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