Comments from Greg Travers
Tax Director and Head of Tax Focus Group
William Buck Chartered Accountants and Advisors
While the Government feels it has taken a scalpel to the housing affordability crisis, the reality is it’s more of a feather. They have danced around the edges and failed to address the big issues.
It might sound good in a Budget speech, but the measures are unlikely to be a real fix to our housing challenges. William Buck takes a look at the key issues impacting housing affordability.
Foreign investment in residential real estate
The Government announced its intentions to apply even tougher rules on the purchase of residential properties by non-residents, including tighter compliance, an annual foreign investment levy for those that fail to occupy or lease the purchased property for at least six months each year and restricting the extent that new developments can be sold to overseas investors.
However, just as it is now, enforceability will be the biggest challenge as many of the rules are circumvented simply by having an Australian resident family member or associate buy the property on behalf of the non-resident. So it is questionable how effective these measures will be in improving the supply of housing.
First Home Super Savers Scheme
The First Home Super Savers Scheme is intended to offer the tax advantages of superannuation to help first home buyers save for a deposit. However, in a best case, a couple using this scheme will save an extra $12,000 over three years. That’s about 1% to 1.5% of the median Sydney and Melbourne property price.
And there are downsides. If a single individual who puts away money into their superannuation under this scheme then moves into a property with a partner who has already bought a house – they can lose their ability to access the scheme. This would then mean their money is essentially stuck in their super fund. In this case, they may have been better to have kept their savings outside of super, and used to contribute to the mortgage of their partner.
The First Home Saver Accounts were a previous attempt to provide a concessionally taxed scheme to assist people save for their first home. They didn’t work. It is very debatable if the tax saving under this new plan is enough to motivate people to access the scheme, given the potential downside.
Capital Gains Tax
There were several rationales behind the introduction of the CGT 50% discount. A key one of these was to encourage investment. Do we still want to be encouraging investment into residential property or should the Government be looking at reform in this area?
The concessional taxation of capital gains, when combined with the benefits of negative gearing, is one of the key tax motivations behind investment into residential property. Changing the laws to limit negative gearing could be complex and may not be the answer to housing affordability. Making changes to how the CGT 50% discount applies to residential property may be a better approach.
There are two fundamental challenges with encouraging investment in affordable housing: the lower rental income and the lower capital growth.
The Government should be looking to offer investors real tax concessions to encourage them to invest in affordable housing. Increasing the capital gains tax discount from 50 to 60 per cent for investments in affordable housing is a good start, but in the long term probably not enough.
To really encourage mum and dad investors to hold affordable housing and accept a lower rental return, make the capital gain tax exempt if they hold the property for at least 10 years. That is bold, and would start to change people’s investment decisions.
If the Government can solve this challenge, it would really start to make a difference.