Monday, April 20, 2009

They're back - the concept of death duties and taxing the family home

They should be

Capital gains tax exemptions would be scrapped, the sales of family homes taxed, and a form of death duties reintroduced as part of a radical scheme to be put to government designed to save $40 billion and fund tax cuts worth $4,000 per taxpayer per year.

The scheme, outlined by the Australia Institute in a paper to be released today, would be costless and would plug tax loopholes overwhelmingly directed Australia's very rich.

The Institute says the top 1 per cent of Australian taxpayers receive 39 per cent of the nation's capital gains and so benefit disproportionately from concessions such as the low tax rate and exemption of the family home.

Capital gains are taxed at only half the income tax rate, benefiting high income Australians even further...

An Australian earning $180,000 who can take half of that income as a capital gain saves $18,700 in tax. By contrast an Australian earning less than $14,000 on the zero tax rate gains nothing by taking income as a capital gains.

The Institute finds the 50 per cent discount costs the Budget $10 billion a year and the exemption for the family home $30 billion.

It recommends abolishing the discount and removing the exemption for family homes above a threshold which it says should be twice the median house price, currently $450,000. The change would mean that Australians who sell their houses for less than $900,000 could continue to bank their profits tax free, but profits made from selling houses from about the $1 million mark and higher would be taxed as income.

The paper argues that the tax exemption for millionaires' homes has fueled the property bubble, encouraged unproductive investment, and imposed further costs on renters who have to pay more tax they should in order to make up the shortfall. However it notes "the political obstacles to including owner-occupied housing in the tax base are formidable".

Noting that its proposal would "raise the cry that savings and investment will
be discouraged" it says if that is a concern "the solution does not lie in the lighter taxation of certain favoured forms of capital income, but in reform of the way capital income is treated in general."

It also proposes a form of death duty known as "deemed realisation on death" that would require capital gains tax to be assessed and paid when a property or shares changed hands on death.

"Currently in Australia, death does not trigger CGT unless the asset is realised; if it is not realised, the cost base is passed on to the beneficiary who only pays tax if and when the asset is sold. In this way the tax can be avoided in perpetuity," the Institute says.

Families that had trouble raising the money to pay the capital gains tax could defer it, with interest accumulating at the long-term bond rate.

Many of the capital gains tax concessions applying to super funds and small businesses would also be abolished, establishing a "level playing field" with the large corporations that are already required to pay the tax in full.

The Institute rejects the change that its changes would harm foreign investment, noting that foreign investors are already exempt from capital gains tax and would remain so.

It is putting forward its changes for consideration in the Budget process and also by the Henry Tax Review which reports in December.

Properly Taxing Capital Gains:

- abolish the 50% discount
- abolish small business concessions
- tax home sales above $900,000
- deem realisation on death
- keep foreign investment tax-free
- cut income tax by $40 billion

The Australia Institute, Reforming capital gains taxation in Australia, April 20, 2009


mOOm said...

Abolishing the CGT exemption on owner occupied housing has to balanced by allowing the deduction of mortgage interest, because it means we would be treating owner occupied property as an investment (well the US has a partial CGT exemption and mortgage interest deductibility!). I suspect the net gain from that move would be minimal or even negative.

The deemed realization on death seems a fair approach to this issue.

johng said...


I think you meant 'would harm' not 'would not harm' in the penultimate para.

It will be interesting to see what political response the paper receives.


John Humphreys said...

Interesting idea, and deserves some consideration.

However, increasing the CGT and adding a death tax is not a "saving" in any sane use of the english language.

Anonymous said...

usual story, baby boomers have free education get middle management jobs at 25 and then inherit their parents' houses with no death duties, genx and following have get dumped on to fix up the mess, making sure they have at least a masters and 4-7+ years of HECS before they waddle into a management job at 35+, if they're lucky the gry nomads will have spent the inheritance, no doubt they'll be poorer but at least they won't feel as ripped off

meika said...

Actually, for it to be really fair the grey nomads who do spend their kids inheritance should also be taxed. Otherwise no one will pass on anything at all. It would affect endowments as well as smug leafy suburb brats.

Unless total consumerism is seen as a good thing.

There are also inequities between being a human being, a natural person, who will eventually dies and unnnatural person, i.e. corporations which may never die.

Removing family trusts (though they'll fight back) in this way would mean there is nothing to compete against the power of these undead legalised fictions, nothign except the state.

The individual is doomed, but it twere ever thus.

Peter Martin said...

Dear johng, Thanks. I've changed it.

Dear m00m, The Australia Institute have already factored in interest.

Here's what it says:

"The Treasury estimate of the gross cost of the main residence CGT exemption is $41 billion per annum,4 but interest and other deductions amount to $18 billion. If two-thirds of the deductions relate to capital gains and about one-third to imputed rent (the ratio between these two types of income on the Treasury figures) this suggests a deduction of $12 billion from the gross figure, leaving a net $29 billion for the housing capital gains exemption.Peter

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