Australia Institute says a cut-off point of $2m would affect fewer than 1% of owner-occupied sales and raise $12bn over four years

This article is more than 4 years old

This article is more than 4 years old

A proposal to scale back capital gains tax breaks for houses worth more than $2m would boost the budget by nearly $12bn over four years while affecting fewer than 1% of properties, new analysis suggests.

Malcolm Turnbull: 'burden of tax is best borne by those able to pay it' Read more

The idea has been advanced by the Australia Institute, a progressive thinktank, which says the existing exemptions overwhelmingly favour the wealthy and changes should be part of the Turnbull government’s forthcoming tax white paper.

People who sell their main residence are exempt from paying capital gains tax. The Treasury estimates this concession will cost the budget about $46bn this financial year.

The tax break should be examined because it costs more than the federal government spends on defence ($26.3bn), education ($31.9bn) or Medicare ($21.1bn), according to a report by the institute’s senior economist, Matt Grudnoff.

The report – which is based on modelling by the National Centre for Social and Economic Modelling (Natsem) – suggests the top-fifth of households by income gained about 55% of the benefits of exempting the main residence from capital gains tax. The bottom 30% of households accrued about 5% of the benefits.

“One policy option that would raise revenue, while being less politically contentious [than wholesale changes], would be to restrict the exemption to those selling houses worth less than $2m,” the report says.

“Under this policy those selling a house worth $2m or more would pay capital gains tax but those selling a house worth less than $2m would remain exempt.

“This has the advantage of raising revenue only from those who can most afford it while maintaining the exemption for the vast majority of householders. Last year, fewer than 1% of owner-occupied house sales were for $2m or more.”

The proposal would raise an extra $2.9bn in 2015-16 and $11.8bn over the four-year budget cycle, Natsem modelling suggests. About 56% of the revenue would come from the top 10th of households.

The Australia Institute published the proposal on Monday in a bid to influence the government as it considers options for its tax white paper, which is due to be finalised in the lead-up to this year’s election.

The institute’s executive director, Ben Oquist, said the capital gains tax exemption should be a target for any serious tax reform because it was “costing the budget a fortune”. He said the proposal to remove the exemption for houses above $2m “would be good for the budget, the economy, and equity in Australia”.

The independent senator Nick Xenophon said policy-makers needed to tread carefully because house values differed across the country.

“Obviously any move to remove capital gains tax exemptions [and] to tinker with negative gearing needs to be done very carefully, very cautiously so that you don’t end up putting a massive wet blanket on the housing market around the country,” he said.

Negative gearing reforms could save taxpayers $1bn in two years, says Acoss Read more

“The housing market in Sydney is very different from the housing market in Adelaide or Hobart, for instance, so it needs to be calibrated and done carefully.”

The Housing Industry Association voiced its opposition to the proposal, suggesting it would restrict labour mobility by discouraging people from moving around the country to pursue employment and educational opportunities.

The association’s senior economist Shane Garrett said the idea would also prevent existing housing stock being used for its full potential by deterring older Australians from downsizing.

“In Sydney the median house price is close to $1m now, so the $2m threshold in the context of places like Sydney and Melbourne would actually drag a reasonably large number of households into the net,” he said. The number of properties affected would increase over time if the threshold was not indexed, Garrett added.

The minister for international development and the Pacific, Steven Ciobo, also rejected the idea.

Ciobo told Sky News it would be “passing strange” to penalise an industry – housing – that was proving to be a strong part of the economy. Pressed on the proposal to limit the measure to sales of $2m or more, he said the impact would “filter through”.

Malcolm Turnbull, the prime minister, has said all options are on the table and fairness will be “absolutely critical” to the tax package that is presented to voters.

Labor has been campaigning against the prospect of increasing or broadening the goods and services tax on the basis it would have the biggest impact on low-income households.

The Labor leader, Bill Shorten, has promised to scale back superannuation tax breaks for high-income earners and also raised the prospect of looking at the capital gains tax discount.

But changes to the main residence exemption do not appear to be on Labor’s agenda. A spokesman for the shadow treasurer, Chris Bowen, said the party had “no plans for change or reform of the capital gains tax exemption for the family home”.

Comment has been sought from the offices of the treasurer, Scott Morrison, and the finance minister, Mathias Cormann.