As Sydney house prices hit a 16-year high, AICD chairman Elizabeth Proust said a lack of supply was the biggest problem.

But the "nexus between negative gearing and the existing capital gains tax discount ... is adding to the problem", particularly because interest rates are so low, she said.

The first edition of the institute's key policy document was published in 2016 and called for a 40 per cent CGT discount but did not deal with negative gearing.

The 2017 version urges the government to "examine the unfortunate nexus between the treatment of negative gearing of investment losses on housing and the current discounted capital gains tax arrangements".

Source: Grattan Institute | Research: Fiona Buffini | Interactive: Les Hewitt 6 2 Next Paul Keating introduced a tax on capital gains in 1985. Before then, there was no general tax on capital gains in Australia. Until 1999, real capital gains, adjusted for inflation, were taxed at personal rates. John Howard, advised by businessman John Ralph, abolished indexation of capital gains, in 1999, and replaced it with a concession to tax 50 per cent of capital gains, to encourage greater investment in “innovative, high-growth companies”. 4 A short history of the capital gains tax 1 5 Bob Hawke & Paul Keating in 1985 3 These changes increased the attractiveness of negative gearing and since they started, in 1999, the number of people making losses on residential property has doubled. Previous Net rents have been negative since the introduction of the CGT discount. Most capital gains are earned by those on higher incomes. The 50 per cent discount on nominal capital gains can distort investor behaviour, particularly at a time of rapid capital gains. BCA submission, August 2015 Capital gains tax concessions for assets held longer than a year provide incentives to invest in assets for which anticipated capital gains are a larger component of returns. Reducing these concessions would lead to a more efficient allocation of funding in the economy. David Murray’s financial system review, 2014 I can’t see any reason for treating capital gains any different from income tax. Former BCA president Tony Shepherd, June 2015 It is broadly accepted that the capital gains tax discount is too high Investor interest in property has been especially strong in recent years, no doubt partly encouraged by low interest rates and the prospect of [concessionally taxed] capital gains. RBA assistant governor Luci Ellis, August 2015 Tax changes that might only drag down house prices by 1 or 2 per cent should be put in perspective. House prices have grown annually by an average of 7.3 per cent since 1999. Grattan Institute, 2016 According to the Grattan Institute, reducing the capital gains tax discount to 25 per cent, could raise about $3.7 billion a year, and would have a minor impact on house prices. Source: Grattan Institute Research: Fiona Buffini Interactive: Les Hewitt A short history of the CGT Australian Financial Review Interactive infographic Interactive infographic by Les Hewitt

"These provisions have combined to help substantially boost the after-tax returns from investment in existing residential property, investment in which fails to add to the productive capacity of the nation," it says.

It also sets out a plan for increasing the GST to 15 per cent and applied to a much broader range of activities to produce an extra $273 billion in revenue over four years. A lower CGT discount and abolition of work-related expenses would add $7.1 billion.

From that would come $81.7 billion in compensation for lower income households, $165 billion in personal income tax cuts, $19.7 billion in company tax cuts and $19 billion in incentive payments for the states to remove inefficient taxes such as stamp duties. The result is an estimated $16.4 billion in extra government revenue.


The figures were produced by Deloitte Access Economics, which contributed similar modelling to the tax white paper process.

In early 2016, the Turnbull government ended months of speculation by releasing Treasury modelling showing tax cuts funded by an expanded GST would not drive significant economic growth.

The AICD has been convinced that too many fast-growing parts of the economy are GST-exempt and so is calling for the consumption tax to be applied to fresh food, education, healthcare, childcare and utilities.

"That is hollowing out the tax base," AICD chief economist Stephen Walters said, adding the GST applied to less than half of household spending. "Project forward 10 years and the GST base will be 30 per cent of spending. So the problem is going to get worse if we don't do something about it."

The AICD paper does mention financial services, which is another large segment of the economy that is GST-free.

"We don't advocate including financial services because it would add an additional layer of complexity on the billions of transactions in the economy, possibly compromising productive activities," Ms Proust said.

Other elements of the blueprint include restraints on government spending, four-year federal political terms, a complete rejection of protectionism and stronger political leadership on infrastructure spending.