tax reform
The Institute has criticised many taxes in use across Australia. Image – Canva.
  • The Tax Institute of Australia has released 'The Case for Change'
  • Argues there are many issues with the main residences exemption rule for capital gains tax
  • Suggests negative gearing should be only applicable to income from the same asset class

This month, the Tax Institute of Australia has published a reform wish list to fix what it describes as Australia’s “broken” taxation system.

While The Case for Change focuses on a range of taxation such as businesses, superannuation and indirect taxes, the report addresses taxation within the property arena – such as rules surrounding the main residence exemption and the highly divisive negative gearing leverage tool.

Main residence exception confusion

The institute notes issues with the current design of the main residence exemption when calculating capital gains tax. It argues it is a regressive policy that benefits high-income and high-wealth households more than those on low incomes.

Complexities include delays moving into a property, a six-month overlap rule when changing a main residence, properties compulsorily destroyed, dwellings passed through deceased estates and marriage or relationship breakdowns.

“This approach to cater to almost every personal and familial circumstance is admirable but makes the rules inherently complex,” the report said.

“Once multiple properties, holiday homes, divorces, deaths and foreign residency are thrown into the mix, the law becomes incredibly complicated to apply in practice.”

Negative gearing changes should be on the plate

Despite being a contributing factor to Labor’s defeat at the 2019 federal election, the institute notes negative gearing reform should remain on the agenda.

According to the report, in 2017-18, over 2.2 million individuals owned at least one rental property with 1.3 million claiming a net rental loss.

Deduction on rental property – such as interest, capital works and similar expenses – were $3.6 billion more than gross rental income.

“The role of negative gearing in driving investment in rental properties and the broader societal impact on housing affordability and entry to the property market is a contentious issue.”

“There is also general concern that income from investment properties is not independently verified like other kinds of income. There is also interesting consideration of whether income from investments should be taxed differently to income from personal exertion.”

The Case for Change, pg 131

“This presents an opportunity for the government to consider improvements in the interactions of the current tax-transfer system and to address the potential tax advantage from investment assets and the economic and social impact by the attractiveness of the CGT discount incentivising investment behaviour.”

The report said there is a strong case for principle-based reform that investment losses should not be deducted from salary and wage income.

This includes allowing losses on investments that apply only to income (such as future capital gains) from the same asset – similar to the current system employed in the UK.

“There are some economic arguments for the last option. It aligns the timing of gains and losses and minimises any tax-driven bias of capital gains over recurrent investment income.”

“However, it may lead to unproductive tax structuring as it may encourage people to hold investments through entity types that have more favourable tax treatment across different types of savings.”

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