For policy nerds like me, the week after the federal budget usually brings some much-needed quiet. After months of speculation and drip-fed policy announcements, we’re usually well and truly ready to move on.
Not this year. The government has announced plans to limit negative gearing to new builds, and to reform how it taxes income from trusts and capital gains. That’s led to a concerted outcry from those opposed to the changes.
Some of the backlash likely reflects Australians’ general concern about the state of our economy, even as many of the individual budget measures set out by the government retain majority support.
But by muddying the waters around what these tax reforms actually do, some contributions to the public debate have missed the mark entirely.
So, let’s set the record straight by busting two persistent myths about these tax reforms.
Myth 1: landlords will just hike rents
Pretty much every renter has had the stomach-churning experience of receiving notice from their landlord that they’re about to hike the rent. The experience has been especially common in recent years.
Since the pandemic, rents on existing tenancies have spiked by more than 20%. So it’s no wonder many renters are worried about what their landlord might do when faced with a bigger tax bill.
While this concern is widespread, it overlooks the fact property investors will always look to charge as much as the market can bear.
If rental supply is low relative to demand, as has often been the case in recent years, landlords will look to raise rents. But they do this because market conditions allow it, not just because their own costs have changed.
To put it another way: if your landlord received a tax cut, would you expect them to pass that cut through to your rent?
Other market forces matter
Recent research by the Reserve Bank examined how housing investors respond when interest rates change. It found that when investors faced higher mortgage payments, they were only able to raise rents by 3 cents for every A$1 increase in their borrowing costs.
Our own analysis backs this up. We’ve previously estimated that tax reforms similar to those set out in this year’s budget would reduce property prices by about 1%, leading to a slight decrease in new house building and rental availability.
But we estimate this reduction in supply would only increase rents by a tiny amount – just $1 per week for the median rental. Treasury’s estimate in the budget is very similar, at around $2 per week.
In addition, properties purchased before budget night are “grandfathered”, meaning they can continue to be negatively geared, further reducing the cost pressures existing landlords face.
James Ross/AAP
Read more:
Will this budget really make housing fairer for more Australians? It’s a good start
Myth 2: taxing discretionary trusts is a ‘death tax’
The government’s proposed trust reforms place a 30% minimum tax rate on the taxable income of discretionary trusts. Certain types of income will be excluded, such as “primary production” income from farms.
This is designed to counteract the practice of using discretionary trusts as tax vehicles that enable families to distribute income to lower-income family members and so reduce the total amount of tax paid.
Testamentary trusts are a particular kind of discretionary trust set up in someone’s will, and which provide flexibility in terms of how future income from assets is distributed. Such trusts can allow beneficiaries to avoid the high tax rates that usually apply to people under 18.
While the finer details of these changes are not yet nailed down, this minimum tax will apply to new testamentary trusts.
Only a small number of individuals use these kinds of trusts, with around 10,500 testamentary trusts established as of 2023, compared to more than 800,000 other discretionary trusts.
The changes don’t mean people can’t put these trusts in their will in future. It just means beneficiaries will face at least a 30% minimum tax rate on that trust income. This is the same tax rate faced by the roughly 49% of Australian taxpayers who earn between $45,000 and $135,000.
Most importantly, this tax will not apply to deceased estates without testamentary trusts, and it only applies to the income that is earned from discretionary trust assets, not on the transfer of assets into the trust in the first place.
To call this a “death tax”, therefore, is to stretch the term beyond any reasonable definition.
Putting tax reform in the ‘too hard basket’ hurts us all
Grattan Institute analysis, along with research by other experts, has for years shown that tax concessions for capital income and trusts were poorly designed and hugely costly to the budget.
But whatever view individuals might have on these tax breaks, we should all be concerned if policymakers decide to put tax reform in the “too hard basket”.
Tax reform means shifting our tax base toward fairer and more efficient taxes. Inevitably, those who see their tax bill rise will be unhappy.
But that doesn’t mean tax reform is any less necessary – or that reformers won’t eventually succeed. Just ask the then Prime Minister John Howard, who broke an election promise – and almost lost the next election – to bring in an unpopular tax economists had long been calling for: the goods and services tax (GST).
More recently however, governments have struggled to implement big reforms of this kind.
That’s a shame. Because there are many more ways we could reform our tax system to boost the budget, grow the economy, and expand economic opportunity for all Australians. If tax reform is off the table, we all lose.
Read more:
The tax changes in the budget only scratch the surface. Here are 4 reforms Australia needs next
