New modelling has suggested that the federal government’s proposed tax settings could lengthen the investment path to home ownership.
Young Australians using direct share portfolios to build a home deposit could need up to eight additional years to reach their target under the federal government’s planned capital gains tax reforms, new modelling has found.
Former NSW Parliamentary Budget Office chief economist Derek Francis and Victoria University Centre of Policy Studies professors James Giesecke and Jason Nassios have separately examined how the replacement of the 50 per cent CGT discount with cost-base indexation could affect prospective buyers investing in shares.
The modelling comes as the federal government moves away from the longstanding 50 per cent capital gains tax discount for eligible assets held longer than 12 months, replacing it with an approach that adjusts an asset’s purchase cost for inflation.
Francis tested the position of a person who already has $50,000 invested and wants to accumulate a $150,000 deposit, equal to 20 per cent of a $750,000 home.
His projection assumes a diversified equity portfolio earns 10 per cent a year, while inflation runs at 3 per cent.
On that basis, he found that the investor would reach the $150,000 threshold after 20 years under the existing rules, compared with 28 years if the revised CGT method was applied.
Francis said the effect would be felt across deposit targets, rather than being confined to the $150,000 example.
“Whatever deposit level you are targeting, it will now take about 40 per cent longer time period to get there via investing, so it’s the worst policy imaginable if you are trying to provide opportunity for young people to build a deposit to buy a house,” Francis said.
He also said that the policy change would affect the broader incentive to allocate money into productive investments, with implications beyond first home buyer savings.
“It is a uniquely hopeless change because it destroys the incentives to invest for no gain, shrinks the economy, and long term collects less total tax revenue because the economy becomes so much smaller, less dynamic and innovative,” Francis said.
Loss treatment under scrutiny
A second model from Giesecke and Nassios, professors at Victoria University’s Centre of Policy Studies, considers a saver with no investments at the outset who is aiming for a $100,000 deposit.
Rather than assuming identical outcomes across every holding, their research accounts for the ordinary spread of returns within a share portfolio, noting that some companies rise faster than consumer prices, while others perform weaker.
The portfolio as a whole is assumed, before CGT, to preserve its value in inflation-adjusted terms.
Their calculation suggests a portfolio producing a 1 per cent gain above inflation, when inflation averages 3 per cent, could surrender 98 per cent of that real gain in tax.
In the scenario involving a saver commencing from zero, they found that the CGT change added one year to the task of reaching $100,000.
The academics’ concern centres on how the rules deal differently with gains and losses once inflation is considered.
An asset that rises ahead of prices can create taxable income, but a holding that increases in dollar terms while losing purchasing power may not generate an equivalent tax offset.
“The new system recognises real gains for tax purposes, but only recognises real losses to the extent they are also nominal losses,” Giesecke said.
“The upside outcomes generate a tax burden, while the downside outcomes do not generate equivalent offsets. The result is a net positive tax burden, even for a portfolio that has just kept pace with inflation.”
[Related: Government softens start-up CGT concession rules]
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