“This is at best, misleading, and should be corrected,” stated HIA’s Chief Economist, Tim Reardon.

“Alan Kohler has made an excellent contribution to housing policy over the past year. He has correctly identified that the burden of the under supply of housing over the past 20 years has fallen disproportionately on a small cohort of Australians, especially renters, and at the same time financially rewarded a different cohort who own more than one home. 

“The inequity of this outcome was accelerated through the pandemic, and he has highlighted the problems of this faux wealth creation of ever-increasing house prices. 

“In the 90’s capital gains tax was changed from 100 per cent of the real gain of an investment, to 50 per cent of the nominal gain. 

“Mr Kohler incorrectly concludes that this is a halving in capital gains tax. This conclusion is wrong. 

“The 1999 change to CGT did not have a tangible impact on tax revenues to government or decisions by property investors.

“Reverting from the current ‘Discount Rate’ of CGT to taxing the real gain as occurred last century, would likely have marginal, if any impact on capital gains tax paid by investors and is a distraction for addressing the causes of the shortage of housing. 

“If we are to address the shortage of housing, it is important to accurately understand the causes. 

“The Kohler article also notes that house price growth accelerated from the turn of the century and concludes that because prices accelerated after the change to CGT that, therefore, this increase was partially due to that change. After it, therefore because of it. 

“Of course, at the same time as the Howard/Costello government changed Capital Gains Tax they also introduced the GST which is imposed on new homes, but not on established homes. The introduction of the GST caused new home building to collapse to a level not seen in the  decades, preceding or post 2000. 

“But blaming the rise in house prices on either the GST or CGT ignores the fact that many developed economies experienced rapid house price growth from the turn of the century, due to factors unrelated to Australia’s housing taxation system.

“House prices have risen at an alarming rate for the past 25 years because demand has increased faster than supply as governments increasingly make new home building expensive through taxes, fees and charges. 

“Politicians continue to blame foreigners, investors and then foreign investors for the housing shortage rather than to make policy changes to reduce tax and increase supply. 

“Only half of the cost of a new house and land package is the cost of the house and land. The other half are costs imposed by governments. 

“The growth in investor activity in the housing market since 2000 is because politicians continue to force up the price of building a new home, ensuring restricted supply, and providing investors with a better return than in other asset classes. 

“The solution to this problem isn’t to keep increasing the taxes on investors or housing, but to increase the supply of homes to ensure house prices remain stable and investors depart the housing market for other sectors,” conclude Mr Reardon. 

What happened to CGT in 1999 and why:

Capital gains tax treatment was reformed in 1999 under the Howard/Costello Government. The following changes occurred:

• Previously, a person would be taxed on their ‘real’ capital gain, i.e. total gain minus the gain attributable to inflation.
• Subsequently, a person would be taxed on half of their nominal gain, i.e half the total gain which includes the amount attributable to inflation.

The reason for the change to CGT in 1999 was that online share trading had made it administratively complex to calculate the real gain. The ability to buy and sell a share within seconds became possible and more common with the growth of online share trading in the 1990’s and with the ‘dot.com’ boom or the late 1990’s. At the time, capital gains tax was calculated by the indexation method that ‘discounted’ the capital gain by the rate of CPI for those seconds that the share was held by that investor.

In short, the government was concerned about taxation leakage due to advent of online share trading.

To address this, the 50 per cent discount method was applied to all assets, including housing, as a proxy for the discount that previously applied under the indexation method. 

The 50 per cent discount rate is merely a proxy to ensure that the government continued to raise a similar amount of revenue from online share traders as they would have from the indexation method. The value of taxation raised under each methodology is difficult to estimate but it would typically be higher under the discount method in periods of high inflation, and higher under the indexation method if inflation is low, ceterus parabus.

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