Treasury overlooks chief tax shelter
The inadequacy of the tax discussion paper released by Treasury last week as a blueprint for long-term reform is demonstrated by one of its basic assertions.
On page 67 of the paper is the following statement: "Given the central importance of the family home for Australian families, there is a strong consensus that it would not be appropriate to tax either the imputed rent on owner-occupied housing or capital gains derived from it."
There are no qualifications or explanations of how this assumption affects the fairness of the tax system and personal investment decisions. The spin doctors focus on the revenue loss from the fewer than 20,000 superannuation funds with balances above $5 million. They do not mention the far larger number (about 40,000) of houses worth $5 million or more, yielding tax-free returns.
The United States provides a model that our Treasury could have mentioned. Its income tax allows home buyers a personal tax deduction for interest payments on mortgages up to $1 million, removing a substantial part of the saving on rental payments from owning a property outright. More importantly, the US taxes capital gains in excess of $500,000 (for a couple) on the sale of the family home. Overall, this system recognises the greater ability of home owners to pay tax and limits their lifetime, tax-free capital gain.
In addition, the US levies further tax on expensive owner-occupied homes via death and gift taxes. Surprisingly, the Treasury doesn't even mention this crucial component of the Haig-Simons ideal income tax base. Presumably, their objective is for the family home to remain the tax shelter supreme in our tax system.
This is worrying in terms of encouraging the productive use of capital and ensuring the equitable treatment of the less well-off who don't own homes or those with have large mortgages.
Without fundamental changes to the taxation of housing, our ageing population and a declining percentage of population who are working will worsen the situation of many taxpayers. Hardest hit will be those who have large mortgages or are paying rent. They will face increased income-tax burdens and the diversion of a large part of their earnings into untouchable compulsory super.
Like it or not, the government needs to address the gross inequities in both the tax and social security systems created by the current open-ended subsidy to home owners. Otherwise, changes, such as those canvassed for the taxation of super, and the company tax imputation system will distort investment decisions away from productive investments into the family home.
While Treasury focuses on whether the capital gains tax and negative gearing influence savings and investment decisions and if so how, and how appropriate the tax arrangements for super are in terms of third fairness and complexity, but fails to ask the same questions about investment in the family home, the result will inevitably be a botched and unbalanced suite of proposals.