Markets 
It’s an all too familiar Sydney story: a young couple have their hearts set on buying their first home but are outbid by a property investor backed by overly generous tax benefits.
The capital gains tax (CGT) discount – which exempts individuals and small unincorporated businesses from paying tax on 50 per cent of capital gains on an investment held for more than a year – was designed to boost incentives to save and invest.
But two decades of evidence shows that the generous discount, when used along with negative gearing, has overcompensated property investors.
The e61 Institute think tank said in a recent submission to parliament that the CGT discount is “inequitable and inefficient” and distorts the way Australians “work, save, invest and finance their investments”.
The Grattan Institute, another independent think tank, told the same parliamentary inquiry that the combination of the CGT discount and negative gearing was encouraging “debt-financed and speculative” housing investments and undermining the integrity of Australia’s tax system by “creating opportunities for artificial transactions to reduce income tax”.
Like most tax concessions, the CGT discount favours the wealthy; the richest one fifth of Australians receive nearly 90 per cent of the benefit of the CGT discount.
Perhaps most concerning is the way these lavish tax breaks for investors have made it more difficult for younger Australians to buy a first home, especially those on low and medium incomes.
“The interaction of a 50 per cent CGT discount with negative gearing reduces home-ownership,” the Grattan Institute warned.
Herald economics correspondent Shane Wright last week revealed how Australia’s investor rental market has become the domain of people in their 60s and 70s, since the current CGT discount was introduced by the Howard government in the late 1990s.
Wright’s report, based on Tax Office data, detailed how older Australians have increased their ownership of rental properties by up to 1500 per cent in the past two decades, while many younger Australians have been priced out of the investment market.
But change now seems imminent; the Albanese government is set to announce a significant reduction to the CGT discount and tighter negative gearing rules in Tuesday’s federal budget.
As recently as last month, Prime Minister Anthony Albanese ruled out these changes. He did the same during the election campaign. It is unclear when the government changed its position, but if the reforms had been under consideration when journalists asked those questions, he should have been upfront; political expediency should never override transparency.
However, given the acute housing challenges facing Australia, the taxation of housing investment must be improved, and the Herald welcomes the prospect of sensible reform.
A recent study found that halving the current CGT discount, and abolishing deductions for negative gearing losses, would raise the rate of home-ownership by three percentage points because those aspiring to buy a home would be bidding against fewer investors.
The proposed tax changes will not be a silver bullet that quickly improves housing affordability. Federal and state governments must still do much more to boost the overall supply of houses, including planning reforms that allow additional medium- and high-density dwellings in well-located parts of our capital cities.
Changes to the CGT discount and negative gearing will probably deliver significant budget savings. The federal government should consider using the additional tax revenue to lift housing supply.
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