Tax reform discussion thread (a spin off from a spin off)

[Guest Alias Grace]

@dianalynch - I may know a few things about it professionally  - although I am certainly no expert across the board.  Happy to answer any questions that anyone has as best I can.  I'm also really interested to know what others think as I spend quite a lot of time thinking about this stuff, but more from a practical rather than a policy perspective.   

[Sugarplum Poobah]

Ultimately taxation is founded on what we find culturally and socially acceptable -- much of which is arbitrary and doesn't really stand up to objective analysis. A good historical example is the window tax (https://en.wikipedia.org/wiki/Window_tax).

And opinions are going to vary on what is fair and equitable. Fuel excise was raised as an issue of double dipping by PPs. However I'd argue that high prices for fossil fuels are a good thing from an environmental perspective.

I can go back to the OP talking about losing the CGT exemption on the principle place of residence -- something that won't stop wealthy people moving but would trap low and middle income earners into existing properties. 

Personally I'd like to see a really decent level of secure public housing (not like it is currently in Australia) which would provide lifetime options for everyone and stop the ridiculous level of property speculation in this country.

If you want to maintain social stability then any change needs to be slow and steady. Storming the barricades might look attractive but historically it's only ever led to lots of death and dispossession -- and not much mass benefit.

[Guest Alias Grace]

@Sugarplum Poobah - I have been thinking more about the topic of housing too.  Perhaps the Government could encourage private investment in social housing - i.e. to encourage individuals to invest in properties that can be used as low cost social housing.  DH and I are considering buying an investment property but I feel guilty that we'll be contributing to the upward trend in house prices and rental costs.  I like the idea of buying a property and renting it out at well below market rates - or even free of cost given that interest rates are so low - to someone who needs it but I don't know the right way to go about it - i.e. who to partner with.  It would be great if there was a scheme that encouraged this at scale.  Then perhaps we could retain some form of incentive (e.g. negative gearing benefits or the 50% CGT exemption or a stamp duty exemption) for this type of investment but 'regular' IPs would not receive any tax benefits.  I don't know whether or not it would work.  

 

[Guest Alias Grace]

Also, on the primary residence exemption for CGT, I am really undecided as to whether it would be more equitable or not.  I think that traditionally the people who realise bigger % capital gains are those who can afford buy houses in more lucrative areas, especially the inner or mid-ring suburbs.  People buying either houses in the outer suburbs or apartments typically see lesser % capital growth and gains.  But both are hit with stamp duty at an equal % rate on upgrading.  So perhaps removing stamp duty and taxing part of the capital gain is more equitable?  Really not sure though.  

[Sugarplum Poobah]

11 minutes ago, Alias Grace said:

@Sugarplum Poobah - I have been thinking more about the topic of housing too.  Perhaps the Government could encourage private investment in social housing - i.e. to encourage individuals to invest in properties that can be used as low cost social housing.  DH and I are considering buying an investment property but I feel guilty that we'll be contributing to the upward trend in house prices and rental costs.  I like the idea of buying a property and renting it out at well below market rates - or even free of cost given that interest rates are so low - to someone who needs it but I don't know the right way to go about it - i.e. who to partner with.  It would be great if there was a scheme that encouraged this at scale.  Then perhaps we could retain some form of incentive (e.g. negative gearing benefits or the 50% CGT exemption or a stamp duty exemption) for this type of investment but 'regular' IPs would not receive any tax benefits.  I don't know whether or not it would work.  

 

There are certainly some schemes around -- but my knowledge of them isn't particularly in depth, sorry. It was be great if it were more widespread because, regardless of the rhetoric, most public housing in this country is pretty much a last resort provision. We could look at a number of options including cooperative housing, intentional communities (which is always going to be limited) shared ownership, rent to own etc. Housing is actually at the core of all the discussions we have about tax, money and security and if we can start to reform that then we're a long way towards creating a more equitable and happy society.

[banyan]

57 minutes ago, dianalynch said:

Wow you all know a lot about the tax system I’ve been left behind 

 

agree with a lot of previous posters, and also I think we need to do something about either superannuation or funding for older age retirement ie 85 years plus. A levy like the Medicare levy, probably levied on business maybe individuals depends on all the other ins and outs, to fund a pension for older aged retirement (so our super doesn’t have to last as long) so we can all plan our super until 85, and then the older aged pension kicks in if you’ve made it that far. Like a giant insurance scheme, we all pay into it, some of us use it, some of us won’t...

I'm still stuck wondering what a franking credit is.

[Sugarplum Poobah]

2 minutes ago, Alias Grace said:

Also, on the primary residence exemption for CGT, I am really undecided as to whether it would be more equitable or not.  I think that traditionally the people who realise bigger % capital gains are those who can afford buy houses in more lucrative areas, especially the inner or mid-ring suburbs.  People buying either houses in the outer suburbs or apartments typically see lesser % capital growth and gains.  But both are hit with stamp duty at an equal % rate on upgrading.  So perhaps removing stamp duty and taxing part of the capital gain is more equitable?  Really not sure though.  

I thought there was a bit of a sliding scale to stamp duty? There's certainly a point at which it kicks in. I know there have been reforms in some states and proposals to reform in others. To be quite frank the idea of replacing it with a yearly additional tax is incredibly unattractive to me (this has been done in the ACT and is proposed for NSW as far as I'm aware) -- at least you know what you're up against with an upfront lump sum as versus an amount that might grow exponentially and become unaffordable. I don't particularly trust the economist's modelling I've seen on this as it seems to be entirely based on what a first time house buyer sees as an upfront amount rather than their understanding of the long term implications. 

[Sugarplum Poobah]

3 minutes ago, banyan said:

I'm still stuck wondering what a franking credit is.

When you receive fully franked dividends they are treated as tax paid already. At the moment if you don't actually earn enough to pay tax then you still receive these franking credits as a tax rebate, rather than as just a deduction against tax owed. (The franking in and of itself simply means the company has paid tax which is a good thing -- the benefits to the individual shareholder are regarded slightly more dubiously )

[Guest Alias Grace]

@banyan - a franking credit represents income tax that has been paid by a company that may be passed onto its shareholders as a tax credit via dividend payments.  So if a company earns $100 of profit and pays $30 of tax on it, it will have $70 of after-tax profits that it can distribute to shareholders as a 'franked' dividend.  The shareholder receives a $70 cash dividend but includes both the $70 + the $30 franking credit in its taxable income (i.e. $100 of taxable income).  The shareholder then pays tax on the $100 at its marginal tax rate to determine its gross tax payable.  The franking credit is then applied to reduce the gross tax payable.  So if the shareholder's marginal tax rate is 45% they will pay $15 of net tax (i.e. [$100 income x 45% tax rate] - $30 credit].  But if the shareholder's marginal tax rate is only 15%, then it will receive a cash refund of $15 (i.e. [$100 income x 15% tax rate] - $30 credit).  Some people (including me) don't agree with the franking credit creating a cash refund as it means that the underlying 30% corporate tax rate is being eroded.  

I hope that makes sense! 

ETA - I see that Sugarplum Poobah has already explained it more succinctly!  

Edited June 17, 2021 by Alias Grace

[banyan]

Thanks to both of you! I am a few wines in, so will read over the weekend.

[Over and out]

If people start paying cgt on their ppr I would think that capital expenses for their ppr would need to stet becoming tax deductible. The house is either a asset that they pay tax on and therefore has tax deductible expenses or not. You can’t have it both ways

[Bornagirl]

6 hours ago, JRA said:

If people start paying cgt on their ppr I would think that capital expenses for their ppr would need to stet becoming tax deductible. The house is either a asset that they pay tax on and therefore has tax deductible expenses or not. You can’t have it both ways

It would be the same as investment properties - either depreciation, or reduce the amount on which tax is payable.

A tax deduction isn't the only way to take into account how you've added value to the asset.  Buy a property for a million, do a half million renovation, sell for $1.6, your profit is 100K.

What's being forgotten here though (and I only remember cos I'm old) is how the 50% reduction came about.  Before the 50% reduction, people were quite rightly able to take into account the changing value due to inflation. e.g. if you bought a house for $300k, sold for $300k ten years later, then what you could do with that cash was dramatically reduced.  So ... people were able to adjust for inflation (at a specific rate, not one off the top of their heads), but it was tedious, time consuming, and generally came out to roughly 50%, because house prices were not going up that much.  I remember  I had to do the calculations for my previous house because I was working from home, stock and all, all over the house, do didn't have to bother with the calculations.  With house prices the way they were, the renovations we did, I didn't make a cent.    They simplified it to being 50% which was win a bit, lose a bit for most people.    Then house prices went through the roof ...

That happened soon after we moved to the current house, and despite using the house as a warehouse (with a LOT of stock) I never claimed a cent, apart from the trivialities that anyone can claim (tiny bit of electricity etc.).

[Romeo Void]

Agree with a lot of the stuff everyone has already said. Not Tax related but I'd also like to see the ABC funded better.

Edited June 17, 2021 by Romeo Void

[Moomintroll]

9 hours ago, Alias Grace said:

@Sugarplum Poobah - I have been thinking more about the topic of housing too.  Perhaps the Government could encourage private investment in social housing - i.e. to encourage individuals to invest in properties that can be used as low cost social housing.  DH and I are considering buying an investment property but I feel guilty that we'll be contributing to the upward trend in house prices and rental costs.  I like the idea of buying a property and renting it out at well below market rates - or even free of cost given that interest rates are so low - to someone who needs it but I don't know the right way to go about it - i.e. who to partner with.  It would be great if there was a scheme that encouraged this at scale.  Then perhaps we could retain some form of incentive (e.g. negative gearing benefits or the 50% CGT exemption or a stamp duty exemption) for this type of investment but 'regular' IPs would not receive any tax benefits.  I don't know whether or not it would work.  

 

There is a scheme in the ACT. Landlords pay high land tax in the ACT. But a property owner can sign up to a scheme where you rent at well less than market rate to a government selected low income tenant, and you don't have to pay the land tax. Ends up not costing the property owner very much at all. 

It's not very well known. perhaps there are similar schemes in other states?

[Gumbette]

10 hours ago, Sugarplum Poobah said:

There are certainly some schemes around -- but my knowledge of them isn't particularly in depth, sorry. It was be great if it were more widespread because, regardless of the rhetoric, most public housing in this country is pretty much a last resort provision. We could look at a number of options including cooperative housing, intentional communities (which is always going to be limited) shared ownership, rent to own etc. Housing is actually at the core of all the discussions we have about tax, money and security and if we can start to reform that then we're a long way towards creating a more equitable and happy society.

Hong Kong has an enormous stock of public housing to which they're constantly adding.  Their housing prices make ours look cheap.  Maybe follow China's lead where strict regulations mean buying a 2nd property is near impossible.  I don't know what the answer is, but but our current system of shutting future generations out of secure long term accommodation (unless you can inherit your parents house) just isn't working and it's getting worse.

[CrankyM]

There is a scheme in WA where lower end income earner can apply for places rented low. I can’t remember the name. I’ve seen it a few times around and a friend has accessed properties this way. I would really like limits on things like air B and B. Currently I live in a town where finding a place to rent is almost impossible. That’s IF you can afford it. ($360/2b 1 bath tiny flat. That’s the subsidy rate BTW. It usually $400-$450 for those places). People with a family income over 90k and stable income not being able to find a place to live. 

[Bornagirl]

8 hours ago, Moomintroll said:

There is a scheme in the ACT. Landlords pay high land tax in the ACT. But a property owner can sign up to a scheme where you rent at well less than market rate to a government selected low income tenant, and you don't have to pay the land tax. Ends up not costing the property owner very much at all. 

It's not very well known. perhaps there are similar schemes in other states?

I think there are, I've looked into it in Vic.   The one I know of, the rent is much lower, but guaranteed somehow, so you don't have to allow for vacancies.

[Guest Alias Grace]

Many thanks @Sugarplum Poobah @JRA and @Bornagirl - I hadn't factored in your points on the deductibility of maintenance and improvement costs (esp. the record keeping that would be involved with that) and the previous entitlement to CGT indexation.  I agree now that taxing gains on primary residences would be completely fraught.  I am also more sympathetic towards the 50% CGT exemption - although as you note it's probably too concessional due to house price inflation far outstripping general inflation.  Not sure what the solution to that is though - i.e. to ensure that only 'real'/post-inflation gains are taxed without re-introducing the complexity of indexation.    

[IamtheMumma]

9 hours ago, Moomintroll said:

There is a scheme in the ACT. Landlords pay high land tax in the ACT. But a property owner can sign up to a scheme where you rent at well less than market rate to a government selected low income tenant, and you don't have to pay the land tax. Ends up not costing the property owner very much at all. 

It's not very well known. perhaps there are similar schemes in other states?

NRAS? Its available in QLD. I thought it was national.

[CrankyM]

Yes NRAS is the scheme in WA too that I was talking about above. I'd never heard about it until my friend mentioned it.

[Bornagirl]

20 minutes ago, Alias Grace said:

Many thanks @Sugarplum Poobah @JRA and @Bornagirl - I hadn't factored in your points on the deductibility of maintenance and improvement costs (esp. the record keeping that would be involved with that) and the previous entitlement to CGT indexation.  I agree now that taxing gains on primary residences would be completely fraught.  I am also more sympathetic towards the 50% CGT exemption - although as you note it's probably too concessional due to house price inflation far outstripping general inflation.  Not sure what the solution to that is though - i.e. to ensure that only 'real'/post-inflation gains are taxed without re-introducing the complexity of indexation.    

Just to be clear, I'm not opposed to taxing gains on the primary residence. It's actually why I'm not too bothered with people my age having to pay stamp duty IF their house is in the higher half of the prices ranges.  I haven't earned the capital gain on this property. The stamp duty if we move will only be a portion of that.  It's very different if people only have a basic home that cost them $50k back in the day, and is now worth $500k.  Then, downsizing isn't going to leave them with much left over.  I don't need a concession to downsize, but others may.

I'm actually not opposed to inheritance taxes.  If you want to help your kids, do it now, don't clutch your assets to your chest, insisting your goods and chattels should go to your children, but the government should give you living expenses in the meantime.

 

[Moomintroll]

2 hours ago, IamtheMumma said:

NRAS? Its available in QLD. I thought it was national.

NRAS is aimed at developers building medium to large scale affordable housing developments. The ACT has an additional scheme for private landlords who select to rent their property out through a community housing service. However it's not a very big program. But a good idea. 

[Tinsel]

Fire levy should be added to council rates, not insurance.  This is a cost that should be shared by all property owners not just those owners of insured properties.  And bloody hell, we could do with improved fire services that's for sure.

Stamp Duty should be a set figure - eg $5K-10K (whatever arbitrary but affordable figure is decided upon) to cover the costs of the Lands Dept (or whatever organisation now oversees land titles) and any money left over going to the state. 

When we bought our house in 1990, NSW had a scheme then, that under a particular $ value, first home owners could pay off their stamp duty over 5 years, instead of up front in a lump sum.  I remember ours was $2,500 and we didn't have to pay our first installment of $500 until we'd been in our house for a year.  NSW's plan to have the option of a single upfront stamp duty fee an annual stamp duty payment could be a goer but they haven't yet decided if the annual payment has an end time or indefinite - indefinite suits those who buy and sell to move every few years, not so good for those who buy and stay long term.

22 hours ago, Bornagirl said:

Just to be clear, I'm not opposed to taxing gains on the primary residence. It's actually why I'm not too bothered with people my age having to pay stamp duty IF their house is in the higher half of the prices ranges.  I haven't earned the capital gain on this property. The stamp duty if we move will only be a portion of that.  It's very different if people only have a basic home that cost them $50k back in the day, and is now worth $500k.  Then, downsizing isn't going to leave them with much left over.  I don't need a concession to downsize, but others may.

I'm actually not opposed to inheritance taxes.  If you want to help your kids, do it now, don't clutch your assets to your chest, insisting your goods and chattels should go to your children, but the government should give you living expenses in the meantime.

 

I know in my area, there would be a great many people who find themselves in this group.  A friend bought a 3 bedroom fibro house in the late 1980's near us for $65K, similar properties in the same street (hell, all the houses in the street are similar) are now selling for $750K and up.  House isn't all that big to 'downsize' from - rooms are quite small, land in the area from 550-600sqm  blocks.  Perfect for developers and KDRBs.  Some townhouses in the area are a little cheaper, but many around the same price and are bigger than the fibro houses (!) and who wants to be aging and dealing with stairs anyway.  Units are much cheaper but are two and three storey older blocks (1970s - 1990s) without lifts (again aging and stairs if not a ground floor unit).  The high rise blocks with lifts are exxy because views to mountains and city.  So downsizing and staying in the area would be difficult if not impossible for them.   Single storey villas, are as rare as hen's teeth.   

We bought only a couple of years after friends and paid $125K, our property now around $1.2M.  We'll be downsizing our way right of Sydney and the balance after re-purchasing will be a component of the 'self-funded' in self-funded retirees.  We don't want to stay here anyway, but finding suitable accommodation is a bigger problem than many (not you, @Bornagirl) see.  Just because there is a glut of units/apartments in greater Sydney doesn't make them suitable for older downsizers from a cost or safety or lifestyle point of view.