Malcolm Turnbull and Scott Morrison are in the unenviable position of criticising Labor policy while also promising to look at excesses in the system

This article is more than 4 years old

This article is more than 4 years old

The ultimate test for a parent is surely whether to vote for your own self-interest or for the interests of your children.

At 50, I am in between the baby boomers and generation X – the two generations that became expert at buying the renovator’s delight, doing a bit of a fix-up and selling to take advantage of the rising property market.



Some of my age group profited from the Howard government tax policy that sparked the property boom. Those who didn’t were stuck with high rents and rising house prices.

Labor now hopes to change that by promising to end negative gearing and make people pay more capital gains tax, saving the budget $32bn over a decade.

Malcolm Turnbull has called the policy “a very significant distortion of the housing market”.

But if something is bent, is it a distortion to straighten out the kinks?

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Consider the history.



In 1985 the then treasurer, Paul Keating, introduced the capital gains tax under which individuals would pay the same capital gains tax at their marginal rate (while allowing for inflation).



In 1999 John Howard and Peter Costello halved capital gains as part of a wider tax package after the Ralph business tax review.



At the time Costello said: “This will put us back in the ballpark when it comes to capital gains.” He wanted to encourage investment culture in Australia.



The journalist George Megalogenis underlined the importance of the political decision facing Labor.

“If Labor does offer bipartisanship, it would confirm an important sea change in the Australian economy – where workers accept a lower tax on capital than they do for wages,” Megalogenis wrote in 1999.

Under Kim Beazley, Labor supported the change – if the Coalition agreed to treat tax trusts in the same way as companies. (Howard agreed but later welched on the deal.)

At the time, the former tax commissioner Trevor Boucher warned of the dangers to the integrity of the system, describing the capital gains tax measure as “fiscal vandalism” that would entice tax avoiders “like bees to a honey pot”.

By providing the CGT concession carrot, combined with the capacity to avoid tax through negative gearing year on year, the Howard government really did change the investment culture.

This is what happened:

It looks like a distortion, doesn’t it?



Property investment became a national sport that has led all the way to The Block.

Pretty much straight away, landlords started making a loss. They could now afford to make a loss because they were avoiding tax and they were punting on the rising real estate market, which would eventually pay off down the track when the property was sold.

The number of landlords grew from 1.3 million in 1998-99 to just under 2 million in 2013. Housing markets got tighter. Rents got higher.

In 2003, the Reserve Bank of Australia tried to ring the bell in a submission to the Productivity Commission inquiry into first home ownership. The RBA said housing affordability was at issue due to a number of factors, including greater access to credit, lower interest rates and investor demand.

The RBA said investors were keen because of their “desire” to earn capital gains, the ease of obtaining finance and the “taxation treatment of investments in residential property”.

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The RBA, careful as always, noted the Productivity Commission might like to look at tax treatment of investor properties. No one much listened.

In 2014, David Murray’s financial system inquiry found “distortions” in the tax system such as negative gearing should be reviewed in the government’s tax white paper process. Nothing was done. The process was effectively ditched when Turnbull said the upcoming budget would “become” the white paper.

And here we are, in 2016 with Sydney claiming the dubious distinction as the second least affordable market after Hong Kong.

Labor has claiming that their policy will go a way to fixing it. The treasurer, Scott Morrison, is screaming at anyone who will listen that the policy will hit the “mums and dads” while claiming two-thirds of people using negative gearing now have a taxable income of $80,000 or less.

The noted economist Saul Eslake, formerly chief economist for ANZ and for the Australian arm of Bank of America Merrill Lynch, has long been warning about the issue and his frustration at the rhetoric is palpable.



“[Negative gearing] is a pretty large subsidy from people who are working and saving to people who are borrowing and speculating ,” Eslake says.

“According to the latest available ABS data, which is for 2013-14, 72% of investment property assets are owned by, and 52% of investment property debt is owed by, households in the top 20% (ie the richest one-fifth) of the household wealth distribution.

“So the argument that negative gearing is just about cops, nurses and teachers trying to ‘get ahead’ is just nonsense – as is all the stuff about ‘what happened’ when the Hawke government temporarily abolished negative gearing in 1985-87.



“Indeed, I often describe that as an example of what Joseph Goebbels is supposed to have said, that if you tell a lie often enough and it’s big enough, it will eventually become accepted as the ‘truth’.”

Labor says existing investors will be exempt from any new arrangements under a grandfathering agreement.

Eslake says while he hates the idea of “grandfathering” changes on the grounds it “privileges people on the basis of what amounts to birth order”, he rates the Labor policy as impressive.

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“One can’t let the perfect be the enemy of the good,” he says. “For a party in opposition, and hoping to form a government, this is pretty impressive stuff.”

But he qualifies it: “If the government really does go ahead with the rumoured alternative of limiting the number of ‘negatively geared’ properties a taxpayer can claim for ... then it might be hard to determine which side has the ‘better’ policy.”

Eslake also dismisses suggestions that any change will lead to a freefall in property prices.

“There is no logical reason that property prices will go into ‘freefall’ as a result of what Labor is proposing – particularly since Labor is proposing to ‘grandfather’ existing negatively geared investments.

“Existing investors will keep their snouts in the trough so they have no reason to sell ... indeed, they might hang on to their properties for longer than otherwise in order to prolong their privileged tax treatment.



“All that may happen is that prices of established dwellings go up less quickly than they would otherwise – and I think that would be an unmitigated good thing.”

So now a line of economists, think-tanks, community groups and even Tony Abbott’s chair of the audit commission, Tony Shepherd, are on the record as calling for change to negative gearing and capital gains tax concessions. (Last year Shepherd told the AFR: “I can’t see any reason to treat capital gains any different from income gains.”)

All of which leaves Turnbull and Morrison in the unenviable position of criticising Labor policy while also promising to look at excesses in the system.

On the bright side, they have the political cover to become known as the fathers of major tax reform on negative gearing and capital gains tax concessions.

Otherwise the Coalition may be forcing voters to choose between themselves and their children. And for those generations who have been so focused on their children as to be called helicopter parents, who do you think we will choose?