A Major Tax Change Is On The Cards (And Yes, It Actually Affects You)

Written by Dale Fenwick - Partner.

You may have heard some vague whispers about a ‘tax change’, ‘CGT’ or ‘50% discount’ and filed it in the boring accounting stuff basket (and probably fair).

But I promise, whether you own an investment property, rent, or are looking to get into your first place, this will affect you.

Because this isn’t just about tax. It’s about how taxes affect real life house prices, rent and perpetuates the cycle of intergenerational wealth.

How did we get here?

In 1999 (stick with me here), the government brought in a rule that said – if you hold an investment property for longer than 12 months and sell it for a profit, only half of your profit will get taxed.

So essentially, if someone makes a $500k gain on an investment property, only $250k is added to their taxable income (and taxed at their marginal rates).

Over time, this then changed how Australians invested and helped fuel a common strategy:

1. Buy an investment property

2. Be ok with losing money each week (negative gearing) to get a tax benefit

3. Rely on property prices going up

4. Get a further tax benefit when you sell

When you combine the tax benefits with the belief (and reality) that property prices always go up, investors in theory can justify paying more for a property than someone just wants to live there.

In recent years, this has been turbocharged thanks to social media spruikers pushing aggressive strategies that are underpinned by these tax perks.

So… what is changing?

This CGT discount is one of the biggest tax concessions in Australia – and accordingly, costs the budget a lot of money. It also tends to benefit people who already own assets, creating more of a wealth divide (particularly intergenerational wealth).

After Labor’s massive election win, the government has been signalling that it wants to make some meaningful reform decisions and word is that the CGT discount is on the chopping block.

 The thinking being, if you can reduce the tax advantages for property investors, it will take some heat out of property prices (and rents) – even if it is only at the edges. It won’t be a silver bullet, but it is just one lever to pull.

The devil is in the details…

Whether a change ends up being helpful or harmful will really come down to the details.

Things like:

• Do existing owners get ‘grandfathered’ (i.e. any changes are only for new owners or after a certain timeframe)? This avoids any panic selling or dramatic market shocks.

• Is the discount reduced, or scrapped entirely? Scrapping it completely may be blunt and unfair, because people would instead pay tax on big lump sum gains at higher tax rates.

• Will the discount be time based (i.e. the longer you hold a property, the more of a discount)? This would reward long term holders (more stable rental properties) and discourage house flipping (which inherently drives prices up).

• Does it apply to all assets, or just property? This matters for investors and small business owners – and it’ll shape whether investor money actually moves away from property, or just gets reshuffled within it.

There’s also a risk that even well intended changes could backfire. If you make it more painful for people to sell, investors may just hold properties for longer to avoid paying tax. Fewer homes for sale almost always leads to higher prices. That is why it’s important to strike the right balance with this stuff.

So will this magically fix housing? Well, probably not…

A well-designed reform (paired with supply changes) could make the system fairer and take some heat out of the market.

A poorly designed reform could add uncertainty and make things worse.

So any reform shouldn’t be about being ‘anti-investor’ or ‘anti-property’, it’s about whether the tax system (and benefits) promote investor money into productive, long-term and affordable housing – or into a bidding war on existing homes that will only drive prices up further.

What do I do about it (for now)?

Well, TBH… nothing…

This is all just speculation, and a lot can happen in the next three months politically that may completely change the game here.

Wait for the actual policy to come out before making any drastic decisions based on a few headlines.

We’ll keep an eye on the detail if and when it comes out and of course, we’ll translate it into normal language for you when it does.

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This is general advice only and does not take into account your financial circumstances, needs and objectives. Before making any decision based on this document, you should assess your own circumstances or seek advice from your financial adviser and seek tax advice from your accountant.