Controversial tax changes for shares and businesses will prevent more money from being funnelled into existing homes, Treasurer Jim Chalmers claims.
Businesses have been relatively receptive to Labor’s decision to wind back tax breaks for property investors.
But changes to the capital gains tax discount on share sales have been slammed by critics, who say it will discourage business investment and constrain productivity growth.
The treasurer has consistently defended the decision to extend the changes beyond property, arguing it would add another distortion to the market and result in capital being allocated for tax reasons rather than pure economic fundamentals.
Speaking at a summit hosted by investment bank Morgan Stanley in Sydney, Dr Chalmers revealed why the government chose not to distort the market in the other direction and give businesses a more generous tax treatment than existing homes.
“If the reforms only applied to residential property and a flat discount continued to apply to shares, this could perversely funnel more investor money into existing housing because it could leave property investors better off than investors in shares during times of high inflation,” he said on Thursday.
The Australian Chamber of Commerce and Industry argued the existing 50 per cent discount on capital gains should be maintained for businesses.
“Removing the CGT discount for all asset classes fails to distinguish between ‘passive’ investment, such as in existing residential property, and productive, risk-taking investment in businesses,” the business group said in a submission to an inquiry into the tax changes.
But Dr Chalmers said productivity had been weak for two decades following the introduction of the CGT discount and the status quo could not be maintained.
Treasury found the discount overcompensated investments in detached housing but has been neutral for shares on average, under-compensating during some periods and overcompensating in others.
“A key design feature of these reforms is that they apply broadly and neutrally across assets,” Dr Chalmers said.
“This encourages investment decisions for economic reasons rather than tax outcomes, which will support productivity over time.”
Housing affordability non-profit National Shelter said the changes would open a pathway to home ownership for tens of thousands of Australians and help redirect investment towards new housing supply.
Auction clearance rates suggest the tax changes are already taking some steam out of the housing market.
Combined with higher interest rates and the impact of the war in the Middle East, economists at Morgan Stanley estimated the proposed changes could cause home prices to fall by as much as 10 per cent.
Westpac had witnessed a 20 per cent fall in property investor loan applications since the budget, head of consumer banking Carolyn McCann told an investor call on Thursday.
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