Latest News• Add My News • Search Old News Gippsland › Latest news › Howard S. EmanuelCapital Gains Tax Amnesty :: (Howard S. Emanuel)Access to the housing market as most Australians would now know is fast becoming not only one of the major headaches for governments in this country....
CAPITAL GAINS TAX AMNESTY 29 AUG 2006 Access to the housing market as most Australians would now know is fast becoming not only one of the major headaches for governments in this country, but more importantly is now one of the most salient and pronounced social issues the nation faces. It is a fundamental bedrock of a fair and equitable society to have housing priced at affordable levels for all in the community. And yet on current trends Australia is fast moving to a position which parallels that of England and some other European countries where only those with significant family assets and well-paid professional jobs are able to own their own homes. The rest rent, often quite modest subsidised housing in large congested estates, sometimes manifest with all kind of social problems. If Australian’s are to avoid a further dividing of their society we simply must find a way to make housing more affordable. Most would agree I assume that Europe and America where home ownership is demonstrably more difficult to achieve than is currently the case here in Australia, have a much more pronounced regime of social division, where class divides are palpable and obvious and where there is a marked increase in the depth and breadth of issues to deal with. Crime and poverty is more profligate etc. From my way of thinking there are several key reasons for the increasing cost in housing. One is that the supply and demand equation is increasingly becoming out of balance, where demand demonstrably outstrips supply. At present and there is little sign that the situation will change of its own accord, there is a chronic shortage of housing in all Australian cities and quite a few of the nations larger regional centres. The other main reason is that those who have a solid capital asset base have been buying housing as an investment item and using this tool to create wealth and income, and to also in the longer term underpin their financial position into retirement. As the baby boomer superannuation dollars and the high incomes of IT professionals and the like hit the market in considerable proportions, the investment in housing has grown to a point where there is now not enough housing to meet the needs of all. In short, investment housing is biting ever deeper into the stocks of housing this nation has on offer. So called "Bricks and Mortar" has always been a solid investment choice, the housing market generally does not experience the risk levels associated with shares and also provides an essential abode whilst one simultaneously builds a capital asset. It’s an attractive situation. Furthermore once one has reasonable equity in their first home, many a bank will happily allow them to borrow against that equity. So it’s not difficult to progress, as long as you can get that initial deposit together and build equity. But all this is changing as the price of housing soars; it is becoming increasingly difficult to obtain a deposit, to make that initial entrance into the market. So those with sufficient capital are left to bid for housing that should really be providing basic shelter for all. In the past 5 years especially, housing investment has been a most attractive proposal. There has generally been about a 120% average increase in the cost of a house in this time across Australia and in some "boutique" markets such as coastal; the increases peaked at around 300/400%. If one bought in early 2000 for $100,000.00 depending on location they could now very well be sitting on an investment worth up to 3 to 4 times that amount. Pretty handy gains in only 5 years, but of course there are pitfalls and downsides. Property rates have soared as eager and debt ridden local councils eye off a virtual bonanza unfolding before their eyes and property insurance and associated costs climb in proportion. But all in all there are plenty of millionaires out there that never in their wildest dreams would have imagined they would gain such status. And of course if you are worth nearly a million dollars, albeit only on paper, today’s sharks otherwise known as banks will throw money at you left right and centre if you desire to build wealth, and many do. So all this means more and more housing is locked up in holiday homes and investment property and is continuing to grow in proportion as those already holding a housing asset are literally having to beat off the banks wanting to help them to buy the next property and so on and so on. But just consider this next point which is I believe crucial to why we currently have such a dearth of housing on the market. (At present housing stocks in this country are at an all time low). If an investor wishes to sell one or more homes and perhaps retire or change investment strategies, under current federal tax laws they are going to be required to pay Capital Gains Tax (CGT). That is they will pay tax on the capital gain they have made on the property, which of course is the difference between the purchase and sale price of the property. So say if you bought a house in 2001 for $250,000.00, rented it for a few years, change direction about how you wish to continue to invest and sell the home on today’s grossly inflated market for $550,000.00, you have made a capital gain of $300,000.00. You can deduct all sorts of costs to lower this figure such as property maintenance, loan costs, estate agents fees etc, but in the end you will still likely show a capital gain in this scenario of at least $250,000.00, probably more depending on how deft your accountant is. Take into account the 50% reduction that applies after you have held the property for a certain period and you are still looking at a $125,000 plus capital gain liability. Then the tax office stalks and under more rigid compliance laws from the ATO, you will pay, even retrospectively if necessary. The tax on this $125,000.00 will be significant and will take the edge of the gains you have made and perhaps even in some cases as I believe is now happening will discourage those who have housing investments to sell the house at all, they will retain the property, thereby robbing the market of stock. Remember that people generally invest in housing to create wealth, as opposed to those with only the family home who buy the property to live in. Investors are canny people, they play the market to make dollars, sometimes lots of them and they don’t take too kindly to seeing a proportion of their investment handed over to the tax office (ATO). After all, these people reason, they paid heavy taxes such as State Government Stamp Duty when they bought the property and were happy to do so as the projections suggested that due to soaring house prices they would recoup this impost and then more some, so why should they incur more tax impost now. One has to consider the nature of greed in all this, the more one has its seems the more one wants. One also has to consider that in a market economy such as this country has; money does give you access to numerous things, such as a bigger house, an expensive car, a lavish lifestyle and all sorts of other embellishments. So why hand back some of this spending power to the tax office. Why indeed I am sure many reason. If enough housing investors think this way and I am sure they do you will have large amounts of either underutilised housing sitting in the streets or sometimes totally unutilised housing sitting left vacant, growing in value, maybe owned by a family trust or some other type tax effective mechanism, unavailable even to rent let alone purchase. So the houses that are on the market become more and more scarce and inevitably more expensive, so more people have to rent, so rental properties become increasingly scarce, so rents go up, so people never get a deposit, never own a home, never build equity to allow them to borrow if needs be and are rent slaves forever etc etc. This is exactly what is happening in Australia’s housing market right now and if we don’t find some way of breaking this impasse that will then allow more houses to come onto the market, the situation will only get worse and worse. In this vein I believe it would be prudent of the federal government to consider an amnesty on Capital Gains Tax for a 12-month period, or some similar timeframe. Such a scheme would I believe have the potential to encourage many an investor to consider selling a surplus property free of the slug of CGT. The potential surge of properties coming onto the market would have the effect of creating price competition again as the supply quantity caught up somewhat with demand. A pool of housing resources coming onto the market would increase stocks and offer more choice to buyers, particularly first home owners who are increasingly being funnelled into new estates often miles from anywhere with little social infrastructure and poor service provision. Under the scheme I envision anyone who chose to buy a property in the amnesty period would not then be able to resell that property either during the amnesty or during any future amnesty and attract the tax advantage. That is the abolition of the CGT would not apply to these people. This will then ensure that we do not encourage investors and developers to enter the market during the amnesty period thereby once again putting pressure on available stocks and stoking an increase in prices once again. For those concerned that under this proposal the federal government would be foregoing considerable revenue by way of Capital Gains Tax, consider that the government has seen its capital gains revenue increase enormously over the past five years as property values have soared. The federal government could not have foreseen the tax bonanza that has landed in their lap as the gap between purchase and sale price of a property has expanded beyond all forecasts. Receipts from CGT have been at such a level as to now allow the government to forgo CGT revenue for a set period without any real impact on the nations budgetary position. My amnesty proposal is designed to break the deadlock that now exits. I believe a considerable proportion of housing stocks in this country are held by investors and not home owners. To alter this situation we must encourage investors to exit the market place. Whilst I do not claim that a CGT amnesty is a cure-all for a very complex problem, I do believe it would contribute to making housing more affordable. Perhaps if the amnesty were over a long enough period it may have the effect of bringing housing back to more affordable levels over the long-term by bursting the price bubble that currently exists. As the only way to deflate this bubble is to increase the amount of houses for sale on the market and then to keep these stock levels up. Consider also that currently the government is strongly encouraging Australians to put more of their financial resources into superannuation. The recent announcement of tax-free access to your super after you reach 60 is designed to do just that. But I believe a great many will not want to bail out of a housing investment to put the money into superannuation because they will attract a significant slug by way of CGT when they sell. If this is the case then any gains the person may make by being able to access their super tax free post 60, are very much offset by the fact that they have had to pay CGT to get the money into their superannuation fund in the first place. Therefore they have less to invest in super. What should have gone into their superannuation portfolio has gone to the government by way of Capital Gains Tax, lessening the total amount they had to invest. The less amount invested, the lesser the premium when their super portfolio matures Personal contributions to super are generally tax free, but if the only way you can make a personal contribution to your super is to use the proceeds from the sale of an investment property you are in effect paying a contributions tax, by way of CGT. So you are worse off. Any savings you may have made on the tax-free access to your super post 60 are offset by the contributions tax (by proxy) you have paid, probably at a higher rate than the 15% tax-free initiative announced by the government. Sounds like pretty dodgy economics to me. In all, it seems to me there really is no gain; you may as well hold onto your investment property and not lose a proportion of your wealth to Capital Gains Tax. Whichever way you look at, we must attack the root cause of the problem, and the problem is that too much housing is being used as an investment tool. We need to give people an incentive to get out of housing as an investment vehicle. I believe either a one-off amnesty or a series of amnesties over a period of time on Capital Gains Tax can achieve this. Once a fundamental change has occurred in investment behaviours, appropriate policy initiatives from government, such as the recent superannuation reforms can to some degree ensure that these changed behaviour patterns remain so into the future. But first we must encourage the initial change. In one sense the government has done their bit by changing superannuation laws to make this type of investment more attractive, but the job is only half done. The challenge now is to make it an attractive proposition to move considerable sums of money into super. If this money is already committed into some form of successful investment venture, then there has to be a very good reason and an effective way for the investor to shift from a well performing investment type into superannuation without attracting the impost of taxation. Otherwise my guess is that people are just going to be leaving things as they are. The innate nature of investing means making money, not giving it away, whether that is to the tax office or anybody else. It pays to recognise this perhaps unpleasant truth about the nature of our society and sculpture policy that reflects this reality. Regards, Howard Emanuel E-mail: howard@howardemanuel.com
Source: http://gippsland.com/ Published by: howard-emanuel@hotmail.com
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