Tax increases

The development comes as Treasurer Scott Morrison and Social Services Minister Christian Porter have threatened tax increases and spending cuts to recoup up to $13 billion in budget cuts that have been marooned in the Senate, mostly since the 2014 budget, and which have scant hope of passing.

The so-called "zombie" measures are predominantly the $6 billion in cuts to welfare, as bundled together in the budget omnibus bill before Parliament, and about $7 billion in cuts to higher education.

On Tuesday, The Australian Financial Review reported Mr Morrison was preparing to abandon these cuts before the May budget should the Senate reject them again, as is anticipated, and replace the revenue with tax hikes or spending cuts elsewhere. "We will have to frame a budget that deals with their ultimate decision," he said.

The decision to ditch the "zombie measures" is part of a major policy reset in which the Coalition would abandon the measures that have caused considerable political damage since Tony Abbott's notorious first budget.

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

Upside of upping tax

Charting a new path, and even adopting some of Labor's tax proposals, such as a CGT concession crackdown, would sever links with the unpopular remnants of the Abbott era and limit the lines of attack for the opposition, which has accused the government of hurting families and trying to foist $100,000 degrees on university students.


The government was insisting yesterday that it had not yet given up on the zombie savings and was hopeful of passing at least some of the measures in the omnibus bill before Parliament rose at the end of March, the last sitting before the May 9 budget.

"They still have weeks and weeks to think about this..." Mr Morrison said. "The Labor Party are saying 'no', they think we should be paying more and more in welfare and sending the bill to our kids."

The Treasurer stressed he was reluctant to increase taxes but if the savings were blocked, the only options were increasing taxes or going further into debt. "I have no desire to increase taxes or increase debt..." he said.

Iron ore windfall too unreliable

Mr Morrison said he was "doing everything I can to avoid those options being contemplated". Despite an expected revenue windfall from a spike in the iron ore price, Mr Morrison said it was too volatile to be relied upon and budget repair had to involve sustainable, structural measures.

Prime Minister Malcolm Turnbull agreed higher taxes would have to be considered if the Senate continued to block the cuts.

"Those who oppose savings measures by definition are supporting tax increases, if you assume that they want to bring the budget back into balance," he said.

Labor leader Bill Shorten said the government should scrap its $50 billion in company tax cuts, rather than impose new taxes on people to pay for the dumped budget measures.


The government has made the cost of living its focus for the year and, alongside energy costs and childcare, housing affordability will be a priority.

Economists have frequently argued that curbing the CGT concession would be more effective than touching negative gearing. In a submission to a parliamentary inquiry into housing affordability in 2015, the Reserve Bank of Australia also focused on the CGT concession as the main villain.

Negative gearing

The RBA argued that negative gearing – the ability to deduct legitimate expenses incurred in the course of earning income – was "an important principle in Australia's taxation system, and interest payments are no exception to this".

"It is worth noting, however, that the interaction of negative gearing with other parts of the taxation system may have the effect of encouraging leveraged investment in property," it said.

"In particular, the switch in 1999 from calculating CGT at the full marginal rate on the real gain to calculating it as half the taxpayer's marginal rate on the nominal gain resulted in capital gain-producing assets being more attractive than income-producing assets for some combinations of tax rates, gross returns and inflation.

"This effect is amplified if the asset can be purchased with leverage, because the interest deductions are calculated at the full marginal rate while the subsequent capital gains are taxed at half the marginal rate. Since property can usually be purchased using higher leverage than other assets that produce capital gains, property is especially affected by this feature of the tax system."

On Monday, Labor moved a motion in Parliament demanding the government adopt its policies on negative gearing and CGT. Shadow treasurer Chris Bowen said the housing affordability crisis had worsened during the past year under Mr Turnbull's leadership, with house prices increasing 16 per cent in Sydney and 12 per cent in Melbourne.