As seen in The West Real Estate

The Capital Gains Tax (CGT) discount debate has reignited as we head towards the Federal Budget in May. 

CGT applies to profits from the sale of assets like investment properties, shares or crypto currency. These profits are added to your annual income, which is then taxed. If the asset has been held for more than 12 months, a 50 per cent discount applies, meaning only half the capital gain is included in assessable income. 

There is discussion about reducing the discount to 25 per cent. There is also speculation the change will only apply to housing, and not other asset classes. One small positive is the suggestion any change may only apply to new investment purchases, not existing properties. 

A key question is who will benefit from these changes?  

Will it improve housing affordability? Recent reports suggest house prices may only drop by 1 per cent. That’s of little benefit to buyers. 

Will it increase supply for buyers? Possibly, in the short term. If changes are applied to existing investment properties, there may be a short-term surge of investors seeking to sell before the discount decreases. However, in WA, demand is so strong, these properties will be snapped up quickly and we will not see a lasting increase to supply. If the change to the discount is only applied to new purchases there is unlikely to be a rush to sell, so there will be no change to supply. 

Will it reduce the competition for properties? It may change the nature of demand. Reducing the CGT discount may make property less appealing to investors, reducing their presence in the market. However, as demand in WA is strong, competition will remain strong regardless. 

How will any change to the CGT discount affect renters? If investors exit the market, supply will decrease. This will see vacancy rates tighten and increase the upward pressure on rents. This is the last thing we need in an already constrained market. 

Reducing the CGT discount by 25 per cent is also likely to reduce the appetite for investing in property, exacerbating supply constraints. The impact on the market will be greater if the change to the discount is only applied to housing. Potential investors will put their money into other asset classes, compounding supply issues. Over time, this will make renting more difficult and more difficult and more expensive than it already is. The small benefit in this scenario is this condition allegedly won’t be applied to existing owners, so we may not see them leave the market. 

There has been a lot of commentary about how much the CGT discount ‘costs’ the Federal government in lost revenue. Overall, it seems the real winner from any change would be the government’s bottom line, while renters will face reduced supply and higher rents.

Suzanne Brown
REIWA President