Scary alert! Like negative gearing? Buy shares!
· Michael West
Michael Pascoe thought no budget had had a bigger build up than this one. As it turns out …
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In summary, this Chalmers budget is wildly optimistic on housing investment, kind to small business, incrementally better on productivity issues, gives the Opposition not much to rage about, picks the low-hanging fruit on taxing discretionary trusts more fairly, delivers a new acronym (WATO! The Working Australians Tax Offset) and, despite all the headlines, does little to help our housing crisis.
For all the noise around capital gains tax and negative gearing, the government claims the changes will only “help around 75,000 homeowners into the market over the next decade” (my emphasis).
Ditto the announced-prior $2 billion spread over four years for infrastructure, the government says it will promote “up to” 65,000 extra homes over a decade.
So, on average, we’re hoping for just 14,000 extra homes a year. In the context of our housing shortfall and how far behind the government is on its 1.2 million new homes target, it is almost marginal.
Negative gearing lives!
And the message for retail investors who have come to love the concept of negative gearing is: Buy shares! Buy commercial property! Buy off the plan! Buy a new house! Buy through your superannuation fund! Negative gearing lives! Heck, on new housing you can keep the existing capital gains tax regime if you prefer it.
Yes, the negative gearing change only applies to existing housing purchased from July 1, 2027.
Not such a big deal, is it?
Along with the CGT reform, the policy aim is to deter retail investors from buying existing housing (as they overwhelmingly do), reducing the competition for owner-occupiers and developers who want to knock down existing housing to build higher density.
And even if you insist on buying an existing house – maybe a holiday home you eventually intend to retire to – Gentleman Jim will let you carry forward any property losses in excess of rental income to use when, in time, you’ve reduced the mortgage and the rent has risen to more than cover interest.
In marked contrast to the Reserve Bank’s pessimistic forecasts last week, Treasury reckons the tax changes will cause a sharp increase in dwelling investment. The RBA, without knowledge of the changes, guessed dwelling investment would shrink by 1.1 per cent in 2027-28.
Treasury says it will rise by 3.5 per cent. Good luck with that.
Landlord subsidies
What should be a Budget headline is that we are spending $7 billion this financial year and $7.4 billion in the new financial year on Commonwealth Rent Assistance – effectively subsidising landlords for the 1.4 million renters who otherwise couldn’t pay the asking price.
That is the cost of governments collectively walking away from public housing over the past three decades, roughly halving the percentage of homes that are available for social housing.
This budget, like its predecessors, is doing nothing to fundamentally change that failure.
It is barely maintaining the status quo.
But the MSM usual suspects don’t care about that. With the negative gearing change turning out to be a bit of a damp squib, the Opposition both in Parliament and the media will be left to rail about the inflationary impact of a deficit and that some people a fair way in the future will pay more tax on their capital gains.
Scaremongering just that
The later is an equity measure. It’s become the norm for rich people to become richer because most of their income comes lightly-taxed capital gains. Read Harry’s piece.
No, there wasn’t mass emigration of our entrepreneurs to New Zealand and Singapore during the 14 years the CGT discount was actually based on the inflation rate. And Jim Chalmers says the alleged tricky bit for the minority of wildly successful startups is open to “further consultation”.
In a calmly rational AFR article as opposed to the paper’s recent opinion columns, economist Christian Gillitzer showed that even for someone on the top marginal tax rate with an investment appreciating by 9 per cent a year (i.e. a good one), yes, more tax will be paid but capital gains will still be treated more favourably than ordinary income. For investments averaging annual appreciation of 5 per cent, the difference with the current system is marginal.
And the deficit?
As for the deficit, yes, if we crashed government spending to fast track to a surplus, inflation would be lower. A recession will do that for you.
Basically, maintaining public sector spending at its present share of the economy will help maintain our weak economic growth with a marginal impact on inflation. Of course government needs to spend smarter, but the quantum isn’t scary on the OECD scale.
Despite the budget’s business investment incentives, Treasury reckons total business investment growth will fall from 4 per cent this financial year to 2.5 per cent next financial year and 2 per cent in 2027-28. Not flash.
Three random observations as I run out of time:
*The Treasurer is seeking a headline for $59.4 million going to community housing providers specifically for 16 to 24 year-olds in danger of homelessness. That won’t go very far and compares with an extra $110.0 million “to support housing and related services for personnel deployed to Submarine Rotational Force – West” i.e.
housing for the American submarine base in WA.
*Always concentrate on what politicians do rather than what they say. For all the talk of fighting terrorism and drugs and such, spending on “public order and safety” is slated to be cut by 11 per cent over the next four years from this budget’s $9.7 billion. Border protection spending drops from $2.1 billion in 2026-27 to $1.7 billion in 29-30. AI to do all?
*I’m writing in the Budget lock-up having to guess what the fishwrappers’ inevitable lists of winners and losers will be.
The biggest winners should be accountants who charge by the hour.
Any tax change makes them busy and the CGT indexation changes will help keep them busy into the future. What’s more, the raft of R&D and small business measures – loss refundability for start-ups, loss carry back, the instant asset write-off – will mean AI isn’t replacing accountants just yet.