Family home at risk of capital gains?

Opponents of tax exemptions on owner-occupied homes have resurfaced following a Treasury report that highlights the high cost of the tax breaks.

The Australian Financial Review ran a story last week which notes that the cost of tax breaks for owner-occupied housing now totals a hefty $31.5 billion a year. The AFR published comments from tax experts who are calling for the Capital Gains Tax (CGT) exemption on the family home to be scrapped.

The AFR article quoted University of Sydney economist Judith Yates arguing that the benefits of the CGT exemption for family homes were heavily slanted towards older buyers.

Yates has found that older, outright owners get the most benefit from the tax expenditures. Her research paper shows that young home purchasers in the lowest income quintile receive an average annual benefit of $2500 whereas outright owners in the highest income quintile can reap up to $20,000 a year.

The former director of Land Values Research Group, Bryan Kavanagh, was quoted saying that housing investment should be subject to CGT the same as any other asset.

Kavanagh maintained that CGT should be introduced at the same time taxes are wound back.

“It would probably take the speculative heat out of markets,” he said.

He warned that the link between housing and finance meant any policy change would need to be carefully managed. “There are implications for banks – they lent far too much into a bubble market,” he told the AFR.

In August last year The Australian ran an article that looked at The International Monetary Fund’s assertion that the tax treatment of housing is too generous. The IMF maintained that there was a strong case for capital gains tax to be levied on the family home.

The IMF believes that homeowners should be made to pay tax on the advantage they enjoy over those who rent their houses.

Treasury Secretary, Dr Ken Henry was quoted saying: “The Rudd Government is considering slapping a wealth tax on the country’s most expensive family homes as part of a wide-ranging and radical review of the tax system, chaired by Treasury Secretary, Dr Ken Henry.”

Treasurer Wayne Swan wasted no time in releasing a statement which made it very clear that the Government “has not and will not consider the policy” outlined in the article and dismissed the notion outright, dispelling any idea that a family home CGT was on the agenda.

Dr Ken Henry echoed this view on 16 October 2009.

At the time a number of leading economists supported the IMF’s views. Now, according to the AFR article, tax experts are divided in their opinion on whether a CGT distorts the property market and if so, whether it should be scrapped.

Real Estate Institute of Australia (REIA) President, Mr David Airey has slammed comments that the family home should not be exempt from CGT.

“This is an issue that was put to bed last year; it seems absurd to raise this matter, particularly in the context of an election campaign, when the Government has been very clear that it will not consider imposing CGT on the family home”, he said.

“Comments attributed to Dr Henry in the AFR clarified irrevocably that CGT would not be imposed on the family home and has never even been on the Government’s agenda,” continued Airey.

“Imposing capital gains tax on the family home was not on the cards, just as it wasn’t in 1985, despite hysterical suggestions to the contrary. Scare campaigns about taxing the family home were just as diabolical and plain wrong then as they are now,” Dr Henry was reported as saying in the AFR.

REIA has put forward a proposal to all political parties reiterating the call for CGT to be excluded from the family home.

“In the current political environment, I call on all parties and independent senators to take the stance that the Government has taken and rule out the imposition of CGT on Australian homes”, concluded Airey.