Landlords using capital gains tax concessions to avoid paying income tax, former Treasury chief Ken Henry says

Australian landlords are using capital gains tax concessions to avoid paying income tax, a former Treasury chief says.

Ken Henry told a Senate inquiry into the 50 per cent capital gains tax that the concessions were often part of a tax avoidance strategy that ended up depriving young people of the chance to buy a house.

“Rental property investments are primarily, under Australian tax law, a vehicle for sheltering wage and salary income from tax,” he told senators in Sydney on Wednesday.

Dr Henry said former judge Kenneth Asprey had warned about this kind of tax avoidance strategy in his 1975 review into Australia’s tax system.

“Which is to find all sorts of creative ways of sheltering wage and salary income from tax, particularly from the top marginal tax rate, which brings me to rental property investments because that’s what they’re about,” he said.

Under laws introduced in September 1999 by John Howard’s Coalition government, someone making a $100,000 gain on a property, owned for 12 months or more, only has to declare $50,000 of that on their taxable income for that financial year.

That means someone earning more than $135,000 can continue paying a 37 per cent marginal income tax rate instead of the top rate of 45 per cent for those earning more than $190,000.

This strategy has led to house price rises vastly outpacing wages since the early 2000s, after the 50 per cent capital gains tax discount replaced a system of indexation for inflation that had existed from 1985 to 1999.

“There is a loss of opportunity there that does great injustice to younger generations of Australians,” Dr Henry said.

“Wealth in Australia is not as evenly distributed as it was say 20 years ago. It’s becoming less evenly distributed and the tax system has, in my mind, certainly played a role in that.

“The intergenerational inequity, I would suggest, lies in lost or lack of opportunity.”

Investors have increasingly bought houses at auction, beating potential first-home buyers wanting to live in their own home.

“What you see in the Australian property cycle is that typically, once house prices start to move in the upward direction, more and more of the purchasers, at any auction, are investors and fewer and fewer are owner-occupiers,” Dr Henry said.

Wilson Asset Management founder Geoff Wilson said the capital gains tax concession had led to speculative investment in housing over more productive assets.

“Investment in existing residential property does nothing to increase the economy’s productive capacity,” he said in a personal capacity.

“Over time, this has contributed to a concentration of capital in existing housing while business investments outside the resource sector has remained relatively subdued. Housing affordability is also linked to productivity.”

Finance Minister Katy Gallagher on Wednesday hinted at changes to the 50 per cent concession in the upcoming May Budget, with Treasurer Jim Chalmers previously speaking up against inter-generational inequality.

“Look on capital gains, there’s people that would like to get rid of it, there’s people who want to keep it, and there’s people in the middle,” she told Nine’s Today.

“We are interested in looking at some of the issues that face younger people in housing and things that prevent them from being able to get into the housing market.

“The Treasurer and the Prime Minister have been clear on that, and we’ll consider those in the lead-up to the Budget.”

The Real Estate Institute of Australia’s president Jacob Caine argued removing the capital gains tax concessions risked jeopardising the new supply of rental accommodation in an already tight market.

“Any policy change that risks reducing investment in and delivery of housing is inherently problematic,” he said.

Dr Henry did his own review into the tax system in 2010 for Kevin Rudd’s Labor government. It didn’t recommend abolishing the 50 per cent capital gains tax discount, which also applies to other assets like shares.

Labor lost the 2016 and 2019 elections with a policy of halving the 50 per cent capital gains tax discount to 25 per cent which would mean an individual making a $100,000 gain on a house or unit would have to declare $75,000 on their tax return.