Billions wiped from federal government coffers through capital gains tax property discount

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NEARLY $24 billion has been wiped from Federal Government coffers in just five years by a capital-gains tax discount economists claim rewards the rich and freezes out first homebuyers, new estimates show.

Treasury predicts these lost revenues will increase by another $23 billion to a total of $46 billion over the next three years.

This is on top of revenue foregone because of negative gearing, previously estimated at $5 billion a year.

And it comes as the Property Council of Australia indicates for the first time its willing to support reducing the 50 per cent concession given to some property investors.

A comprehensive and consultative reform package is one of the key policies the Turnbull Government has promised to take to the next Federal election.

Public discussions to date have largely centred on possible changes to the goods and services tax, thanks in part to persistent protests by the Opposition.

But an analysis of Treasury figures by News Corp reveals the amount of revenue lost via the CGT concession given to individuals and trusts on property held for more than a year will skyrocket from $4.41 billion in 2010-11 to $8.31 billion in 2017-18.

This is in addition to the billions of dollars collected between 2000-01, when the discount was introduced, and 2009-10 which previous Treasury documents suggest could be worth as much as $48 billion.

News Corp this week contacted the Treasurers office to confirm this sum, but was told previous Tax Expenditure Statements could not be relied on because forecasting benchmarks could change and the estimates were of medium reliability.

A spokesman for the Treasurer declined to provide new figures.

AMP chief economist Shane Oliver said the discount, introduced by the Howard Government, was too generous and distorted the tax system.

The decision in the (late) 1990s to introduce the CGT discount reopened a huge hole in the tax system which is therefore putting more pressure on regular income taxpayers to pay higher tax, he said.

(Its) also having the unintended consequence of making life tougher for first homebuyers as well.

Dr Oliver said the concession should be scrapped and replaced with the previous system, which taxed investors on the real portion of capital growth by indexing for inflation.

Bank of America Merrill Lynch chief economist Saul Eslake said hed prefer to see the discount lowered to 33 per cent, which would roughly approximate the previous system but require less red-tape.

He agreed the current system benefited the wealthy and pushed up property prices.

Mr Eslake said while it would be incorrect to conclude the budget would be $72 billion better off now had the discount not been introduced because the extra revenue would likely have been spent, the concession was a significant impediment to budget repair.

The midyear economic and fiscal outlook handed down by the Government last month predicted the deficit would increase to $37.4 billion partially because of a shortfall in tax revenues.

In 2018-19 the deficit is predicted to drop to $14.2 billion less than two times the $8.3 billion in revenue lost because of the CGT discount the year before.

Responding to questions from News Corp this week, a spokesman for Treasurer Scott Morrison said: The Government is engaged in a discussion on taxation so we can ensure we better assist Australians to work, save and invest.

Mr Morrison and Prime Minister Malcolm Turnbull have previously claimed everything was on the table when it came to tax reform.

Property Council of Australias Ken Morrison said he had told the government his organisation would support lowering the discount to 40 per cent and extending the eligibility period to two years.

There needs to be some CGT discount; its not fair to tax inflation, he said.

(But we recognise) that a 50 per cent discount particularly in a low inflation environment is quite a significant discount.

Mr Morrison urged caution over changes to negative gearing however, saying property investors were responsible for one third of new housing supply.

If those that argued for the complete abolition of negative gearing and the CGT discount were successful you would certainly see less housing construction, less rental stock and higher rents as a result, he said.

Reducing the discount has previously been slated by the Australian Greens, who last year asked the Parliamentary Budget Office to cost several scenarios including reducing the discount to 40 per cent a recommendation of the 2010 Henry tax review.

The PBO reported in May this measure alone, without changes to the eligibility period, would increase revenue by $2.4 billion over the 2014-15 forward estimates.

Removing the discount entirely was predicted to boost revenue collections by $10.2 billion over the same period.

Greens deputy leader Scott Ludlam said the party would undertake further research this year before refining its policy over whether the discount should be scrapped or simply reduced.

Revenue lost because of 50 per cent CGT discount given to property investors after one than a year.

To date: Financial Year $b

2009-10 4.33

2010-11 4.48

2011-12 4.91

2012-13 3.99

2013-14 4.30

2014-15 5.41

Total: 27.42

Source: Treasury 2013 Tax Expenditure Statement

Forecast: Financial Year $b

2015-16 6.97

2016-17 7.64

2017-18 8.31

Total: 22.92

Source: MYEFO 2015 Tax Expenditure Statement