Budget surplus trumps concerns about negative gearing changes

Altering the tax breaks offered to real estate investors should be considered by policy makers if they are serious about returning Australia’s Federal Budget to surplus in the near future

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Altering the tax breaks offered to real estate investors should be considered by policy makers if they are serious about returning Australia’s Federal Budget to surplus in the near future.

According to Paul McClintock AO, national chairman of the Committee for Economic Development of Australia (CEDA), structural economic and taxation reform are a pressing issue for Australia, however it is likely they can only be addressed when the national economy is performing strongly

“Australia needs to have a much larger national conversation around structural economic reform, in particular tax and key areas such as bracket creep, corporate tax rates and GST,” McClintock said.

“Reform is much easier during periods of fiscal strength. Removing the deficit by 2018-19 will allow Australia to reset the conversation on economic reform,” he said.

McClintock said the current realitly of the Australian budget is that "we have been spending more than we earn for too long and we need a realistic approach to returning to surplus."

According to the Deficit to balance: budget repair options report, which was compiled by the CEDA’s Balanced Budget Commission, to return the budget to surplus by 2018-19 the federal government would be required to cut expenditure by $2 billion and increase revenue by $15 billion.

The Better Budget report presents five options for how the additional revenue could be raised, all of which include altering current property tax arrangements such as the capital gains tax (CGT) discount or negative gearing.

Two of the proposals suggest the current capital gains tax discount should be halved, which would bring in an additional $3.6 billion in revenue, while another two proposals include reducing the CGT discount by 75% to generate an additional $5.4 billion in revenue.

Another proposal included reducing the CGT discount to 40% and not grandfathering purchases made before the change to generate $1.7 billion.

The removal of negative gearing for all assets purchased after December 2105 is also put forward in one proposal, a move that would generate $2.6 billion.

All of the proposals also include a range of other changes, including superannuation taxes, taxes on luxury cars, taxes on petrol and changes to work related tax deductions.

The changes to the CGT discount put forward by the report are in line with the plans announced by the Labor party, which would also restrict negative gearing to newly built housing from 1 July 2017.

Those proposals have been heavily criticised by numerous property lobby groups, however when questioned following an address at the National Press Club to launch the report, McClintock said any drop off in investment activity caused by the changes would not be drastic.

“With things like negative gearing, a system that was designed to compensate people for high inflation rates, the inflation rates are lower, there is a strong argument to suggest you can lower that and still produce an environment where people are willing to invest,” he said.

“Our judgment call is that, yes, of course it will have some marginal impact, so will everything, but it’s a manageable impact.”

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