The recent federal budget has sparked a flurry of debates and misconceptions, particularly regarding its impact on renters, small businesses, and the introduction of a 'death tax'. In this article, I'll dissect these claims, offering a fresh perspective and a critical analysis.
Renters and the Tax Changes
One of the most prevalent concerns is the potential rise in rents due to the modifications in negative gearing and capital gains tax (CGT). However, I argue that this fear is largely unfounded. The temporary abolition of negative gearing between 1985 and 1987 did not lead to an immediate spike in rents, and the current changes are unlikely to have a similar effect. The core issue here is the misconception that taxing investment in established properties will reduce housing supply, thereby increasing rents. In reality, investment in established dwellings primarily drives up property prices, which indirectly increases rental demand.
The curtailment of negative gearing and the CGT discount for established properties may indeed reduce investment in these areas, but it will also likely shift investor demands towards new builds. This could potentially increase the supply of housing, which would then mitigate the impact on rents. Moreover, landlords are not in a position to significantly increase rents, as they did not reduce them during the recent interest rate falls.
Rent-Vesting and Housing Market Entry
Another concern is the potential harm to younger people's prospects of getting into the housing market due to the changes in the CGT discount. Critics argue that this will reduce incentives for 'rent-vesting', where young people buy investment properties while continuing to live with their parents or in rentals. However, the data tells a different story. In 2022-23, only 4.4% of taxpayers aged 18-34 reported capital gains, and the number of young negatively geared property investors has declined substantially over the past decade.
The tax breaks do little to assist young people saving for a deposit, as they typically rely on financial institutions for mortgages. Therefore, the impact on rent-vesting is likely to be minimal.
Small Businesses and Startups
The notion that the budget is 'bad for small business' and startups is also misleading. While I agree that small business owners should not pay less tax than those earning the same income through wages, the reversion to pre-1999 CGT rates may unfairly penalize startups and their employees. To address this, the government could consider implementing an 'averaging' system similar to that used for farmers, sportspeople, and entertainers.
The 'Death Tax'
The imposition of a 30% minimum tax rate on distributions from discretionary trusts has been labeled a 'death tax'. However, this is a misnomer. The minimum tax only applies to new discretionary trusts and does not affect fixed trusts. Moreover, this change could be viewed as a positive development, especially in light of the substantial inheritance expected from baby boomers' estates over the next two to three decades.
Australia's lack of a tax on deceased estates or inheritances sets it apart from many OECD countries, including the US and the UK. The fact that neither Ronald Reagan nor Margaret Thatcher sought to abolish such taxes suggests that they are not inherently 'bad'.
Conclusion
In conclusion, the recent budget reforms are not without flaws, but they represent significant improvements to the tax system. While there are valid concerns about the impact on renters and small businesses, the evidence suggests that these fears are largely unfounded. The introduction of a 'death tax' is a misnomer, and the changes to the CGT regime could have positive implications for the housing market. As we move forward, it is crucial to critically analyze these reforms and their potential outcomes, rather than simply reacting to sensationalized claims.
