Capital gains tax has been mentioned in the media recently due to the Government considering reforms to the current system. While it was decided to not make any changes foe the time being, we thought we would take the opportunity to breakdown what capital gains tax is and what possible changes could mean.
So what exactly is capital gains tax?
Essentially, it is a tax on profits made from certain collateral. The Australian Federal Government taxes profits that individual’s make from the sale of all capital assets. This includes houses and vacant blocks.
The profit is measured by the asset’s final sale price minus associated costs such as legal fees, major improvements or stamp duty. If an asset is held for over 12 months a 50% discount may be applied.
The remaining profit is then calculated and a marginal rate of tax is applied accordingly.
Capital gains tax can have an affect on both buyers and sellers. There is an exemption for the sale of an individual’s main residence, so the tax only applies to sellers with multiple properties.
For buyers, the tax can impact competition and ultimately prices in the market, particularly if the property is auctioned.
The current system gives generous discounts to investors who have an advantage over other buyers, typically first homeowners.
The 50% discount combined with negative gearing favours an investor market, making it easier to stay on the property ladder, but difficult to get on in the first place.
Experts believe that escalating housing affordability is fuelled largely by these factors, which allow investors to expand their property portfolios and drive market prices up, essentially pricing out first timers.
While a reform to the current capital gains tax could alleviate some of the affordability issues, the Housing Institute of Australia mention that it won’t solve everything. Increasing year-to-year supply of new property is suggested as a better alternative than the restrictions a tax reform would impose.
While the capital gains tax is set to remain the same for the time being, it is interesting to think of the potential impact it could have on the market and economy.