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House rules

An unremarked property tax change in the recent Budget aims to change how housing is supplied

June 2017

Amid all of the post-Budget debate, one measure that nobody seems to have noticed was a change to tax treatment of some investment properties.

Currently, if you own an investment property for more than 12 months and make a capital gain when you sell it, the tax on the capital gain is discounted by 50%. Alongside negative gearing, this is one of the factors that make property investment so attractive. The change proposed in the Budget would increase this discount to 60%, under certain conditions.

Most economists would say that if we want to do something about housing affordability for new home owners, we should be cutting the capital gains tax discount, not increasing it. A cut would make property a less attractive investment, removing some investors from the market, thereby reducing upwards pressure on prices.

But this particular Budget measure has some other very interesting features.

For a start, it doesn't apply to all investment properties. For a property to attract the additional concession, it has to be offered to tenants on low to minimum incomes, at less than market rent. This makes it a targeted measure – aiming to increase supply for those facing the greatest challenges in the rental market.

A property also has to be held by the owner for at least three years – presumably intended to provide some stability in supply of rental housing, and to discourage investors from turning over properties rapidly to realise short-term capital gains.

Perhaps the most interesting feature is that it has to be managed by a community housing organisation. This goes to the heart of one of the problems in the tenancy market: that the supply of housing is fragmented into millions of individual investors, who then turn to real estate agents for help. As CHOICE's research shows, this far too often results in a poor experience for tenants.

Housing is the only essential service that we are prepared to allow to be managed in this way.

The government has thought about how to better organise provision of housing for defence force personnel – through Defence Housing, which allows private investors to buy properties that are then centrally managed – but until now has failed to work out how to do this for the broader population.

On the whole, it's hard to support this change to capital gains tax because any increase in tax concessions will exacerbate generational inequality – making it easier for people with property and wealth to accumulate more, while making it harder for younger people to enter the market.

But I hope that it's the start of some creative thinking about how to better organise the supply of rental housing, especially for people on low incomes.

Alan Kirkland, CHOICE CEO
Twitter: @AlanKirkland