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The likely change to the capital gains tax and the 'Ponzi scheme' of housing · The Morning Edition

• 0:04
  S1: Treasurer Jim Chalmers is likely about to make a big
• 0:07
  S1: change to our tax system. But will it do anything
• 0:11
  S1: to combat intergenerational inequality? I'm Samantha Zellinger Morris and you're
• 0:16
  S1: listening to The Morning Edition from The Age and the
• 0:19
  S1: Sydney Morning Herald. Today, senior economics correspondent Shane Wright on
• 0:24
  S1: who this change will benefit and who it will cost
• 0:28
  S1: and by how much. It's April 22nd. Hey, Shane. Welcome
• 0:36
  S1: back to the podcast.
• 0:38
  S2: Oh, Samantha, you don't know the joy of seeing your
• 0:41
  S2: happy face again.
• 0:43
  S1: Well, I'm very excited. You know I am, because I
• 0:46
  S1: reckon you've written what amounts to a near mic drop
• 0:49
  S1: bit of journalism about tax such that it is because
• 0:52
  S1: you have just revealed that Jim Chalmers is leaning towards
• 0:55
  S1: reforming the capital gains tax. Now, this is a controversial space, right?
• 1:00
  S1: It triggers a lot of feelings in people jealousy, justice,
• 1:03
  S1: or lack thereof. So can you just briefly tell us, well,
• 1:07
  S1: how do you know this? And why would Jim Chalmers
• 1:09
  S1: reform this tax now?
• 1:11
  S2: Well, I'm not going to give away how I know this. Sammy.
• 1:14
  S2: You never. It's like asking a magician how to how
• 1:17
  S2: they put together their secrets.
• 1:18
  S1: Okay. Well, you record from within within the halls of
• 1:21
  S1: power at Parliament House. So we'll just we'll tell the
• 1:23
  S1: listeners that that we know.
• 1:24
  S2: That'll do. But look, since about August last year, after
• 1:28
  S2: the roundtable economic roundtable that Jim Chalmers called together for
• 1:31
  S2: three days, that the government has been considering a change
• 1:35
  S2: around capital gains tax and perhaps negative gearing, all tied
• 1:40
  S2: up with the the Ponzi scheme, which is the Australian
• 1:42
  S2: housing market. I was actually just doing a little research. Australia.
• 1:46
  S2: Australia has four capital cities where the median house price
• 1:50
  S2: is more than $1 million. The 50 capital cities of
• 1:55
  S2: the United States. Not one has a median house price
• 1:59
  S2: of $1 million. This is part of the issue that
• 2:01
  S2: Australian housing is just stupid levels.
• 2:04
  S1: Anyway, it's gone out of control. So let's just let's
• 2:07
  S1: get into it. How long has the capital gains tax
• 2:10
  S1: been around and what is it?
• 2:12
  S2: So mid 1980s Paul Keating, treasurer at that time says look,
• 2:17
  S2: we've got to change the tax system. It is stupid.
• 2:20
  S2: Like the top marginal tax rate was $0.60 in the
• 2:23
  S2: dollar and it kicked in pretty low. The company tax
• 2:27
  S2: rate was higher. And capital gains, which is the amount
• 2:31
  S2: of money you might make selling say an investment property
• 2:36
  S2: or some shares was untaxed. So if you were wealthy
• 2:40
  S2: and you were buying and selling assets, you were effectively
• 2:43
  S2: making off like a bandit. You weren't getting taxed.
• 2:45
  S1: So I'm just going to interrupt there for a second.
• 2:48
  S1: So just just to make it very clear for those
• 2:49
  S1: of us who, let's just say, have a film degree
• 2:51
  S1: instead of an economics degree, like some people. Shane. Right.
• 2:54
  S1: So the capital gains is you buy something for $1 million,
• 2:58
  S1: you sell it for a million and $750,000. That capital
• 3:02
  S1: gain is the $750,000, right?
• 3:04
  S2: You go to the top of the class with that
• 3:06
  S2: analysis there, Samantha.
• 3:07
  S1: Okay. Thanks, Shane. As you were.
• 3:09
  S2: Thank you. So he introduced what was the Australia's first
• 3:14
  S2: capital gains tax. And this was occurring across the world
• 3:17
  S2: at that time because economists treasuries were working out that
• 3:23
  S2: there was this whole amount of wealth being created that
• 3:26
  S2: was untaxed. And it meant that the income tax system
• 3:30
  S2: was doing a lot of the heavy lifting. So he
• 3:33
  S2: also introduced fringe benefits tax at the same time, which
• 3:37
  S2: helped Keating introduce the deepest cuts we've ever seen in
• 3:41
  S2: personal income tax and the biggest cut in company tax.
• 3:44
  S2: So when he introduced it, one of the most important
• 3:47
  S2: elements was that he didn't want to tax the increase
• 3:51
  S2: in the value of an asset that is actually just
• 3:54
  S2: moving in line with inflation. So just because something goes
• 3:58
  S2: up in line with inflation doesn't mean you're making your
• 4:01
  S2: way with money. It's the excess that you're trying to tax.
• 4:04
  S2: That's the capital gain. So he set up a system
• 4:07
  S2: whereby you had to calculate, let's say you bought your
• 4:10
  S2: your little property for $1 million as a landlord. And
• 4:14
  S2: ten years later you sold it for 1.75. Um, you
• 4:19
  S2: would track how much inflation had gone up over that period.
• 4:23
  S2: So between like we're using 1.1 and 1.75 million, that
• 4:28
  S2: is the movement in the Sydney median house price between
• 4:32
  S2: 2015 and 2025. During that period, inflation went up by 33%.
• 4:38
  S2: So under Keating's system, you'd say, right, it wasn't really
• 4:41
  S2: $1 million. That's the starting point. It was 1.33 million,
• 4:46
  S2: which is 33% of $1 million. On top of that,
• 4:50
  S2: so you would tax the difference between 1.33 three and 1.75.
• 4:56
  S2: So in 1999, Peter Costello comes along and he has
• 4:59
  S2: had a review into the business taxation system. And one
• 5:03
  S2: of the most curious elements of that report was a
• 5:06
  S2: recommendation to change capital gains tax on two elements. One,
• 5:11
  S2: it was a little bit clunky by having to calculate
• 5:14
  S2: inflation over a set period of time. Two this review said, look,
• 5:20
  S2: we want people to invest money into the Australian share market.
• 5:24
  S2: We want them buying shares, supporting Australian companies. So if
• 5:28
  S2: we change the capital gains tax calculation from this inflation
• 5:32
  S2: system to whereby we will just whatever capital gain you
• 5:36
  S2: make for tax purposes, we will cut that in half
• 5:40
  S2: and then tax you on that remaining 50%. The theory
• 5:44
  S2: being this will help the share market. Oh my God,
• 5:47
  S2: was that wrong? Utterly wrong. There were a few charities
• 5:50
  S2: actually at the time said this won't work. It'll go
• 5:52
  S2: into property. Lo and behold, they were absolutely correct. Australia
• 5:56
  S2: went from a nation of positively geared landlords to one
• 6:01
  S2: of a majority of negatively geared landlords, because people went right.
• 6:06
  S2: They took the punt. I'll borrow more money. I'll buy
• 6:10
  S2: a property. The capital gain I make on on holding
• 6:13
  S2: that for a few years. And because it's so concessional taxed,
• 6:17
  S2: I'll make money that way. That's what's been going on
• 6:21
  S2: since 1999. Then there's been a long argument from 2010
• 6:31
  S2: when Ken Henry's review of the tax system came out.
• 6:34
  S2: He actually came up and said, so this is a
• 6:37
  S2: guy who was in Treasury when Costello made the change,
• 6:40
  S2: said it's proving too generous and it is distorting elements
• 6:45
  S2: of the property market. So probably since 2010, there has
• 6:49
  S2: been this debate going about how the capital gains tax
• 6:53
  S2: system of Costello works with the property market, works with
• 6:57
  S2: negative gearing, works with housing construction, works with the tax system.
• 7:02
  S2: And we've got to this point whereby on May 12th,
• 7:06
  S2: everybody is now expecting that there will be a change
• 7:09
  S2: to be announced by Jim Chalmers.
• 7:12
  S1: But specifically, the change that we're expecting he is going
• 7:15
  S1: to announce is a return to this Paul Keating era, CGT.
• 7:19
  S1: Is that right?
• 7:20
  S2: There is a number of different alternatives that you can examine.
• 7:24
  S2: He has effectively narrowed it down to two, which is
• 7:28
  S2: leaning towards going back to Keating or taking the discount
• 7:32
  S2: from 50% to 30%. Now we'll come back to our
• 7:36
  S2: house in Sydney, the one the 1.75 million under the
• 7:40
  S2: under the Costello system, you would pay marginal tax rate
• 7:45
  S2: on $375,000, which is 50% of the 750 000 profit
• 7:51
  S2: that you've made on the sale of the property. Under
• 7:53
  S2: the Keating system, you would pay tax your marginal rate
• 7:57
  S2: on about 420 000. So you can see that there's
• 8:02
  S2: an increase in the amount of tax that you've paid.
• 8:04
  S2: But that's one element. The other is that it is
• 8:08
  S2: telling property investors, look, perhaps you should be looking at
• 8:12
  S2: something else because we know like property investors, like the
• 8:17
  S2: industry says, oh, they are building new homes. Some do.
• 8:22
  S2: More than 80% are just buying existing dwellings where they
• 8:26
  S2: are largely competing with first home buyers or second time buyers.
• 8:30
  S2: That's been the problem. That is clearly evident in everyone
• 8:33
  S2: who's looked at what's gone on in in the property
• 8:37
  S2: market since the CGT concession came in.
• 8:40
  S1: Okay. And let's just do a little bit of a
• 8:42
  S1: deeper dive, I guess, about how this change that you
• 8:44
  S1: think Jim Chalmers is going to make, how this will
• 8:46
  S1: impact investors. So is the idea that, okay, it's going
• 8:49
  S1: to look less appealing for them to invest in secondary properties. Therefore,
• 8:54
  S1: we're going to push them to spend their money where like,
• 8:56
  S1: is that the idea they want to push investors to
• 8:58
  S1: spend money in other areas? And if so, where might
• 9:01
  S1: this push investors to spend? Or is that not the idea?
• 9:04
  S2: Well, that is that would be what a bit of happenstance. Okay,
• 9:07
  S2: now some people might say, why wouldn't you want investors
• 9:10
  S2: investing in housing? As I've said, most of the time
• 9:13
  S2: they're just buying existing dwellings. So this is where you
• 9:17
  S2: get into an alternative, which is you change. You could
• 9:20
  S2: actually keep the CGT system as it is, but limit
• 9:24
  S2: it to building established homes. Now, anyone in the real
• 9:28
  S2: estate market knows that building a new home, the capital
• 9:31
  S2: gain that you're going to get, is actually going to
• 9:33
  S2: take a lot longer, that you will need much more
• 9:37
  S2: time to get a substantial capital gain, as opposed to
• 9:40
  S2: buying an inner city property in Sydney or Melbourne or
• 9:45
  S2: Brisbane and Perth. and you can see huge capital gains
• 9:50
  S2: in a very short period of time, because normally these
• 9:53
  S2: really expensive dwellings are in sought after places. That's part
• 9:57
  S2: of the problem there.
• 10:02
  S1: After the break.
• 10:03
  S2: We had two wound up, two fascinated and invested far
• 10:07
  S2: too much in our housing sector compared to everything else
• 10:10
  S2: that you could sink money into and have a quality life.
• 10:22
  S1: Okay, well, I want to ask you about how this
• 10:24
  S1: change that we think Jim Chalmers is going to make
• 10:27
  S1: to the capital gains tax, how that might affect the
• 10:30
  S1: rest of us, us non investors, uh, those of us
• 10:33
  S1: I joked with you beforehand who are just trying to
• 10:35
  S1: pay our rent, our mortgage, trying to get through each
• 10:38
  S1: day with our dignity intact, let alone making bank off
• 10:41
  S1: of extra investments. So would any of this affect us?
• 10:44
  S1: You know, these investors, they'd be paying more tax on
• 10:46
  S1: their capital gains. If this change is brought in as
• 10:49
  S1: we think it will be. So will the rest of
• 10:51
  S1: us possibly benefit from this additional tax paid? Like, will
• 10:54
  S1: it maybe go to government programs that benefit us? Like
• 10:57
  S1: what's going to happen with this extra moolah? Shane.
• 11:00
  S2: Well, it may not be a lot of moolah. And
• 11:03
  S2: this is it like, especially if you don't, if you
• 11:06
  S2: grandfather people with existing dwellings and go forward, you're not
• 11:10
  S2: going to get a huge amount of income quickly. So
• 11:14
  S2: the argument that this is all about a cash grab
• 11:19
  S2: doesn't hold up quite at this moment, but we don't
• 11:22
  S2: know the full details as yet. But the more important
• 11:25
  S2: thing is you are sending a signal to property investors saying, look,
• 11:30
  S2: and this comes back to where Peter Costello was in 1999, saying,
• 11:35
  S2: because ultimately investing, investing in inverted commas in property, property,
• 11:40
  S2: new homes are not productive elements. They deliver you shelter.
• 11:46
  S2: A place to hang your photos of Kate Bush on
• 11:48
  S2: the wall. But apart from that, they aren't overly productive elements.
• 11:54
  S2: You want money to be going into. And this is
• 11:56
  S2: where Costello comes in. Putting it into, say, businesses that
• 11:59
  S2: want to expand and develop their own new operations, which
• 12:04
  S2: are going to employ people, make the country wealthier. So
• 12:08
  S2: you are coming back to and Costello was absolutely right
• 12:12
  S2: in that thinking. This is what we want. It was
• 12:15
  S2: how we went about it fell apart fairly quickly. So
• 12:18
  S2: that's that's remember, apart from, say, taxes and savings. Chalmers
• 12:23
  S2: has said he wants to boost productivity in the economy.
• 12:27
  S2: So at the margins a change around CGT may help.
• 12:32
  S1: Okay. So changes to the capital gains tax though this
• 12:35
  S1: is the hill on which other politicians have died. Right.
• 12:38
  S1: So tell us how this arguably ended former labor leader
• 12:41
  S1: Bill Shorten's political career. What he proposed in terms of
• 12:46
  S1: his change is that he wanted to. The capital gains
• 12:48
  S1: tax and just how Chalmers at least the reform that
• 12:51
  S1: he's leaning towards, how it compares.
• 12:54
  S2: Yeah. So shorten went to the 2019 election saying he
• 12:58
  S2: would halve the concessions. He wanted to take the concession
• 13:00
  S2: down to 25%, and he also had changes around negative gearing.
• 13:04
  S2: And we haven't like this is still in the ether.
• 13:07
  S2: Whether the government makes changes like limits negative gearing to
• 13:12
  S2: just two, 1 or 2 properties, and this is where
• 13:16
  S2: 80 to 90% of investors have 1 or 2 properties.
• 13:19
  S2: Australia has too many landlords. It does because because our
• 13:24
  S2: tax system encourages you to to take on holding property.
• 13:29
  S2: The vast majority of people only have one landlord. Now
• 13:33
  S2: I've had landlords over the years. The bigger the pool
• 13:37
  S2: of individuals, the bigger the chance you have of someone
• 13:41
  S2: being unpleasant or not caring, or not looking after the
• 13:44
  S2: property like we are. We stand out in the rest
• 13:48
  S2: of the world in terms of the proportion of landlords
• 13:51
  S2: to the overall population. It's it is weird and it's
• 13:53
  S2: because of our tax system.
• 13:55
  S1: Okay. But this, this reform that we think Jim Chalmers
• 13:58
  S1: will likely announce next month when he hands down the
• 14:01
  S1: federal budget to capital gains tax. Is it going to
• 14:03
  S1: make much of a difference? Because I'm just wondering like,
• 14:05
  S1: how minor is it? It's less generous, I guess, to
• 14:08
  S1: investors than what Costello proposed. So it's obviously going back
• 14:13
  S1: to the Paul Keating era. Is it going to make
• 14:15
  S1: any difference?
• 14:16
  S2: So there has been some modeling around this. So at
• 14:20
  S2: the one end is the say, the housing sector, which
• 14:24
  S2: has an absolute vested interest in this whole case, saying
• 14:27
  S2: you'll have end up with 33,000 fewer homes over about
• 14:32
  S2: 4 or 5 years. We're supposed to be building 1.2
• 14:35
  S2: million over that period. So a reduction is not what
• 14:39
  S2: you want. But 33,000 is not. It is not the end.
• 14:43
  S2: It's not disaster and terrible. The Grattan Institute reckons about
• 14:48
  S2: 10,000 fewer homes over five years. That is absolutely minuscule.
• 14:54
  S2: And they estimate maybe you knock 1% off house prices.
• 15:00
  S2: So back to our 1.75 million Sydney median house. You've
• 15:07
  S2: taken $16,000 off it. Something like that. So it's still
• 15:10
  S2: $1.59 million, which I still think is absolutely stupid. But
• 15:15
  S2: that's the going median price for a house in Sydney.
• 15:18
  S2: So it is ultimately, I know that people get really
• 15:22
  S2: fixated and excited by tax. Your prime example.
• 15:25
  S1: You know I do you know I do you do.
• 15:27
  S2: But at the end of the day, the number of
• 15:31
  S2: homes we build far, far more important where we build them.
• 15:36
  S2: The planning laws. Don't get me started on NIMBYs and NIMBYs.
• 15:40
  S2: Interest rates. They are the key determinants of how many
• 15:44
  S2: homes you build. Then you've got population growth. So the
• 15:47
  S2: people arguing about immigration, that's another issue. Whether we have enough,
• 15:51
  S2: enough skilled workers to build the homes that people want.
• 15:55
  S2: All these factors are really like, I actually would rank
• 15:59
  S2: them higher than the tax system. And one particular tax
• 16:03
  S2: like CGT.
• 16:04
  S1: Okay. Well, I guess just to wrap up then, Shane,
• 16:06
  S1: like what's public opinion, uh, at with regards to the
• 16:10
  S1: capital gains tax, you know, are we overwhelmingly for it
• 16:13
  S1: or not? Do we think it's going to bring about
• 16:15
  S1: great change. Might we be disappointed when this eventually does come.
• 16:18
  S1: Or do most people just not think about it at all?
• 16:21
  S2: Are people think about it. The commentary we've had this
• 16:25
  S2: week on the story, that story, uh, tells you that, um,
• 16:29
  S2: we like, we had a resolve poll this week, which
• 16:32
  S2: shows of a range of tax arrangements or tax changes
• 16:38
  S2: double the number of people support reducing the concession on
• 16:42
  S2: capital gains tax as opposed it. I think it's 42%
• 16:45
  S2: say yes, 19% oppose, which is that's a small number
• 16:51
  S2: in opposition to something. Um, and they haven't, but they
• 16:55
  S2: haven't seen what else it means. So if Chalmers announces
• 16:58
  S2: changes to negative gearing or a big increase in incentives
• 17:03
  S2: to build more homes which may be funded by this,
• 17:06
  S2: then you could see you you're looking at whole tax package.
• 17:08
  S2: And I think that's where you end up with with
• 17:10
  S2: Chalmers looking at a a not just if he just
• 17:14
  S2: does CGT and negative gearing, then you'd be wondering this
• 17:18
  S2: isn't really tax reform. It's tax. It's tax adjacent tax
• 17:21
  S2: reform adjacent.
• 17:22
  S1: But do you think that it is going to be
• 17:24
  S1: CGT plus the other changes. And assuming that is the
• 17:28
  S1: case will this actually at the end of the day
• 17:31
  S1: help younger Australians to finally you know get that Australian dream.
• 17:35
  S1: Actually buy into getting a home.
• 17:39
  S2: Do you want the glass half full or glass half empty?
• 17:42
  S3: I want, I want, I want both, I want what
• 17:44
  S3: you really.
• 17:44
  S1: Think because you're bringing decades of experience to this. And
• 17:46
  S1: this is what the listeners and myself and all of
• 17:48
  S1: us want to know.
• 17:49
  S2: You would hope it does something, but you still want
• 17:53
  S2: to see everything else. The housing. And this is where
• 17:57
  S2: I'm glass half empty that Australia's Australia's economy is the
• 18:02
  S2: property market is our Achilles heel. We are too wound up,
• 18:06
  S2: too fascinated and invested far too much in our housing
• 18:09
  S2: sector compared to everything else that you could sink money
• 18:12
  S2: into and have a quality life. To think that the
• 18:18
  S2: median house price is more than $1 million in Adelaide,
• 18:22
  S2: in Canberra, in Brisbane, in Sydney, in Perth. And it's
• 18:27
  S2: almost there in in Melbourne you go. We have stuffed up.
• 18:33
  S2: We have stuffed up the economy. We've stuffed up the
• 18:35
  S2: opportunities for our young, for our next generation of people
• 18:39
  S2: to get into the housing sector.
• 18:40
  S1: Okay, so that's post 7 p.m., Shane. Right. When the
• 18:43
  S1: when the mood's gone down and you're feeling a bit
• 18:45
  S1: a bit grim about stuff.
• 18:46
  S2: Let me get let me grab a glass of red.
• 18:48
  S4: Yeah, yeah yeah, yeah. But but though these.
• 18:51
  S1: Changes are small and given everything you've said, are these
• 18:54
  S1: changes the kind of thing that like in a decade,
• 18:56
  S1: in 15 years, in 20 years, they will be moving
• 18:59
  S1: things in the right direction.
• 19:00
  S2: I guess I'll cross my fingers, cross my toes. I'll
• 19:06
  S2: find a rabbit's foot, uh, maybe a four leaf clover.
• 19:10
  S1: Okay.
• 19:10
  S2: And say a few prayers.
• 19:12
  S4: Okay.
• 19:13
  S2: That's where we get to.
• 19:14
  S1: Okay. Got you. Well, thanks, Shane, as always, for your
• 19:18
  S1: expertise on this.
• 19:20
  S2: It's always a pleasure talking to you, Sammy.
• 19:32
  S1: In other news, today, the new United States submarine boss
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  S1: and construction of Australia's submarines are lagging well behind. The
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  S1: tax office is introducing new changes that mean Australians could
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  S1: and are good food team has carried out the ultimate
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  S1: supermarket Anzac biscuit taste test. Find out which bikies come
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  S1: out on top on our websites SM or the age.com.au.
• 20:07
  S1: Today's episode was produced by Kai Wong. Our executive producer
• 20:11
  S1: is Tammy Mills, and our podcasts are overseen by Lisa
• 20:14
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• 20:21
  S1: Apple or Spotify. Thanks for listening.