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Thursday, 15 June 2017
Page: 6629


Dr LEIGH (Fenner) (11:25): I move the second reading amendment that has been circulated in my name:

That all words after "That" be omitted with a view to substituting the following words:

"whilst not declining to give the bill a second reading, the House notes the Government's failure to deliver any meaningful measures to deal with housing affordability".

Labor will agree to support the Treasury Laws Amendment (Foreign Resident Capital Gains Withholding Payments) Bill 2017 in the House and to refer the bill to a short Senate committee inquiry. The bill make some changes to the foreign resident capital gains tax regime announced in this year's budget. It is legislation that is billed as action on housing affordability, but let's be honest: these changes are not going to go to the heart of the housing affordability problem in Australia. In Australia now we have a home ownership rate that is the lowest it has been in 60 years. We have seen a collapse in the share of young Australians who can buy their own homes. We have seen household debt at historic highs, suggesting that those who have been able to buy into the market are more burdened by debt than any previous generation. Yet, the government is failing to act on negative gearing and capital gains tax reforms, which have been backed by experts across the board.

Going to the measures in the bill, there are amendments that increase the CGT withholding rate for foreign tax residents from 10 per cent to 12.5 per cent and reduce the capital gains tax withholding threshold for foreign tax residents from $2 million to $750,000. Both changes are to occur from 1 July 2017. There are other measures, which were foreshadowed in the 2017 budget, relating to foreign resident capital gains tax changes—namely, ensuring that only Australian tax residents can access the CGT main residence exemption, and applying the principal asset test on an associate-inclusive basis for the purposes of determining the market value of a taxable Australian real property for foreign residents. They, apparently, are to be included in a future piece of legislation.

It is, however, worth making a particular comment on those measures. There had been prior concerns that those measures would include certain New Zealand constituencies, and the New Zealand constituencies would be denied access to the capital gains tax main residence exemption. It is important that that issue be fully canvassed in a Senate inquiry. The government has made some noises in the right direction, but a Senate inquiry on this is appropriate.

The government's changes increase the 10 per cent of the first element of the cost base required to be paid to 12 per cent and lower the threshold for the market value of the relevant asset from $2 million to $750,000. This is a measure that is effectively just tinkering around the edges when it comes to the challenge in housing affordability. You can see that if you look at the list of experts who call for action on negative gearing and the capital gains tax discount. They now include the International Monetary Fund, the OECD, the government's own Financial System Inquiry, the Grattan Institute, ACOSS, the Committee for Economic Development of Australia, the Australian Institute of Company Directors, Saul Eslake, and former Reserve Bank governor Glenn Stevens.

We have had plenty of Liberals, among them former Victorian Premier Jeff Kennett and former New South Wales Premier Mike Baird. Indeed, members will remember being in this very place when the former member for North Sydney, Joe Hockey, stood over there and in his final speech to parliament called for action on negative gearing and called for negative gearing to be restricted to new-built homes. That is what Labor has proposed, yet his successors in this place are unwilling to heed Joe Hockey's advice.

We know that it is important to get action on housing affordability because access to a home provides stability in retirement and a sense of grounding in one's community. We know that the government has spoken about the excesses in negative gearing. Those were the Treasurer's own words: 'the excesses in negative gearing'. Yet the government is unwilling to take serious action. Instead they are suggesting that they will put in place a first home super saver scheme, effectively saying to young Australians that the only way of getting a home is to dip into their retirement account. There is not an expert around that believes that that ought to be the top solution to housing affordability.

Sure, Labor supports measures such as introducing a bond aggregator and walking back some of the attack on housing supply that we saw in the first budget, with the abolition of the National Housing Supply Council being one of the early acts of the Abbott government. But it is critical that we have real action on housing affordability because it is at the heart of much of the rise in economic inequality in Australia. We have inequality now at a 75-year high, with earnings for the top 10th having risen three times as much as earnings for the bottom 10th. We see now in Australia house prices rising extraordinarily quickly. Over the past decade house prices in capital cities have risen 72 per cent. In Sydney and Melbourne house prices have risen 94 per cent and 95 per cent respectively. That represents an increase, just last year, of $300 a day. You cannot save for a deposit by forgoing a few smashed avocado breakfasts when house prices are rising at $300 a day. That is more than a few lattes and smashed avocados.

We know that the tax settings that we have at the moment are the product of a quirk of history. Negative gearing came into the tax code in 1936 as a Depression-era stimulus for the economy. The capital gains tax discount emerged out of the 1999 Ralph review. It was not directed towards housing; indeed, that review did not even mention housing. The purpose of the capital gains tax discount at the time was that a lower capital gains tax rate would spur investment in high-tech firms. But when you put these two policies together, the confluence of negative gearing, which does not exist in countries such as Britain and the United States, and the capital gains tax discount, which was new to the Australian system, together they acted to reverse the total taxation we saw from landlords. Previously, landlords had been net tax payers. After 1999 landlords quickly became net recipients of tax. Landlords moved from buying a house in order to make a recurrent return to buying a house to make a recurrent loss which could be written off on their taxes in the hope of making a capital gain.

That is bad investment advice. If you were advising a young person as to how to invest their money, you would say, 'Don't put all your eggs in one basket.' But negative gearing and the capital gains tax discount do exactly the opposite. They tell young people, 'Get into housing, because that is the best way of minimising your taxes.' Good investment advice says, 'Don't speculate—buy assets that produce a recurrent return.' Again, negative gearing and the capital gains tax discount create the opposite incentive: an incentive to buy speculatively, hoping for a gain when you sell and willing to take a loss as you go. You see that in the taxation statistics.

The result is that investors have nudged out first home buyers in auctions across Australia. Home ownership rates, as I have mentioned, have crashed, falling for young people aged 25 to 34 from 60 per cent down to 48 per cent. At the same time, we have seen the share of the population who are renting a home increase from 20 per cent to 26 per cent. So we have seen a significant increase in the share of Australians who are renters and a significant fall in the share of young Australians who own their own home.

By closing tax loopholes, Labor is pursuing one of the most sensible principles that underlies tax reform. One of my Harvard lecturers, Martin Feldstein, who was previously Ronald Reagan's chair of the Council of Economic Advisers, has spoken about the importance of closing tax loopholes. As he puts it: 'It's vital to focus on tax expenditures because they raise revenue more efficiently than increasing tax rates, and they have a lower deadweight loss than raising rates. It's a way of ensuring progressivity and efficiency at the same time.' Martin Feldstein has argued, in the United States context:

Congress should review these tax expenditures and eliminate those that the country cannot afford.

Here he is talking about the mortgage interest deduction—one of US academic economists' favourite targets for economic reform. But the argument applies equally in Australia. We need to look rigorously at our tax expenditures. I commend the work of Treasury in regularly producing a tax expenditure statement, which allows us to look at where tax expenditures are going and has informed work by Labor in spearheading the debate over curtailing superannuation and tax concessions.

This issue, as I have noted, is one which the government's own reports have highlighted. The Financial System Inquiry's final report—the Murray review—stated:

For assets that generate capital gains, the tax treatment encourages leveraged investment, which is a potential source of financial system instability. Investors are attracted by the asymmetry in the tax treatment of expenses and capital gains, where individuals can deduct the full interest costs of borrowing (and other expenses) from taxable income, but only half of their long-term capital gains are taxed. The tax treatment of investor housing, in particular, tends to encourage leveraged and speculative investment in housing.

The shadow Treasurer, who has led this debate, has made the point that we need to reform negative gearing and the capital gains tax discount because it is a financial stability issue for Australia. While we have these risks to financial stability, the Australian economy is imperilled by the government's failure to tackle housing affordability and sensible tax reform.

You will hear the usual canards from those opposite, claiming that 67 per cent of those who claim negative gearing earn a taxable income of less than $80,000. But the point here is taxable income. That includes the millionaires who manage to pay no tax by claiming excessive tax deductions. Those millionaires are among the people who have a taxable income of less than $80,000. The point is that you cannot simply look at taxable income; you have to look at income before tax. Take a very simple question, and ask, 'Where do the benefits of negative gearing and the capital gains tax discount go?' Well, more than half of the benefits of those two tax breaks go to the top 10th of Australians. Look at the average benefits claimed by surgeons and cleaners. Surgeons claim 100 times the average negative gearing benefit that cleaners do. And the average surgeon claims 16 times the average benefit that a nurse receives. So the suggestion that negative gearing and the capital gains tax discount are principally used by those at the bottom is completely false.

Indeed, inequality has continued to grow as a result of this. If you look at the mid-1970s, home ownership rates for the lowest-income quartile of Australians and the highest-income quartile of Australians were the same. Those lower-income Australians back in the 1970s lived in smaller homes, but the odds that a low-income Australian owned a home in the 1970s were the same as the odds that a high-income Australian owned a home. That is not true any longer. Now the most affluent are 15 per cent more likely to own their home than the least well off. We will also hear the canard from those opposite that negative gearing keeps rents lower than they would otherwise be, but, as analysis from Saul Eslake and the Grattan Institute has shown, in the years from 1985 to 1987, when negative gearing was stopped by the Hawke government, rents rose in Sydney and Perth, but the growth in rents slowed in Melbourne, and all the other capital cities had no change in the growth of rental prices. The rent rise in Sydney and Perth, according to the experts, is much more likely to be attributable to unusually low vacancy rates in those cities prior to the implementation of the policy.

Negative gearing does not boost housing supply, because, under the current policy, 93 per cent of negative gearing is going to existing homes. If it were aimed at boosting housing supply, it would be akin to the way in which we structure our policies around first home owner grants. First home owner grants in all states and territories go disproportionately or only to newly-built homes. Our rules around foreign investment work in the same way. Foreign investors are mostly barred from buying established real estate and are directed towards newly-built homes, again because we want them to add to housing supply. Labor take the same bipartisan principle that applies to first home owners and to foreign investors and we apply it to negative gearing: so that negative gearing should only be applied to purchases of newly-built homes after the policy comes into effect.

We provide our support to this bill in the House, subject to a short Senate inquiry, but we reject any suggestion by the government that this is a serious plan to tackle housing affordability in Australia. It is nothing of the sort.

Mr Giles: I second the amendment and reserve my right to speak.

The DEPUTY SPEAKER ( Mr S Georganas ): The original question was that this bill be now read a second time. To this, the honourable member for Fenner has moved as an amendment that all words after ‘That’ be omitted with a view to substituting other words. The question now is that the amendment be agreed to.