Treasurer Jim Chalmers floats limiting negative gearing to two properties

Treasurer Jim Chalmers has suggested Cabinet will explore the idea of limiting negative gearing to two investment properties, hinting inter-generational inequality was an excuse to scale back expensive tax concessions.

Ahead of the May Budget, Treasury is considering limiting tax breaks for landlord investors making a rental income loss and diluting the existing 50 per cent capital gains tax discount to 33 per cent, in a bid to tackle soaring Federal government spending.

Dr Chalmers declined to debunk a report in The Australian about Treasury exploring the idea as a Government “alive obviously to the inter-generational issues in the housing market and the tax system”.

“It’s not unusual this far out from the Budget that the Treasury would be considering other options,” he said in Logan on Friday.

“Any further steps along those lines would be a matter for Cabinet in the usual way.

“We’re still a little ways out from the Budget and I’m not prepared to go into the details of the sorts of advice that Treasury provides us pretty regularly as we work through the options in the lead-up to a Budget.”

The Treasurer also downplayed the idea his office had leaked the policy proposal to a media outlet to gauge the public’s response.

“It’s part and parcel of Budget speculation that these stories pop by from time to time - I’m not especially troubled by that,” he said.

“I don’t know where it came from but this is not unusual in the weeks and months leading up to a Budget.”

Even real estate agents are open about curbing negative gearing with Starr Partners chief executive Doug Driscoll suggesting the top one per cent of income earners be banned from the tax break which benefits mum and dad investors.

“If you’re earning half a million dollars, you shouldn’t have the ability to leverage negative gearing,” he told The Nightly.

“Surely, negative gearing is tax break to help those who need help. I’m assuming it wasn’t to help the rich get richer.”

Any change was expected to deter future property investors.

“When you introduce something that diminishes those returns, what they’re more likely to do is look at other investment vehicles whether it be stocks or whether it be bonds or whether it be crytocurrency,” Mr Driscoll said.

Opposition Leader Angus Taylor is opposing the idea of limiting negative gearing and capital gains tax breaks, arguing it would curtail the supply of new housing.

“We will reject policies that are going to make it harder and less economic, less attractive to build houses,” he told reporters in Sydney.

“Now, if you want less of something, you put a tax on it. This government has run out of money so it’s coming after Australians’ money and that means it’s going to make it even more difficult to invest in to build houses in this country.”

University of New South Wales economics professor Richard Holden said diluting capital gains tax concessions could hit the supply of rental properties and therefore hurt tenants unless there was a nuanced approach of allowing a more generous discount for brand new homes.

“There’s definitely a risk about that and you could also see an increase in rents,” he told Sky News.

“Another thing you could do is lower it in a tilted way.”

Since September 1999, someone making a $100,000 gain on an investment property has only had to declare $50,000 of that on their tax return.

But a dilution of the discount to 33 per cent would mean an individual would need to declare $67,000 as part of their taxable income for the financial year.

The ACTU wants the 50 per cent discount restricted to one investment property, with the concession reduced to 25 per cent beyond that.

The Australian Manufacturing Workers Union, aligned with Labor’s Left faction, and a pressure group Labor for Housing want the 50 per cent capital gains tax concession scrapped entirely.

Limiting negative gearing to two investment properties would mark the biggest change since Bob Hawke’s Labor government briefly scrapped negative gearing altogether in 1985 only to revive it two years later.

Labor lost the 2016 and 2019 elections with a policy of restricting it to new properties and halve the 50 per cent capital gains tax discount to 25 per cent.

The Parliamentary Budget Office last year calculated that negative gearing tax breaks would cost $101.3 billion in foregone revenue over the coming decade.

Treasury is forecasting a $36.8 billion deficit for this financial year, with government spending as a proportion of the economy at the highest level in four decades outside of COVID.

Swiss bank UBS noted government spending was adding to inflationary pressures, making a May hike likely from the Reserve Bank of Australia.

“Overall, fiscal policy – across all Governments – remains stimulatory. For the Australian Government only, while the Budget deficit is tracking to be smaller than expected, the size of the deficit is still increasing,” it said on Friday.

Further rate rises could potentially slow the labour market with Deloitte Access Economics forecasting a jobless rate of 4.6 per cent by June next year, up from January’s low level of 4.1 per cent and worse than the Reserve Bank’s forecast of 4.4 per cent.

This would see another 80,000 people joined the ranks of the unemployed, leading to more demands on Commonwealth welfare.