasing council rates. So do you get the drift ? Our governments, for whatever reason, are clearly unable to control their spending. They will OVER spend whatever taxes they collect. They will ALWAYS want more ! For so long as we (the people) blindly accept ca 50 billion for NDIS and another 50 billion for NBN and another 50 billion for submarines etc we don’t stand a chance ! Australia does not have a tax problem, we have a spending problem. And our politicians, personally, have an entitlement problem.

    • Profile photo of Steve McKnight

      Peter,

      As much as I hate seeing politicians waste money, the reality is that we have a standard of living that costs more than what we can afford. If you want to drop that standard of living, then it won’t be the rich that feel it most, but rather those living closest to the poverty line.

      The NDIS is a good idea. Are you saying you wouldn’t be willing to pay a little more in tax so that an autistic child’s parents can have some respite care? We can’t have the idea if we don’t have funding for it. If that funding is going to come from spending savings, what programs will you cut?

      And I’m not talking about more tax anyway, but rather a fairer tax. If you are wealthy enough to own real estate, you should be prepared to support those who don’t. After all, in the past 10 or so years you have had a massive increase in your wealth which has not, currently, been taxed.

      – Steve

  20. wayne

    WOW good reading heaps of i dears which all could be used so when you have one /two property you are in courage to invest as part of your pension/super save gov money, and have a pro rata from your third on wards were there is a fair tax
    w

  21. Peter Henery

    Regarding housing affordability the solution is VERY simple. Give people the right to sub-divide their existing dwelling WITHOUT the current fire-wall requirements and WITHOUT having to provide additional car spaces on site. Over the last (say) 40 years average number of people per dwelling has fallen from ca 5 to now ca 2. Housing stock has remained pretty much the same. We ALREADY have the bedrooms, but nobody is using them ( or they are full of junk). Instead of fire-walls use ‘linked alarms’ (as used in other forms of communal housing quite effectively). Most houses in Australia would have space for one or two cars in the street outside. Use it for parking. Insurance would need some innovation. Possibly use the strata-tile model that works for apartments. But change negative gearing … nope. Ain’t going to do anything but put rents up over time. Increase supply AND that supply is already in the right locations. This would also revolutionise many people’s retirement funding. Granny sells half the house. Stays living in the other half. Easy !!

    • Profile photo of Steve McKnight

      Varying or relaxing planning regulations would certainly help. Most people who have ever had the pain of putting in a development application get frustrated by the delays and red tape. This is the problem with having elected officials try to administer government policy. Perhaps we should remove planning from local governments and have an independent State planning tribunal that simply administers the planning laws?

      – Steve

  22. Brett McGrath

    Hi Steve,I think we all agree that the current tax system for property is flawed in one way or an other. If you remove the 50% cgt concession for investment properties this would slowly but surely reduce the amount of avialable rental properties because investors will bail out of their properties before the close off date, thus allowing first home owners into the market. The negitive side to this is you will always have people wanting to rent for what ever reason, so this will put an extra burden on the public housing system that we know can’t manage the current enquiries, not to mention the homeless.

    Most concessions the government come up with are a dual sided sword, the cgt tax concession was given to rob peter to pay paul

    Our politicians can’t be trusted to come up with a fair and equitable tax system that stops the rich getting richer, and the middle class being taxed out of existence, they are only interested in their own perks and long term benefits.

    I believe as Australians we all don’t need to live in expensive 4 bedroom houses that we can’t afford with all the bells and whistles first off, and take a page out of our immigrants who come here and help each other get into houses by all pitching in and saving to buy the first house together then move on to the next house and so on.

    Singapore has a maximum individual tax system of 20% with low unemployment and all public housing is supplied by a government loan, with the highest in the world of 90% home ownership, maybe we should look at their model and laws?

    http://www.ifhp.org/ifhp-blog/singapore’s-successful-long-term-public-housing-strategies

    https://www.rikvin.com/taxation/a-personal-income-tax-guide-for-foreigners-in-singapore/

    Brett

    • Profile photo of Steve McKnight

      Agreed Brett. We should definitely look at other countries. Remember the size of Australia vs Singapore though. Friends say to me “why can’t we have an internet like Singapore” and I simply replay “because we’re bigger.”

      Singapore also has a large financial hub for the region. Tax there is 17%, but at a guess I’d expect the volume of transactions is much higher.

      Welfare, like Taxation, tends to evolve rather than be strategically planned. Reform in both is needed to make things simpler.

      Regards,

      – Steve

  23. Tom Ryan

    Since apparently most property investors lose money in the hope of making it up later, an annual tax would make it worse. The answer is to dampen the demand from investors for existing property, and encouraging them to build new properties. Sometimes there is an excess of new properties, and a shortage of existing, so you cant increase the supply of existing properties. The real answer (politically a killer) is to kill profit making in existing properties, so demand will be based on owner buyers only, and eliminate capital gains, so you can buy a house in 5 years time for the same price as now, allowing more people to buy (which could force the price up!). But the tax concessions (negative gearing)need to go , so investors buy on its merits. Why should the taxpayer subsidise it – its a form of welfare!

    • Profile photo of Steve McKnight

      Most Aus property investors lose money on their tax returns, but are increasing wealth as their capital gains are not taxed until the property is sold. We need to find a way to tax property incrementally, not allowing it to be deferred until sale.

      In other words, we need to pay today’s costs using today’s tax from today’s income. We are paying today’s costs using debt, which we hope to repay from tomorrow’s tax on tomorrow’s income.

      – Steve

  24. Profile photo of Jalugera

    In the high-demand low-availabile of 600+ M2 homes in the leafy suburbs of Sydney and Melbourne property ownership has never been so good: 2% inflation, 8%+ CAGR, 4% home loans and, for investors, 3% rental returns. Doubling in real terms every 10 years! WOW! Clearly this is not sustainable. That $2m home will cost some $16M in 30 years!
    So, I think, in the next year or two growth will moderate and possibly stagnate. Investors faced with a scenario of no growth won’t invest. Longer term investors may cash in and move into the share market. We shall see.

    Another thought is how to encourage retired homeowners who enjoy a Government pension to sell their $2M property to increase supply? I suggest a reverse HECS type scheme where the pension received is accumulated and paid back when the property is sold. A furthter added incentive could be reduced stamp duty when they downsize.

    • Profile photo of DeanCollins

      Hi Jalugera,
      Reverse mortgages are advertised here in the USA a lot. I think they make a lot of sense (not that I’ve looked into the specifics).

      The one issue I did hear about is some rogue firms charging a lot of “fees” eg inspection fees, annual management fees, jacking rates a few years after the contract was entered into etc.

      Eg one of them charge 4 x inspection fees a year at $600 a visit “just to drive past and take a photo to document the “asset property” was being maintained to a high standard.

      Usual BS you find in the USA that most countries would manage just fine.

  25. Profile photo of wilbell5

    I think increasing a land tax on non PPR properties is a great idea if state gov’s agree to dial down stamps. Reduced stamps will encourage more buying/selling. Increase annual costs will take a lot of speculators out of the market and we would not be subject to such sharp booms. i.e. pre GFC. It would also give the government a consistent revenue stream which ensures more revenue to spend in recession times which would be now less severe because there weren’t so many speculators on the investment roller coaster when it went down!

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