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Editorial

Action finally contemplated on property tax exemptions

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In May 2010, the Rudd government released the findings of the Henry tax review. Kevin Rudd lost the prime ministership the next month; not as a result of the review but because his fractious, micromanaging style had worn his colleagues' patience too thin. However, those colleagues had also feared the damaging backlash that Mr Rudd's tax on mining "super profits" had created, and its effects on their re-election prospects.

The mining tax was one of just five recommendations – of 138 proposed by the review – that Labor accepted. Almost all the others were ignored. However, Mr Rudd ensured that he very publicly rejected a small handful. On the same day he released Dr Ken Henry's findings, he said "we will never, ever embrace ... the recommendation to include the family home in means testing [or] to introduce lands tax on the family home".

The "family home" has long been a sacred cow of Australian politics. Six years ago, Mr Rudd knew that taxing it – whether through land tax, capitals gains tax, death duties or means tests – was political suicide. Indeed, this shibboleth extended to property in general. Generations of Australians have shaped their working lives around relying on tax-free, or at least minimally taxed, housing – their own home plus one or more investment properties – to fund their retirement years. The NSW Carr government was burned badly in 2005 when it increased land tax for multimillionaires who owned three or more high-value homes; it was forced to dump the change after less than a year. In the ACT, Katy Gallagher almost lost the 2012 election after the Liberals campaigned almost exclusively on opposing Labor's shift towards rates and investment property taxes.

Yet the public mood appears to have shifted. Over the weekend, federal Opposition Leader Bill Shorten announced he would limit Labor's support for negative gearing (tax breaks for property investors) and capital gains tax exemptions (tax breaks for property traders). Treasurer Scott Morrison also said the Turnbull government planned to wind back negative gearing for high-end investors. Rather suddenly, both parties have decided that tax incentives for (at least some) property investors are not in the national interest.

What's brought on this policy epiphany? The federal budget, for one. The government has a worsening structural deficit and tax exemptions – e.g. for negative gearing and capital gains tax – are among the fastest-growing contributors to public debt. As Mr Shorten pointed out, these two tax breaks now cost over $10 billion a year, more than the government spends on universities or childcare.

The Reserve Bank has also played a part in shifting debate in recent years. It says these two exemptions have superheated metropolitan property markets (especially in Sydney and Melbourne), helped create a housing bubble, and made it harder for low and middle-income earners to buy their first home.

Neither main party has yet confirmed the detail of their policies on this issue. Yet, whatever options they take, they would be wise to adjust the tax system slowly and to protect Australians who have already planned a retirement for themselves based upon property ownership. The tax incentives that housing attracts might not be the most productive use of public money in the long term. Nonetheless, unwanted sacred cows should be taken out to pasture, not slaughtered, if governments want to avoid unnecessary hardship.