Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 548

For the younger generation, we need to get real on tax

This is an edited transcript of Dr. Ken Henry’s radio interview with Andrew Pike on ABC's RN Drive Program recorded on 15 February 2024.

Dr. Ken Henry is an economist and public servant who served as the Secretary of the Department of the Treasury from 2001 to 2011. He chaired the Future Tax System Review, known as the Henry Tax Review, in 2010. Dr. Henry was also Chair of National Australia Bank from 2015 to 2019.

---

Andrew Pike: How often do you find yourself warning somebody that something bad is going to happen if they don't act, and then you have to sit back and rather painfully watch it play out just as you suspected it would? That's unfortunately been the experience of one of Australia's top economists, who's now warning that the state of the tax system has deteriorated to the point that Australia's social compact is at risk of falling apart. Dr. Ken Henry was the Treasury Secretary for a decade until 2011. He famously conducted the comprehensive, routine branch examination of the tax system known as the Henry Review. That report made 138 recommendations and specifically warned about possible tax distortions created from negative gearing.

Dr. Henry, great to have you.

Dr. Ken Henry: It's good to be with you.

Pike: 138 recommendations. How many of those recommendations were adopted? Do you know?

Dr. Henry: No, I don't. Very little actually. And some of those that were adopted were subsequently reversed. So, for example, we proposed a new taxation system for Australia's natural resources to tax the very large profits that mining companies, multinational mining companies especially, were making out of the extraction of Australia's natural resources.

Pike: The RSPT, yeah.

Dr. Henry: The RSPT. At that time, the Rudd government endorsed that recommendation, but of course it didn't survive the parliament. Another of the recommendations, you remember at that time the government was designing what became called the Carbon Pollution Reduction Scheme, which was the emissions trading scheme, the economy-wide emissions trading scheme for dealing with climate change or carbon abatement. That was in due course implemented, and then of course, that was abolished when the Abbott government came into power. So, we have gone backwards. We're in a much worse position today than we were 15 years ago when we were working on that review.

Pike: I think a lot of people in voter land right now have seen the Stage 3 tax cut changes and vaguely believe that there is some more equality in the tax system. You say that Australia's social compact is at risk of falling apart due to the state of the tax system. What do you mean?

Dr. Henry: So, what I mean is that – and actually your reference to the restructuring of the personal income tax scales is highly appropriate, because the discussion that we in Australia have been having about the design of the personal income tax scales over the past 12 months or so has been a conversation about fairness, about equity, about who should get tax cuts. The tax cuts are going to be provided. Who should get them, high-income earners or low-income earners? And not surprisingly, the community consensus is that those tax cuts should be skewed to lower and middle-income earners.

Now that's consistent with a basic principle of tax reform, which is that if you think about the features of the tax system in terms of efficiency effects, basically what impact does the tax system have on the performance of the economy; the equity effect, which is all about fairness; and the simplicity of the tax system. If you think about those three buckets, the one that trumps, always trumps, is equity. But here's the point. Because we have lost interest in economic efficiency as a guiding principle, and also to some extent in simplicity, the tax system has now become so distorted that it is underpinning the greatest inequity of all, at least the greatest inequity that I've seen in my lifetime, which seems to me to be an intergenerational tragedy.

So, the point is that we now have, because of this intense focus on equity at every point in time, we have a system which has been designed to be fair to the baby boomers, people like me. The consequence of it is that people like me are sitting on large, untaxed capital gains in houses that young working-age families will never be able to afford to buy, and in fact, increasingly, are not being able to afford to even rent. And we're sitting there either as investors getting very lowly taxed capital gains and interest deductions, or we're sitting there on tax-free capital gains, and we have priced out the working-age generation. We've just priced them out of access to the Australian property market.

That's just one example of the way that through this intense focus on equity, equity, equity for every tax issue, we have managed to produce a situation in which we have created a tragic intergenerational inequity. We've lost sight of the main game. The main game should be making a better country for future generations.

Pike: So, if you don't disagree with the Albanese government's changes to the Stage 3 tax cuts, you say that they ultimately go to that point of equity, which is largely a good thing, what more can the Labor government do to address this equity to get middle Australians and working-age Australians into the position that their parents enjoyed?

Dr. Henry: Well, get serious about tax reform.

Pike: Negative gearing?

Dr. Henry: Well, of course, that has to be part of the discussion. We have to talk about negative gearing. We have to talk about the capital gains tax concession, the fact that only 50% of nominal capital gains are included in a taxpayer's income, whilst they get full interest deductions. That's what negative gearing is all about. We have to get serious about that. We have to think about the way the capital income is taxed, in the way the capital deductions are allowed in our system. But that's only one of the things we have to think about.

I mean, my generation, the baby boomers, at the same time as we're sitting on those tax-free capital gains and our wealth is not taxed, we are paying the smallest rate of consumption tax in the industrialized world. We've got to think about consumption tax in this country. The whole GST debate from 1975, when Kenneth Asprey published his report, The Asprey Review in 1975, right through until 2000, the debate was all about the so-called tax mix switch, putting more reliance on taxation of consumption and less reliance on the personal income tax system.

Pike: Is that the Scandinavian tax model? You've sort of raised this idea.

Dr. Henry: No, the Scandinavian tax model is really about how you apply similar taxation treatment to different forms of capital income, whether it'd be interest, rent, dividends, capital gains, trying to tax those in a uniform manner so as to reduce the distortions in the economy. That model does do a lot to address the distortions created by negative gearing. And that is one of the distortions that we do have to address.

But the other one that I was talking about just then is that we have to go back to thinking about the appropriate balance between taxes on income, taxes on wealth, and taxes on consumption. Because the source of the intergenerational inequity that I've been talking about is that the workers who are the ones that are paying the personal income tax, they are having to shoulder the burden of supporting a Commonwealth budget that delivers benefits not just to aged people, but predominantly to aged people or increasingly to aged people, I should say, who are themselves contributing very little. Because they're not paying tax on their superannuation, they're not paying tax on their capital gains, and they're paying a very, very low rate of consumption tax. So, we've got to ask ourselves, is this really fair? Is it really fair that the young working people who are the ones who are paying all the tax, they're not able to afford a house? They're the ones who are going to have to pay off the massive public debt that has been accumulated both in the Global Financial Crisis and more recently in the pandemic. Many of them have huge HECS bills. I mean, for goodness sake, how can anybody think this is fair?

Pike: I mean, you're almost directly talking to my generation in my early 40s. A lot of my friends are exactly in this position.

Dr. Henry: Right.

Pike: So, let me ask you then, who do we blame? I mean, do you put blame at the feet of the Rudd-Gillard government, which was in power at the time of your review, because it was arguably their lack of action, which allowed subsequent governments like Liberal and Labor governments to sort of sit on their hands?

Dr. Henry: I mean, of course, I would wish that they had been more successful. But they had a go. I don't blame them. Actually, I blame all of Australia. I think as a country, we've got to get real about where the country is going and the policy changes that we need to improve the way that the country is going. Many commentators will tell you that the Australian economy is really, really strong. What they mean is that the mining sector is doing well. That's what they mean. The mining sector, let me tell you, employs less than 1.5% of the Australian labor force, right? And yet, that's what's driving the great optimism amongst the economic commentators in Australia and including politicians in Australia. Oh, well, the economy must be doing well, but they're really talking about is mining is doing well, right? We've got to start worrying about the rest of the economy. We've got to start worrying about the other 98.5% of the labor force and what's happening to their real wages growth? Well, negative. And why negative? Because we don't have policies that are making the labor force more productive year after year after year.

Pike: So, on that, we heard yesterday, a treatise from Professor Ross Garnaut, who basically believes it's time for Australia to revisit a carbon tax. He calls it a carbon solutions levy, or CSL, get prepared to hear that quite a lot over the next few months until the next election. I mean, essentially, this is to incorporate the climate impacts of fossil fuels into the economic system also to open up our export industries to European standards, who are also implementing these kinds of taxes. What did you think of this vision, this idea of a CSL?

Dr. Henry: What do I think about it? Yeah, I think it's a great idea. By the way, I don't see it happening anytime soon, but I do think that that's exactly the sort of tax change – tax changes of that magnitude that we need to be having a discussion about. And we have avoided those discussions for many, many years now. We published the Intergenerational Report in 2002, which pointed to some of the looming intergenerational challenges that you and I have been talking about this afternoon. And we have, in the 20 years since studiously avoided talking about these big policy changes that are going to be required. And a policy change of that sort is exactly the sort of thing that we should be talking about.

Pike: It was Julia Gillard that said when she was PM, we think an abolition of negative gearing would cause distortions to the property market we don't want to see. I mean, this is sort of part of the problem, isn't it, that politicians are too afraid to tackle this head on?

Dr. Henry: Too afraid, yeah. I do remember when I was posted to the OECD in Paris, which was a lovely posting, I've got to say, but the analysts in Paris used to say that Australia was top of the class when it came to dealing with adversity. But whenever Australia thought that the good times were rolling, policy was just crap. And for most of the time, we think the good times are rolling, and so policy is just crap.

 

 

97 Comments
Mark
March 01, 2024

I don't disagree strongly with the points made by Dr Henry. But I'd like to see the public discussion about tax reform approached from a different angle. Rather than just focus on inequalities or unfairness of specific taxes like negative gearing, CGT concessions, superannuation concessions, income tax scales etc, I think the discussion needs to be framed around one question as a starting point: What sort of country and economy do we want in the future? Do we want a strong health system that meets current and emerging needs, ditto primary and secondary education, ditto defence, ditto law and order, ditto a strong manufacturing sector, giving younger generations a proper, genuine help to own their own home, continue doing our bit to accept and help genuine refugees, and so on. Decide on these points and then start taking about a tax system to achieve these objectives. If I ever hear a politican or party start a discussion about tax reform in this manner, I'll take some notice. The vested interests who lobby to protect the status quo have no part in a genuine discussion about tax reform.

Gregory John Olsen
February 27, 2024

Sadly, Ken Henry's whole basis for tax reform is completely misguided. It's rooted in neoclassical economic doctrine and neoliberal thinking. Although many of his ideas are good for economic justice, he is thinking about them falsely.

For example, he writes, "Is it really fair that the young working people who are the ones who are paying all the tax, they're not able to afford a house? They're the ones who are going to have to pay off the massive public debt that has been accumulated both in the Global Financial Crisis and more recently in the pandemic".

There is no "massive public debt". Therefore, basing a tax policy on it is nonsense. Tax does a few things. It can:
i) be used to redistribute money already in the system;
ii) take money out of the economy, destroying it;
iii) be used to dissuade unwanted behaviour eg taxing tobacco.

The big truism is that Federal Government tax doesn't fund Federal Government spending. Sadly, nobody in Parliament House makes economic policy with that fact front and centre. ??


He correctly says, "We have to go back to thinking about the appropriate balance between taxes on income, taxes on wealth, and taxes on consumption." I really like his point that real estate investors get 100% income deductions for the costs of owning a property but only pay tax on half of any capital gain upon its sale!

George B
February 27, 2024

“real estate investors get 100% income deductions for the costs of owning a property but only pay tax on half of any capital gain upon its sale”
I can think of at least 3 reasons why this is so.
1. it’s a form of rent subsidy for people who otherwise may not afford to live in the suburb of their choice;
2. there is no account for inflation;
3. the gains are all taxed in one financial year (usually at the highest marginal rate).
In contrast they were previously only taxed on real gains after inflation and the tax rate recognized that the gains accrued over several financial years. Ask somebody on $50K a year if they would prefer to pay tax on $250k every 5 years instead and he/she will understand the need for a tax discount.

Dudley
February 27, 2024

To amplify George B's point "gains are all taxed in one financial year":

Income $20,000 / y ($0 tax) for 5 years, capital gain of $250,000 realised in 5th year, inflation 0%.

[https://paycalculator.com.au/]

Current system; tax payable over 5 years (50% CGT discount in last year):
= 4 * $0 + 1 * $41,617
= $41,671

Alternate system; tax payable over 5 years (100% CGT payable each year):
= 5 * $14,617
= $73,085

Alternate system; tax payable over 5 years (50% CGT payable each year):
= 5 * $5,667
= $28,335

Capital Gains Tax is paid after gain is realised bacause that's when the money is available.

Angus
February 27, 2024

Dr Henry makes no mention of the need to cap Defined Benefits Schemes for many existing and retired Public Servants and Politicians. Whilst stopped now for new Public Servants and Politicians, these were often handed out as additional to existing remuneration and required little or no contribution to the Schemes by many existing or retired Public Servants yet often entitle them to up to 75% of their Final Average Salary, CPI adjusted for life. It's like winning lotto!! And no investment worry or risk or effort is required. Set up for life from the Government purse and their spouse often gets 66% of their entitlement when they die, even if they married after they retired. And then these very same existing and retired Public Servants and Politicians can also double dip by having a Superannuation Fund as well. And even take on second careers once they leave public service. These arrangements for many existing and retired Public Servants and Politicians are a simply massive impost on the Budget each year as they are often Unfunded. For individuals it can lead to incomes from their Defined Benefits Pension alone of lotto size numbers, in some cases over $500,000 pa CPI adjusted for life. That is an intergenerational transfer if ever there was one. A straight transfer from tax payers to pay many existing and retired Public Servants and Politicians, many of whom are already well off. That is where a Royal Commission examination is needed to reduce/cap these Benefits. The bear has been in charge of the honey pot! What a conflict of interest. And that intergenerational transfer just grows and grows with time. Superannuation, where all the funds in the Super funds is the Superannuants' money, and where tax has been paid by the Superannuant on the way in and every year their Super Fund exists up to retirement, have been subject to all sorts of legislative changes and now a punitive mooted Unrealised Gains tax at 30% above certain Fund levels. If Equity is truely to be enacted it should start with the biggest item of them all - a Royal Commission into Defined Benefits Schemes and Pensions. It literally costs the Budgets of Governments Billions and Billions of dollars per year growing through CPI increases AND as more Public Servants and Politicians retire and take early retirement. It is simply out of control. Intergenerational Inequity at its' worst.

Alison
February 27, 2024

Defined benefit schemes have not been offered to teachers for about the last 16 years, and in order to keep open the possibility we had to pay 9 % of our income into super for some years.
After working for 30 years in High Schools i now have a pension only $50 above the Age Pension - plus my own contributions returned. Yes it is adjusted for inflation/ as is everything else- incomes, the age pension etc or it would be worth very little after 20 years.

Mark
February 26, 2024

Every economic decision taken by government ,both Labour and Coalition,is first run through the “how will this affect our polling “ filter. Until we get politicians who don’t put their power and pockets first, you can forget any meaningful change that requires hard decisions. Water and energy supply in Australia included.

Martin
February 29, 2024

Unfortunately, we have such a short electoral cycle that governments step away from making difficult decisions because the public will vote them out next time. The history of any form of carbon tax is a perfect example.

George B
February 29, 2024

"we have such a short electoral cycle that governments step away from making difficult decisions"
The governments of Russia or China don't have that problem but I doubt that many of us would be willing to go down their paths.

Tony Dillon
February 25, 2024

It amazes that there is virtually no discussion around government spending whenever tax reform is discussed. Particularly when we have a federal budget out of control, projected to be nearly 27% of GDP in 2025, when it was only 23% in the early ‘90s.

Take the NDIS, where disability creep and servicing creep is ever present. A much wider net is now being cast over what counts as a disability with for example, typical childhood behavioural aberrations now counting as autism, qualifying them for expensive treatment plans, rather than allowing many of those children to simply grow out of the condition as they did back in the day. And over-servicing is rife in all treatment areas, with the mere mention that a service is part of an NDIS plan, triggering a staggering increase in billing than otherwise would be the case. The cost of the scheme is growing at an unsustainable 14% p.a. projected to cost about $100 billion by the mid 2030s, substantially more than the medicare and defence budgets. We need to get back to the original intent of the scheme which was to aid and assist those with genuine life-affecting disabilities.

Then there is the bloated public service with some 350,000 employees federally at a cost of around $35 billion. In Labor’s first year in office, bureaucrat numbers in Canberra alone increased by 10%, adding $1 billion to the wages bill. Add in state and local government employees, and you are looking at 2.4 million public servants across the nation, and a staggering wages bill of $215 billion. With a vast number of those employees working from home. Waste in the system surely abounds.

It makes no sense to consider tax reform in isolation without similar consideration for spending reform. Instead of focusing on how taxes can be increased to fund the government’s spending largesse, how about we consider actually reining spending in. We have a productivity problem in this country, and it will take both restrained spending and a competitive tax regime to rectify it.

OldbutSane
February 25, 2024

True, but you have identified only part of the problem. What about welfare for those who really don't/shouldn't need it eg seniors health care card (jt income up to $144k, usually mostly tax-free), childcare support (up to $530k) and parental leave (up to $350k). People whose joint incomes are more than 1.5 times median really don't need income support - if they are "doing it tough" it's more likely due to inflated spending habits, not lack of income. Money saved could be redirected to solve more important problems like helping those who are really struggling (and, no that does not include the 18% if people who use food banks who according to AFR have incomes over $130k!!!).

A lot of the structural problems in the budget we pointed out years ago when Costello made wholesale changes to super (making them tax-free and tax-exempt) and pensions (doubling the assets thresholds) and now the long-term problem with those changes are being felt. Also, why is it that full age pensioners can get home care packages and not contribute a cent towards the cost. They also seem to be too easy to get (I know a couple who get a level 2 and level 3 package, yet they are perfectly capable of painting their own house!!!)

I have an admirer here
February 26, 2024

The Child Support is not about middle class welfare, it's about keeping mothers in the workforce.

Former Treasury policy maker
February 25, 2024

Probably because to policy makers, tax reform isn't really about the amount of tax to be collected. Rather it's about the efficiency, equity and overall economic impact of the mix of taxes. So we introduced the GST, but got rid of sales tax and a few others, to restructure the indirect tax base so it didn't distort pricing in goods and services markets. It wasn't about raising more revenue. The fact that it did increase the tax take a bit was offset by cuts to personal income tax rates, but even those had redistributive intent as they were concentrated at lower income levels.

Not saying that the overall budget and spending aren't important, but that's a separate issue to tax reform.

Lyn
February 26, 2024

Former Treasury policy maker: to ordinary people like me and evidently Tony Dillon above, your first 2 sentences is Government-speak for tinkering with tax because it can. You think of it as a science when it's not. It's adding up 2 tall columns of big figures so they balance (or not). Imagine if a household looked at only income without looking at its' spending, most taxpayers are not that irresponsible. Tax reform cannot stand alone no matter what words you dress it up with and if what you said is indicative of policy, then we should worry about how 300,000+ federal employees are spending the tax or its' reform, if it's considered a separate issue as you stated.

Former Treasury policy maker
February 27, 2024

Lyn, of course it can and always has. As I explained - or thought I had - that's exactly what happened with the last major tax reform, when the GST was introduced. It wasn't an exercise in budget repair, wasn't tied in with changing government spending and wasn't about changing the total tax revenue. It was about the mix of taxes, getting rid of inefficient ones like the old sales tax and switching from personal income tax to spending tax. To the extent that it was about the total tax take, it was because indirect taxes on spending are harder to avoid - rich people pay GST when they buy a car for instance, or when they build a big new house and can't avoid it.

I DID NOT SAY that the budget isn't a topic worthy of discussion, so your comment about households not looking at both what they earn and what they spend is simply off the mark. You have misunderstood what I said and criticised my comment for no good reason.

Tony Dillon
February 27, 2024

FTpm, well in Dr Henry's case, clearly it was about the amount of tax collected. He recommended the resources tax, carbon tax, and in the interview talks about the CGT discount, and negative gearing. All clearly it's about increasing the amount of tax collected. Yet, not once in the interview was the spending issue tackled, hence my comment and Lyn's. If you think about the stage 3 tax cuts even, Labor could have honoured the Coalition tax cuts AND provided the extra relief to lower income earners, if it was serious about restraining spending. But instead, spending as a proportion of GDP is projected to go up not down, so the Coalition plan was ditched.

Tax reform should always aim to ensure a balance between government revenue and expenditure. If tax cuts are considered for example, without considering spending cuts, then either revenue must be generated elsewhere or we go further into debt. In any case, policy proposals that includes both tax and spending reform, engenders public confidence in policymakers and government.

Lyn
February 27, 2024

Former Treasury policy maker: impossible to misunderstand the first and last sentences. You indicated tax reform is not about the amount to be collected, and, is a separate issue from budgetary matters. I made no reference to GST or its' principle. Readers don't 'criticise' but deliver a collection of thoughts from random age groups and a throw - around of interesting alternatives, some agree, some disagree and that's what makes it interesting to see different perspectives. Let's hope current policy-makers read such a rich source of varying perspective.
.

David in dismay
February 25, 2024

I love that this perceived problem is "all my generations fault". I've been self employed almost my entire life. I've paid income tax (and lots of it in good years), I've paid consumption tax, I've paid my own super contributions, I've paid for private health cover so I'm not a burden on the public system, and I've never qualified for a family tax benefits or any other government handout. On top of that I've employed people and paid company tax on any profits we've made. So I'm well an truely a net contributor to our country's coffers.

My home has appreciated significantly due to the low interest rate fuelled property market. But to call it a tax free capital gain is fundamentally flawed. It is our home regardless of its value! We need a roof over our heads and if we move somewhere else the new property would have appreciated similarly. The increased value serves us no purpose and just results in our having to pay more council rates as they are calculated on land value.

I have spent many years planning our self-funded retirement as I have no expectation on, nor desire for financial support from the government. As a result I find comments like those from Dr Henry blinkered and very concerning. I've worked hard, already paid my fare share of tax, and will pay for my Golden Years without assistance. So how about you stop thinking of ways to impose more taxes on me to stifle the retirement I'm already paying for!

George B
February 25, 2024

My sentiments exactly!

Bill Green
February 26, 2024

I couldn't agree more because we have followed the exact same methodology, self funded from day one and no government support. That is what many of us did, scrimped and saved for decades to get our foot on the property ladder. Now the bureaucrats, and people like Henry, want to tax those very assets that we saved to buy. But I would argue that the real reason Australia is in this position is because essentially Australia, like most western countries, is run as a Ponzi scheme. That is my taxes were used to pay for my parents generation and now my children's' taxes have to pay for the cost of my generation. Couple this to the fact that Gov cash is splashed around without adequate control and targeting means that Gov is one big hungry beast which is impossible to satisfy. Why is that, because politicians want to stay in power and they know that cutting spending will not go down well with the electorate.

self Funded
February 27, 2024

I know how you feel. Now I wish I had not worked, saved & invested in Australian businesses…just blown the lot when young & fit. If I become frail, it will really cost me.

GT
February 27, 2024

back in your day David the cohort of people living to grand old ages was a lot smaller and hence the demand on the public purse not what it is now and what it will be going forward. Demographic changes require an equal shift in response to how these changes are dealt with. I am living your earlier life right now as a self-employed person, employing others and all the other things you mention in force. I will have paid consumption tax for a far greater period than you, but how much is unquantifiable. What will be different for us, however, is that tax free income in our retirement years will not be as lucrative as it has been for your generation because something has to give in all of this. It is already happening with the introduction of pension balance caps and the proposed unindexed $3M threshold before they slug you with a new tax, charged like no other tax has ever been calculated before mind you (inflation will ensure more people are ensnared in this $3M trap).
This article talks about equity and future generations being burdened by inequity in the system now. Your argument that you have paid taxes all your life and are a net contributor to our countries coffers is not disputed but the implication that it should cease or significantly reduce now, is disputable.
I'm in the "have's" but I am acutely aware of the number of people in the "have not's" and unless we do something better to deal with the ratio here, other than tinkering around the edges, the fabric of the society we have all grown up cherishing, will be lost to history. BHAG's are difficult to implement but once you do, we'll be wandering what took us so long.

Margit
February 25, 2024

I endorse that, but then I belong to that hardworking generation.

We have to unbundle social security from the general taxation system, ie consoldiated revenue, and create a stand-alone social security system, directly funded, so-called social insurance. It must also be intra-generational rather than the current inter-generational system, which has been in place since Bismarck (and gets a mention in the 10 commandments!!!). Intergenerational systems are Ponzi schemes, which necessitate constant population growth and economic growth, impossible on a planet fixed in size.
This requires a big re-think, and, well yes, productive people

Peter
February 25, 2024

Perhaps the nation needs to work towards increasing productivity ?

Young people need to understand how hard their great grandparents and grandparents worked, scrimped and saved and in so doing increased the nation’s productivity.

Stop spending money, work two jobs, make sacrifices and save year in and year out.

Rob
February 25, 2024

The simplistic view that GST/consumption Tax should be increased vs Personal/Company Taxes, will never pass the tax policy fairness test ie ability to pay relative to personal income. For the same reason Negative gearing strongly favours those with Taxable Income over $180K ( NG tax benefit =47%). I guess Ken Henry wouldn't understand this, being on a Fat, no risk, public servant Defined Benefit Pension.
Thank goodness GST cannot be increased without the agreement of ALL States and that has minimal chance, unless the Federal Govt. pulls a rabbit out of the hat that can satisfy all State revenue split demands, and unproductive State transaction duties (taxes!!) such as Stamp Duties would need to be abolished.
Negative Gearing Investment Property losses, have never ever passed the subjective or objective test for deduction against Non Property Income, which requires for tax deductibility:

All Losses and expenses to be incurred in gaining or producing ASSESSABLE INCOME, or are NECESSARILY incurred in carrying on a business, for the purpose of GAINING OR PRODUCING INCOME and specifically excludes Capital Asset expenditure or losses.

The ATO has allowed the offset of what is clearly a Capital Asset expense ( mortgage interest) and apart from Hawke/Keating briefly stopping this practice, successive governments have been too weak to rectify this, apart from the self interest of many Pollies with many investment properties.
The 50% CGT exemption introduced by the Howard govt, added fuel to the Negative gearing fire.
Combined with NG and CGT discount, as other readers point out, the long period of US driven (QE/Money supply) low interest rates, combined with immigration and excessive Local Govt /Council housing approval, requirements/costs, have resulted in hardship for many home buyers/owners and renters.
The long period of low interest rates is over now and the Modern Monetary Theorists have crawled back into their holes.
Aus interest rates will always follow US rates, but higher, so even if inflation comes back to 3%, home loan rates will stick above 5%, after RBA cuts.
With a long term hosing stock supply shortage, it's time to get rid of the immediate price influencing factors :
Cut Property Negative Gearing to a single property, and abolish 50% CGT discount. All Negative Gearing losses to be accumulated for deduction against Realised Capital Gains and re-introduce indexation of the CGT Cost Base.
At the same time limit rental increases to CPI, until the market finds a new level, which unfortunately for all of us will be down, as non - viable property owners exit. And by the way NO GRANDFATHERING in the changes.
The next Federal Election will be different, because a large number of young new voters will be looking carefully about what Labour and LNP will be doing to improve housing affordability not in 5 to 10 years time, but now. And more 1st home owner grants won't cut it.


James
February 25, 2024

"At the same time limit rental increases to CPI, until the market finds a new level...."

Really! You're kidding right? Landowner's mortgages, rates and insurances go up faster than CPI, not to mention rapacious state government land tax increases out of nowhere! Landlords are running a business/investment of sorts, not providing subsidised accommodation to the masses. Government is responsible for most of the mess around housing not landlords! Think policy and policy settings and limiting supply whilst not balancing population growth with infrastructure growth.

Disclaimer: I own no property apart from a PPOR, so I've no dog in this fight!

Rob
February 25, 2024

No kidding James and yes, mortgage interest, and insurance have been going up faster than CPI - and therein lies the problem - you fail to mention, median house rentals in 3 years to end Dec23 rose : Sydney +33%, Melbourne +24%, Brisbane +36%, All Capital Cities +28% - landlords have been milking the supply imbalance to such a degree that prospective tenants have been invited to bid/ make higher offers, than the advertised rental for properties.

Even with these record rentals, many landlords are still running Negatively Geared investment property losses, under the guise of, as you put it " running a business/investment OF SORTS". No astute investor makes investments that are only viable, based on tax breaks and the hope of future capital gains, because tax rules are always subject to change. Negatively Geared, loss making property investors are being subsidised by other taxpayers and unfortunate people who have been unable to buy and can only rent.
Seriously ask yourself where this is headed to if nothing is done to make housing more affordable:
> In 25 years housing affordability has gone from 3 to 4 times average income to 7 to 8 times average income!!
As Alan Kohler commented this is the " Worst Ever Financial Mistake" made by successive governments.
I'm sure both the ALP government and LNP opposition realise if they don't make the hard decisions to fix the problem, disadvantaged younger voters will make it for them.
Labour will probably resurrect their previous proposed, Negative Gearing only for NEW residential property, because NG of existing housing stock does nothing to increase supply and has to be stopped.

James
February 25, 2024

"- landlords have been milking the supply imbalance to such a degree that prospective tenants have been invited to bid/ make higher offers, than the advertised rental for properties." Where is the actual evidence of this accusatory assertion? Still don't buy it! If landlord costs go up, rents should follow. It's largely a supply problem, exacerbated by all levels of government coupled with a period of unprecedented cheap money!

Philip - Perth
February 26, 2024

I suspect that Ken Henry will receive a Commonwealth public service pension that is FULLY TAXABLE. Check for yourself. Henry actually speaks in principles rather than self-interest. The trouble with Australians is that they, largely, follow self-interest rather than equity in policy. Simply put, it's about fairness for those who need help.

Rob
February 27, 2024

OK James, I suggest you do some fact based research yourself on annual rental increases . I provided factual data that certainly indicates landlords have been milking rent increases, in my reply to your post : "you fail to mention, median house rentals in 3 years to end Dec23 rose : Sydney +33%, Melbourne +24%, Brisbane +36%, All Capital Cities +28% " The data comes from Domain.com.au.

And Phil - If Ken Henry is receiving a fully taxable pension,(less 10% offset) that's because it's indexed to CPI for life and came from an UNTAXED scheme (contributions and earnings) , unheard of in the private sector. OR the pension is tax free, if not indexed and tax on contributions and earnings was paid. Either way defined benefit schemes pay a pension based on final average salary and irrespective of the pension fund investment performance there is never a risk for the pension recipient. Certainly no self interest involved here if you read my comments on Ken Henry proposing increased GST, as relates to tax policy equity/fairness ie ability to pay relative to personal income.

James
February 27, 2024

@Rob: "CoreLogic Economist Kaytlin Ezzy said a shortage in rental listings has continued to place upward pressure on rents, with overall rental supply being negatively impacted by higher interest rates."

"“On the demand side, record levels of overseas migrants, many of whom rent in inner-city unit precincts, has bolstered rental demand this year, causing an imbalance between rental demand and supply."

"“Investors tend to shy away from the housing market during negative economic shocks. The sharp rise in interest rates has coincided with a -23.6% fall in new housing investment lending between April 2022 and May this year, and this includes a slight recovery in investment lending in recent months, which has lifted 10.0% from a low in February this year,” she said."

Coupled with increased mortgage interest costs, rates, maintenance costs and excessive land tax charges from greedy state governments these account for a lot of the increase. But heh it's easier to blame greedy landlords!

It's largely a demand/supply problem! Economics 101!

Jean -Sydney
March 18, 2024

I am an 80-year-old grandmother and my two daughters own their own homes. One has lived in the UK for 27 years. Maybe a different tax system there but the same problem with affordability. My concern is when I see young children changing schools frequently because they live in rental accommodation. The reasons for the move are many and varied but nothing contributes more to a stable society than people being able to own their little patch.

Steve
February 24, 2024

Couple of points as usual. Capital gains is a convoluted problem. First there is no allowance for the "real" gain (ie after inflation). At least the old system had that, and what I thought was great refinement to only use the first 20% of the gain to calculate the tax rate payable which was then applied over the whole capital gain (sans inflation offset). The 50% discount was just a lazy way to replace a better system that required a bit less work for Ken Henrys outfit. However even this is not a true picture. Apart from the very few who can pay cash for a house, the actual cost of the house is basically the deposit plus all the accrued mortgage payments plus any residual debt. To simply compare headline prices with no allowance to actual cost to purchase, any analysis is basically flawed from the outset. So all this cash boomers are sitting on is to some degree a refund of the massive interest they paid. Don't blame them for successive govts throwing fuel on the fire with various ways to give buyers more cash to throw at an auction bid.
Second, negative gearing. Personally if the tax code allows costs to be offset against income then I don't see why excessive costs should be written off, as this makes the investment "non income producing" which is a requirement to claim a deduction. On that basis negative gearing is an oxymoron. BUT, negative gearing also means the income (ie rent) was not enough to cover the cost (interest, rates, insurance, maintenance etc). So that means the owner is effectively subsidising the tenant. You could argue the countless billions of lost tax revenue from negative gearing is a multi-billion dollar rental subsidy, but that doesn't paint landlords as the baddy so the media aren't going there. Human nature says someone buys an investment property to turn a profit. If you run at a loss on the income side, you have alot of ground to make up on the sale side.

Mark the Distruntled
February 23, 2024

While I agree with the raising of GST, it irks to read the "wise" commentary from the chairman who's pithy commentary on NAB's "fee for no service" debacle was sadly lacking at the banking inquiry. Love how, the government's ABC agenda machine trots out these tired-old-war-horses and foists their "wise" vision as a financial panecea, upon on the general populace.

Former Treasury policy maker
February 24, 2024

Give it up sunshine. Ken is one of the best Treasury heads we ever had, an intelligent policy maker whose ideas deserve to be evaluated on their merits. Yes, he didn't handle that episode as NAB Chair very well, but that doesn't mean his views on tax policy are in any way tainted.
So care to say something analytical about his views?

George B
February 24, 2024

“people like me are sitting on large, untaxed capital gains in houses” – the gains on PPRs are illusory because assuming everyone needs a roof over their heads, the gains are merely recycled when selling/buying a similar house in the same market plus an overhead for taxes (stamp duty) and agency/marketing costs, so there is actually an 8% loss every sell/buy cycle.
“We've just priced them out of access to the Australian property market”. The pricing out of the property market has been caused by central banks irresponsibly manipulating interest rates during economic downturns (GFC, Covid) thus creating asset bubbles which nobody asked for but everybody has to deal with. Human greed dictates that when interest rates approach zero (or worse) you can get infinite purchasing capacity. Add to that promises from the reserve bank that interest rates will not increase until 2024 and some people will choose to load up on debt like there is no tomorrow.
“investors getting very lowly taxed capital gains”. The discount on capital gains is there because there is no account for inflation and because the gains are all taxed in one financial year (usually at the highest marginal rate). In contrast they were previously only taxed on real after inflation gains and the tax rate recognized that the gains accrued over many financial years.

Mark the Disgruntled
February 24, 2024

I would though, like to draw your attention to Mr Henry's response to the Interviewer's following question: "Pike: 138 recommendations. How many of those recommendations were adopted? Do you know? Dr. Henry: No, I don't. Very little actually. And some of those that were adopted were subsequently reversed." While there is much validity to Mr Henry's "views" most of them remain untested or reversed due to politics. Likewise I agree that the tax system requires a massive overall. But I doubt that the current, or successive, governments will have the gumption* to make sweeping or progressive changes. Ergo, the evaluation of Mr Henry's "ideas" and "views" is redundant; due to the fact that they'll be kicked down the road for years to come and will only remain theoretical. I remain, disgruntled.

tom taylor
February 23, 2024

I just have to laugh when I remember Ken Henry. I contributed a 50 page submission into the 2010 Henry review on superannuation with regards to our SMSF. Most economists Henry included believe that governments are there to help people. Government are simply there to control us often to societies detriment under the guise of being inclussive.

So called tax reform is nothing more than an oxymoron to screw the productive middle class. It is not only occurring in Australia it is a world wide phenomena. The Arthur Laffer curve sends most economists into a catotonic lather they hate it.

Look at Singapore and until recently Hong Kong the tax rate for the middle class did not exceed 20%. and is often 0% for the bottom earners. Both those countries after the second world war were poverty hell holes.Prime Minister Lee Kuan Yew and Hong Kong British administrator Sir John James Cowperthaite transformed their economies by minimizing income and business tax.

The trade off is there is little or little government assistance for the growing number of people for whatever reason are not a productive members of society. The easier you make it for people to look at government handouts as a given the greater the government outgoings and the greater need for higher taxation.

Another example the company tax rate in Ireland in the early part of this century was so competative that most European governments despised it. The result was Ireland went from being at the bottom of th OECD to near the top. The EU in has put a lot of pressure on Ireland for their adherence to the Laffer concept. The lower the tax rate the greater the income to both government and industry and as a collateral its citizens.

I am an immigrant I came to this country in 1974 when the slippery slope of government intervention started under Edward Gough Whitlam. Before I was self employed I always had 3 jobs and as I discovered people use to say to me how lucky I was. The more I worked the luckier I got.

We had an SMSF that was in the top 5% of all SMSF's We started with $6000 in 1994. When Scott Morrison was treasurer and deemed people like us had too much money in super in 2016 we saw the writting on the wall. We knew if the liberals were doing this then Labor would be back for a bigger slice. We were at the age we could get out, took the money out mostly tax free and reinvested it in something we controlled. The recent labor tax on unrealised capital gains on SMSF property to start in 2025 was as we envisioned a given.

It all gets back to my contention. Governments both Labor and Liberal do not want you to be financially independent. Their agenda is to make you dependent. That is the modus operandi of all governments since the US went off the gold standard in 1971.

Disgruntled
February 23, 2024

Hewson's GST plan was much better. 15% and a whole raft of other taxes were to be abolished.

Even the 10% GST was supposed to see other taxes abolished that never were.

The poor don't have much to be taxed on, the rich have better access to tax minimisation options so the middle class is continually being shafted.

Even Howard and Costello's middle class welfare handouts to stay in office longer have bitten middle class in the backside.

Hans
February 23, 2024

The problem with the GST is that it encourages tax evasion.Who hasn't had a tradie offer a discount for cash.Before the GST it was just the tradie who benefited.Now it's both.Raising it will increase the incentive and though government may get more GST tax they will lose more from tax avoidance
Same goes for many businesses. Government could solve the problem by making purchases in cash above a figure illegal - say $2000.That would have the added benefit of crippling the drug trade - a trade whose business model depends on cash.What is the point of having money if you cannot spend it

Economist
February 23, 2024

Huh? So your tradie pays GST on the stuff he buys at Bunnings but doesn't want to charge you so he can claim those inputs back? I suspect he's trying to avoid income tax not GST, which he hasn't avoided at all.

Hans
February 23, 2024

True, but the problem remains as what happens is that prior to the GST it was only in the tradies interest to be paid in cash, now it's in both our interests.It thus encourages tax avoidance.If people see others as not paying tax it encourages them to do the same. The more we can discourage this practice the more tax the government will get.A practical way is to limit their use of cash by making it illegal for vendors to accept cash payment above a certain amount

Geoff
February 23, 2024

If I could get any tradie to actually quote me a price inclusive of GST that'd at least be a start.

They rarely mention it until they invoice you... and you realise that they've been not including it any any previous discussions.

Harry
February 23, 2024

So Henry’s idea of “tax reform” is higher GST, higher CGT, no NG, wealth taxes.
All so govt can provide more “services”.

Lucky we have free medical in Australia, when I was working I paid $12k in Medicare levy, $10k medical insurance every year to get this free medical treatment, and then $70 for my free visit to the doctor, $200 to my ophthalmologist, a few hundred more for dental checkups, cleaning etc. All while on top cover.

Yeah let’s get more of these govt services!

Henry also claimed investment properties don’t pay enough taxes. Of course he only looks at personal taxes.

Have 1 investment property, for the last 9 years it had been positively geared, but over the last year due to 2 successive land tax increases of $10k each year (for a total of $31k in land tax) and the large rise in interest rates has made it go negative.
Somehow making negative income while paying $31k in taxes isn’t enough tax.

Thinking that changing NG and CGT will make housing cheaper is nuts. The reality is the pool of desirable locations is pretty much static. As people grow in wealth they move towards those desirable locations. More people just means the prices rise, the number of places isn’t really changing.

The only way to make a structural large scale change to this is more first class cities, with infrastructure, company HQs, full stack of job opportunities and of course desirable areas to live, coastal etc. Every twiddle with taxation or home buyer subsidies pales into insignificance or makes the problem worse compared to massively increasing the number of homes in desirable locations.

Dave
February 23, 2024

There is no need for taxation at all: merely the requirement for the financial system to remain in equilibrium, with
the desired amount of stimulus (QE). All that is necessary is liquidity to be reduced by an appropriate amount to balance the amount of government and private creation of liquidity in order to keep demand inflation in check. Extraction from the economy by adjusting the money supply will offset government and private borrowings.
This can be done adjusting banking liquidity, or if we had international drawing rights, by adjusting the exchange rate.
The so called taxation system should not be used to entice investment or redress income inequality. There is no need to distort the system by demanding that taxation is “progressive”. This can be done separately by Government spending via the social security and business incentive schemes.
Thus whatever net earnings an individual or firm achieves they retain for expenditure or investment.
If a Government wants to disincentivise an activity they could do so when granting permits or prohibiting it altogether. Repatriation of earnings overseas would be affected by the exchange rate.

David
February 23, 2024

Are Australian's living in a golden age?
Is our money gold?
No? then no.

Choco
February 23, 2024

Raise the GST and fix the whole tax mess
Personal tax, petrol taxes, stamp duties, company tax, do the job properly.
And put the money raised to work properly and fix our schools hospitals and infrastructure problems.
Time for politicians to grow some and make a decision on the future of this country not just how long they can stay in power for and grow their own personal property portfolio and super fund
Its time to act

Trevor
February 23, 2024

I’m not keen on increasing the rate or broadening the scope of the GST because it makes everything more expensive. Just like inflation.

James
February 25, 2024

Plus, when the GST was introduced stamp duty was meant to be cancelled. It wasn't! Never trust a politician!

Disgruntled
February 25, 2024

If it raising the GST goes along with the removal of a raft of other taxes as originally promised it's not so bad.

Unfortunately, that's unlikely to happen.

Pete
February 25, 2024

100%

Trevor
February 23, 2024

In Ken Henry’s words “ policy is just crap”. Maybe his recommendations weren't so flash either.

Garry
February 23, 2024

All this talk about taxation is academic. If government didn't spend increasing amounts of our GDP to keep themselves in office then there wouldn't be such a need to extract as much as possible via tax.

Geoff D
February 22, 2024

I'll get on my hobby horse once again! How is it fair that someone can sell his/her principal place of residence for, say, $1million tax free profit in a period of 18 months ownership when another taxpayer in the PAYG system earning, say, $100K per annum pays tax on every dollar at the same time as trying to pay a mortgage/rent and everyday living expenses? I'm a capitalist but this is patently unfair and has always been incomprehensible to me. This isn't socialism - it's about being fair!

The bureaucrats and politicians know it too! They just don't have the guts to change it - vested interests perhaps?

George B
February 23, 2024

The “unfairness” was caused by irresponsible lending and equally irresponsible borrowing when Central banks adopted across the board emergency interest rates. While some lucky owners may benefit from the asset bubble that was thus created, the gains may be largely illusory when it comes to the PPR because any windfall gains will likely have to be spent when purchasing a similar PPR in the same market (minus about 8% in stamp duties and selling costs).

Jack
February 22, 2024

According to this view, the untaxed capital gains of family homes that boomers are sitting on and the fact that those inflated property prices puts home ownership out of reach for young people, is somehow the fault of the boomers or the tax system.

According to PropTrack’s research, a home owner’s borrowing capacity reduces by around 10% if interest rates rise by 1%. Meanwhile, a 2% interest rate increase will see borrowing capacity fall by 19%.

The reverse is also true. Interest rate cuts boost asset prices. This has been deliberate policy of central banks globally (called quantitive easing) ever since the GFC. The stated aim was to raise asset prices.That may have also saved the economy from a very steep recession. But because it didn’t happen, that part is ignored. In fact interest rates have been falling (until recently) ever since Keating’s 17% . No wonder people regard low rates as normal.

If we want to make housing more affordable, we don’t need to change the tax system, we just need to raise the interest rate to 10% and watch the unemployment rate explode and the government lose the next election.

George B
February 22, 2024

When interest rates were lowered to emergency levels during Covid, lenders could have continued to assess new loan servicing capacities at much more realistic (medium term?) levels by recognizing that the emergency would likely pass in due course. This would have avoided the asset bubble that is now proving so difficult to unwind and which in hindsight was caused by irresponsible lending and equally irresponsible borrowing.

Jack
February 23, 2024

The whole point of the exercise was to raise asset prices. The solution to the debt crisis that caused the GFC was to encourage people to take on more debt precisely with “irresponsible” lending. The result is an asset bubble that is now proving so difficult to unwind. But it is NOT a function of the tax system.

Geoff R
February 23, 2024

"we just need to raise the interest rate to 10%"

why so low? When I got my first home loan the rates were capped at a maximum of 13.5%. This cap was later removed and the rates went spiralling up from there.

but at least the house prices were lower, so it had the desired effect!

Ramani
February 22, 2024

No tax reform can lead to equity unless we address structural causes of inequity: 'salary sacrificing' where the lucky few (including politicians and ATO staff) can carve out otherwise taxable income into non-taxable; against the grandiose and doomed-to-fail rules taxation resident's global income (hello, Panama and Wickenby), we exclude gift, wealth and inheritance taxes; the burden of age-pensions ignores asset-rich recipients while their inheritors wait for the will to be read as the testators are funded by poorer taxpayers.
If tax reform must lead to sustainable outcomes (instead of serial PhDs, all talk and no action), we need spine.
Those who propose reforms (in effect: less tax for their lobby groups) must be asked to nominate equivalent or greater tax savings, if reform is to be serious.

Jon Kalkman
February 22, 2024

From the government’s viewpoint, a dollar paid out on age pension is the same as a dollar not collected through a tax concession. The opposite is true for the individual - a dollar not received in age pension is the same as a dollar paid in tax. I am a self-funded retiree with a tax-free pension from my super fund. I don’t pay tax but I also don’t receive an age pension. Therefore, I am saving the taxpayer $28,500 per year for a single age pension. So I’m paying the same tax as an employee earning more than $120,000.

To illustrate, imagine the age pension was paid to everyone over age 67 regardless of assets and the age pension and super pension were combined and taxed as normal income. My total income would then be less than $120,000 and so I would be better off because I would pay less tax then than I do now.

Please don’t try to tell me that self-funded retirees pay no tax.

Geoff R
February 23, 2024

"Please don’t try to tell me that self-funded retirees pay no tax."

yes Kevin made the same point further down in the comments. A lot of people don't realise this - self funded retirees should be greatly appreciated and thanked!

I am surprised that whenever tax reform is mentioned that no-one ever mentions increasing company tax to match the top income tax rate. To Australian taxpayers the company tax rate is largely irrelevant as you pay tax on your dividends at your own marginal rate (due to franking credits) so it would mainly affect foreign shareholders (and they may get an allowance by their own government for tax already paid here in Australia). Sure there are retained earnings but this would encourage companies to pay higher dividend to earnings ratios and instead raise extra capital (if they need it) for expansion. All those franking credits on company's books from retained earnings do no-one any good (apart from the government!).

Ralph
February 23, 2024

You are not paying tax. Not getting an age pension because you are too wealthy is not the same as paying tax.
We have to get rid of the notion that an age pension is an entitlement for everyone, it is not. It is designed to stop people living in penury and if you are not in danger of that, you should not be entitled to receive an uneccesary cash handout.

It is also not correct to just look at the income from your self-funded pension. Your SMSF also does not pay tax and probably gets significant refunds of franking credits.

Dudley
February 23, 2024

"You are not paying tax. Not getting an age pension":

It is government not paying the negative 'tax' to the wealthy that it does pay to the poor.

Consequence of entitlement limits, aka Age Pension Income & Assets Tests, is the government guaranteed taper rate of 7.8% / y that can be earned on 'excess capital' by not accumulating it or wasting it or stuffing it in home improvement.

James
February 24, 2024

"We have to get rid of the notion that an age pension is an entitlement for everyone, it is not."

The Kiwi's and other countries think it is, so why not here too? Would make things a hell of a lot simpler wrt income and asset tests, bureaucracy etc.

I agree with Jon too. Self funded retirees deserve more credit, as they are saving the tax payer from having to support them in retirement. Time to better recognise their contribution!

Geoff R
February 23, 2024

"You are not paying tax. Not getting an age pension"

oh come on Ralph - it means I have less money to spend and the government has more - the same as all taxation.

means testing means that as one's income or assets increase you lose some benefit so you have a very high effective marginal taxation rate. It is the same through our whole broken welfare system with different "claw backs" where people get into poverty traps because it is not worth them working as they end up getting only marginal net benefit or may even end up being worse off for their efforts. All means testing should be banned - give people some incentive to work hard and improve their lot in life.

bill
February 23, 2024

He can still claim the input credit for the gst on the stuff he bought from bunnings (so he gets the tax back).

For cash jobs, he can also make out that he is collecting gst, but have a second book of invoices, one where he collects the gst but doesn't report it, so can pocket the gst he said he was collecting. If he suspects that the job that the tax office is investigating, then he just makes sure he includes that job into the list of transactions that he shows to the tax office

JS
February 23, 2024

We need to get the amount that we can have in a super pension to the right figure. It needs to be the figure that will give you the $120,000 that Jon has calculated to be the pension saving above.

So, if we assume a 5% income rate on the "tax free" pension, then there needs to be $2.4m in the super fund, not the $1.9m currently allowed.

Strike me pink
February 22, 2024

The boomers “Sitting on capital gains” with their homes overpriced.
Those words mean nothing more than taxing unrealised capital gains - as Labor has already done with Superannuation.
Imagine arguing with the ATO over the value of your home every July!

Lyn
February 26, 2024

Pink, Or worse, when enough to keep going on own but not enough to pay imaginary tax too. Imagine tax at highest rate year of sale if had to sell to pay & maybe not enough left for retiree accommodation deposit to go elewhere. Is that the plan to knock over-67's off their perches to early grave? If so we need a revolution of the French variety.

Simon the Likeable
February 22, 2024

I for one haven't forgotten the disgraceful interview Henry gave that ended his career.

Peter Taylor
February 22, 2024

Avoiding recession which usually resets the economy by first selling off public assets paid for by previous generations and then spending consistently more than the country earns to accumulate a public debt of overv1 trillion dollars does have its challenges.
Let's hope the wannabe home buyers can ignore the debt amassed for them to deal with in the future when the nations credit card fails and they can still feed the cash cow needed for the rising number of pensioners.
Bit coin rather than house speculation could be the future.

Peter
February 22, 2024

Dr Henry is concerned about the inequity of the tax system for young Australians. Another article on Firstlinks today comments about the concerns of retirees outliving their savings. A much wider discussion is required that what Ken Henry is focusing on.

Ted Kramer
February 22, 2024

Intergenerational equity is too hard for us to address, whether it be tax, tax expenditures or the damage to the environment. Why? Because good decisions can be killed off easily by fear campaigns, as in 2013. So why are we so dumb? Simple...thinking critically is too hard and too dangerous to be taught in schools!! We teach plenty of the descriptive stuff about our democratic structures but FAIL to provide voters with the skills to make our democracy/government policies provide intergenerational equity and economic efficiency. Thanks Andrew, Ken and Ross Garnaut for your persistence.

VW
February 22, 2024

I agree with Dudley. It is the cheap interest rates that are keeping property values elevated. As much as interest rates are hurting mortgage owners, the houses themselves have been overpriced in the first place for a couple of decades, especially in Sydney and Greater Sydney. We have priced ourselves out of the market.
Add to that the crazy stamp duty fees that have basically not moved in decades.
Add to that the the enormous immigration intake - these people have to live somewhere.
Add to that wealthy overseas buyers who prefer to invest in Sydney real estate. Some countries do not allow non-residents to buy real estate, only lease it.
Add to that the short-sightedness of jamming another international airport into Sydney.
I own property in Sydney and property prices are scandalous in how high they have jumped in just a few short years. And now there is talk of taxing capital gains before it is even realised!
Sorry, I don't know too much about other areas in Australia.
I know a lot of people are hurting with current interest rates, but these rates are probably still not where they need to be.
Governments also need to incentivise aspiration, not tax it out of existence. Our young are struggling with this concept of aspiration as they have no inspriration. At the moment, the government is killing it and now we have the blame game on successful generations. It is easier to blame old folk than look within. The government and their economists need to take a long hard look at increasing productivity, but without aspiration and inspiration, productivity increases are a very long way off. There is simply nothing to work towards except a utopian society - strip the wealthy and redistribute it. Problem solved! This is very shortsighted but where we are headed with our current governments.
As interest rates go up, housing becomes more affordable, but somehow, we need to accommodate our immigration into this balancing act.

Boomer destroyer
February 25, 2024

Boomers ran the country for the last 25 years. Who let in all the immigrants? Who built no houses? Who stopped rezoning for density? Who blocked infrastructure spend for new rail etc.

George B
February 23, 2024

Be careful what you wish for Destroyer for governments of every generation have their failings and the time will come when your generation will be judged by coming younger generations.

James
February 23, 2024

Blame the voters who vote Greens, independents, Teals etc etc so that neither party can get legislation through the Senate without massive comprise at best; at worst they don't try to make needed changes!

Albert
February 23, 2024

Whoa James! The Teals are all in the House of Representatives where Labor has a majority. Nonetheless they have proposed useful amendments to Government legislation. They are also the only members of parliament calling for a review of the tax system, not just fiddling around with tax bands as Labor and the coalition do.

Former Treasury policy maker
February 24, 2024

Who let in all the immigrants? Those who believe that Australia is a wonderful country that welcomes people from all over the world to do things like build our nation. Without immigrants we'd be a very poor country indeed.

Who built no houses? No one that I know of. Housing construction has been pretty strong for decades - just look at what's happening out Menangle way for instance.

Who stopped rezoning for density? No one. The issue may well be that zoning needs to change, but it wasn't a problem for ages so didn't need to be addressed.

Who blocked infrastructure spend? No one - there's massive infrastructure been taking place.

CC
March 29, 2024

Former Treasury policy maker, your comment about houses built is nonsensical. if there were ample houses being built, the supply demand equation would drive prices down. instead we have rental vacancy rate of 0.7%, insanely expensive housing prices ( unless we ask our kids to move out to the sticks ) and our kids won't be able to afford to move out of our family home probably before age 30.
the housing affordability crisis is the culmination of decades of government incompetence and vested self interests ( politicians own investment property portfolios ), inflamed by one of the highest immigration levels in the OECD.

Greg
February 22, 2024

He talks like the CGT discount is a bad thing. If we assume a future return of 8% p.a., split 4% in dividends and 4% in capital gains and inflation at 3%. Then the real gain is 1%. With the CGT discount investors are paying tax on a gain of 2%, more than the real gain. If they want to reform this in any way they should go back to the old system of just taxing real gains. But this will not result in a revenue bonanza and may well result in less revenue than the 50% CGT discount.

John
February 23, 2024

If inflation stays high, around 6% nominal and 10% in reality, it won't take long for sellers to be better off under a CGT regime that taxes only real gains. The long run capital gains on housing and ASX shares are around 7% if you live in a capital city like Sydney. Shares have a much higher running yield (averaging 4.5% plus franking) than housing in big cities, where rents can be as low as 2% gross in posh suburbs and holding costs wipe that out. But when you sell the house, you pay CGT as if all the gain occurred in one fiscal year. Shares beat rental housing as an investment. They have near zero holding/transaction costs and can be sold in chunks to avoid high marginal tax brackets once retired. Having sold our CGT exempt PPoR 2 years ago, milking downsizer contributions to the hilt, we are obliged to live in our former investment property for 20 years to wash away most of its CGT exposure. It would take one hell of a tax, downsizer or superannuation concession to make us give this place up sooner, despite it being perfect for a young family of 5.

Kevin
February 23, 2024

I'd still be giving up on it John.People see what they want to see.
While I kept it out of super, ( don't like super) ,because my understanding was way back when leverage could not be used in super.
So fast forward to today.The crossover point for franked dividends is ~ $140K. So on $140K the ATO gets $42K of that leaving $98 K for me. No pension,and no cards,CSHC card etc .

$42K in tax,save the govt ~$29K in pension,let's just call it $70K that the govt gets or saves.

So on a gross income of $140K the govt gets half of it in tax and savings .Plus Medicare levy and the savings from no cards.

Then they want a bit of the tax for next year through the PAYG system.

Then the constant,people would go back to work if the pension was universal.If I went back to work on a system of tax income at normal rates I'd be much better off.

Self funded retirees pay no tax,I just laugh at them now and let them get on with it .

Beware of geeks bearing formulas perhaps.

Then the history of the human race. "If the facts don't fit in with what they want to see,then the facts are wrong There is no other possible reason"

I don't mind paying tax .If people spent 1% of the time they waste denying reality,on trying to see reality,they'd be much better off

Lanche
February 22, 2024

If only personal incomes were taxed on real gains too
seems more logical to tax actual productivity at a discounted rate than unproductive assets getting a CGT discount.
To be clear I don't disagree with the 50% CGT discount either, just pointing out how unfair PAYG system is.

George B
February 23, 2024

"just pointing out how unfair PAYG system is"
According to this reference the top personal income tax marginal rate was between 60 -75% for most of the period from the 1950s to the 1980s. It is now "only" 47%.
https://treasury.gov.au/publication/economic-roundup-winter-2006/a-brief-history-of-australias-tax-system

Johns
February 22, 2024

But the slight of hand (that is always there when governments "reform tax" - reform means increase the tax take, but give the impression that you are reducing it) with the change from taxing capital gains (after indexing the cost base) to the current regime of only taxing 50% of the gain came with the change in how the tax was calculated.
Under the only regime, the ATO calculated the extra tax that arose from the capital gain event on 20% of that gain, and then multiplied that figure by 5. The new regime just added 50% of the gain to your other income. The effect of this (and this is where "reform" became "increase" was that the 50% was then taxed at your marginal tax rate (and increasing marginal tax rate). So to illustrate, a $300,000 taxable capital gain would under the old regime, tax calculated on an additional $60,000 on top of your other income (probably at a marginal tax rate of 37% on the whole gain) and then multiplied by 5, whereas under the new regime, the $300k would be added to your other income, and a significant proportion of it taxed at the top marginal tax rate (47%). As I said, slight of hand, where "reform" means "increase"

Rob
February 22, 2024

Must be the weather - string of former politicians, bureaucrats and ceo's opining on the ills of the world!

Nothing in Ken Henry's treatise that mentions the efficiency or inefficiency of Government, the balance between Public and Private, the killing off of incentive, the bloat of bureaucracy and the never ending tangle of a world where nobody can make a decision, or take personal responsibility. Only the Elite knows best - well no, actually they don't and the Referendum rammed that message home!

[For the record, the NAB share price is yet to regain the highs of 2015]

John
February 22, 2024

Australia needs a certain amount of taxation to run the country.

The question is how to fairly distribute that cost. The carbon tax suggested is a good idea. We want to reduce our carbon footprint, and increasing the cost will discourage use of carbon.

Any carbon tax should not be seen as an increase in tax, rather a redistribution of how we pay our taxes. Of course, the opposition politicians (it doesn't matter who is in opposition, they will all do it) will present it as an increase in taxation, and use it politically. And the people will believe it, and will vote the government proposing it out.

With any carbon tax, it needs to be levied as the coal, gas, oil, etc is taken from the ground, rather than as it is used.

I love the idea of someone in China or Japan paying more for our coal because of the tax on the coal. Whatever some overseas country pays in taxation to the Australian government is less tax I have to pay (recall, the total tax take that the government needs is a given, so if someone else pays it, that is less for me to pay). And in the case of finite resources, if the increase in tax leads to less usage or less being taken out of the ground, then that is a good thing. What's even better, is if we keep it in the ground, it doesn't deteriorate and will remain there, and eventually it will be mined, and our future generations will benefit for even more tax

Graeme
February 22, 2024

What makes you think that someone in China or Japan will meekly pay more for our coal because of a tax on the coal?

Jack
February 23, 2024

Take our coal, or leave it. No problem for me either way

If you take it, and pay tax, then that's fine

If you don't take it, and use someone else's then they will eventually run out (these minerals are a finite resource, and they are not making any more of the stuff), and then you will come back to me wanting to buy mine (I might be dead, but my kids may get the benefit). And guess what? When you come back wanting mine, the other fellow's won't be there, so you will not only pay my taxes, but you will also pay a higher price

So, I don't care, Australia will eventually get the benefits of our raw materials

CC
March 29, 2024

Jack, maybe they aren't making more of the stuff, but there is enough in the world to last hundreds of years at least, so no they won't be paying more for our coal and others won't "run out". you seem to have little understanding of how important is the money that our country earns from exports to the rest of the world. buying coffees at our local cafe may employ baristas but it doesn't balance the national budget

Cam
February 22, 2024

From memory 6 of the 138 recommendations of the Henry Review were enacted. The Henry Review was one of very few recommendations out of the 2020 Summit that actually occurred. To be fair to the Rudd Government, they were dealing with climate change; the greatest existential threat of or time, if I remember his words correctly. Nothing happened there either.
Still disappointed, though I tend to blame the Greens refusal to budge on their climate change position, but that's another topic.

Dudley
February 22, 2024

"not able to afford a house":

Can't / won't / don't save fast enough to accumulate enough capital soon enough to buy a home cash on the knocker (without mortgage).

Due to negative after inflation, after tax interest rates resulting in slower accumulation of capital than is required to buy a home within a reqired time - without mortgage.

Consequently homes are bought with cheap interest rate mortgages resulting in expensive prices.

Blame cheap money for poor savings and unaffordable homes.

Dudley
February 22, 2024

"get real on tax":

= Don't tax Un-Real (imaginary / inflationary) returns?

Geoff R
February 23, 2024

"Blame cheap money for poor savings and unaffordable homes."

exactly!

and the same goes for people advocating removing stamp duty and replacing it with an annual land tax - NO DON'T DO IT! - the buyers won't save a penny as the prices will just increase to reflect the fact that they have now got "extra" money available to bid at auction. The same has happened with all the first home buyers grants - prices increase.

"Don't tax Un-Real (imaginary / inflationary) returns"

you get my vote Dudley

Disgruntled
February 24, 2024

Not only would the money saved be used to bid up the price f the property, they will also have an annual land tax bill on top of their annual rates bill from local government, both of which will rise over time.

At least Stamp Duty is a one off thing.

Also removing Stamp Duty will encourage more property flippers back to the market.

 

Leave a Comment:

     

RELATED ARTICLES

Taxing the ‘rich’: the potential tax consequences of inequality

The mixed fortunes of tax reform in Australia, part 2

The mixed fortunes of tax reform in Australia, part 1

banner

Most viewed in recent weeks

Meg on SMSFs: Clearing up confusion on the $3 million super tax

There seems to be more confusion than clarity about the mechanics of how the new $3 million super tax is supposed to work. Here is an attempt to answer some of the questions from my previous work on the issue. 

Welcome to Firstlinks Edition 566 with weekend update

Here are 10 rules for staying happy and sharp as we age, including socialise a lot, never retire, learn a demanding skill, practice gratitude, play video games (specific ones), and be sure to reminisce.

  • 27 June 2024

Australian housing is twice as expensive as the US

A new report suggests Australian housing is twice as expensive as that of the US and UK on a price-to-income basis. It also reveals that it’s cheaper to live in New York than most of our capital cities.

The catalyst for a LICs rebound

The discounts on listed investment vehicles are at historically wide levels. There are lots of reasons given, including size and liquidity, yet there's a better explanation for the discounts, and why a rebound may be near.

How not to run out of money in retirement

The life expectancy tables used throughout the financial advice and retirement industry have issues and you need to prepare for the possibility of living a lot longer than you might have thought. Plan accordingly.

The iron law of building wealth

The best way to lose money in markets is to chase the latest stock fad. Conversely, the best way to build wealth is by pursuing a timeless investment strategy that won’t be swayed by short-term market gyrations.

Latest Updates

Investment strategies

Have value investors been hindered by this quirk of accounting?

Investments in intangible assets are as crucial to many companies as investments in capital equipment. The different accounting treatment of these investments, however, weighs on reported earnings and could render ratios like P/E less useful for investors.

Investment strategies

Investors are threading the eye of the needle

As investors cram into ever narrower areas of the market with increasingly high valuations, Martin Conlon from Schroders says that sensible investing has rarely been such an uncrowded trade.

Economy

Persistent, but not permanent

There is universal consensus that the Earth is experiencing climate change. Yet there is far more debate about how this will impact different economies across the globe. New research sheds more light on the winners and losers.

SMSF strategies

How super members can avoid missing out on tax deductions

Claiming a tax deduction for personal super contributions can end in disappointment if it isn't done correctly. Julie Steed looks at common pitfalls and what is required for a successful claim.

Investment strategies

AI is not an over-hyped fad – but a killer app might be years away

The AI investment trend looks set to continue for years but there is only room for a handful of long-term winners. Dr Kevin Hebner also warns regulators against strangling innovation in the sector before society reaps the benefits.

Retirement

Why certainty is so important in retirement

Retirement is a time of great excitement but it is also one of uncertainty. This is hardly surprising given the daunting move from receiving a steady outcome to relying on savings and investments.

Economy

This vital yet "forgotten" indicator of inflation holds good news

Financial commentators seem to have forgotten the leading cause of inflation: growth in the supply of money. Warren Bird explains the link and explores where it suggests inflation is headed.

Sponsors

Alliances

© 2024 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.