Welcome to Firstlinks Edition 608 with weekend update

Labor will form government in May in collusion with the Greens and potentially some Teals. Labor has a massive campaign funding advantage, an absolute belief in "Whatever it Takes" and the vast majority of the media on its side. The Greens are essential for Senate control, so Labor will move on gearing of (at least) residential rental properties. It would be hypocritical to stop there, so gearing into shares or any asset will be curtailed, if not (initially) banned outright. Hopefully, the impact on new property supply to the rental market will be devastating (for renters, developers and builders) to the point where Labor is finally forced to radically reduce immigration due to shortage of rental properties. For companies, capital raising will get tougher, forcing some CEOs and Boards to stop their self-serving support of the ALP. The Coalition needs a consequential recession, with mass unemployment before the 2028 Federal election to have any chance of forming government then.

So in other words let's blow up the country to get the political outcome that you want?

Interesting arguments here, thanks to all.

Economics aside, what are the energy requirements to build and install a solar panel system with battery? Just wondering if the energy saved over a typical panel/ battery life period (says 10) exceeds the energy used to produce the system?

Modelling done by various global energy think tanks indicates that it would require more oil resources than the world possesses to produce enough solar/global power supply to meet demand. Nate Hagens (The Great Simplification podcast) a former Goldman Sachs energy trader, Comments that whilst reducing our carbon footprint is critical, the battery/solar panel solution is only kicking the can (problem) down the road for 20 years. Hence the need to reduce global energy demand (good luck with that) and keep investing in other finding better alternates (fusion-still being developed if possible).

So back to my original query, I wonder if the environmental benefits of individual house solar stacks up? Clearly the economics of it don’t from both the article and commentary. Perhaps more national grid solar hybrid power rather than individual solar?

Much of the reason the U.S. has reached the nastily divided condition it is in (apart from Trump’s personality) is because of the divide between “haves and have-nots”. As Ray Dalio shows from his lifetime of study, investment and research, this is an inevitable outcome of “bigger cycle” evolution for countries, kingdoms or empires whereupon the have-nots (logically, renters in Australia) ultimately resort to whatever “promise” (and lies) might deliver relief from the ever-increasing wealth gap. The U.S. is obviously further along that cycle than we are, but there are already many admirers of the current U.S. “solution” in Australia.
Major reform, if any government has the gumption, would be better sooner than later.

"Major reform, if any government has the gumption, would be better sooner than later.":

Saving Policy. In addition to saving through compulsory super.

Convert “have-nots” to "haves" by more efficiently converting Human Capital to Financial Capital to Physical Capital.
Avoid rent and mortgage: Work to Save to buy home, cash on knocker.

Not taxing imaginary inflation returns would be a start.

The simple answer to correcting any distortion that negative gearing makes to the property market is to accept the reality that it is a "capital play" and allow the amount by which interest exceeds income as a deduction against the capital gain, not a persons other personal exertion or investment income. That still provides tax advantages to buying and owning rental property but reduces the negative impact on government revenue.
The only mistake Costello made in the setting 50% as the simplified inflation calculator was that it wasn't indexed by some form of rolling average over time, so that it was reviewed as inflation change substantially.
And of course, the simple answer to reduce the cost of housing in and around Australia's capital cities is to reduce the excessive size that houses are now being built and extended. A family of four can live very comfortably in a house of 150 m², but the average build now is in excess of 250 m². That's where the real cost is.

No mention of the support to property prices that tax concessions provide and how that feeds into higher rent.

Using Kalgoorlie as an example when things are going well locally and there is an increase in demand for housing then the Landgate would start the process of preparing land for development, one of the first steps is gaining native title clearance which takes several years. The local economy depends on mining and its cyclical swings mean that demand can drop off suddenly. There is reduced likely hood of sales of land so the Landgate stops the process. The cycle repeats and again no land is available.

"Cutting the capital gains discount would reduce the supply of rental properties and push up rents"

Properties don't disappear off the face of the earth if the property is sold and comes off the supply of rental properties. The property is purchased by an owner occupier, which means one less property on the supply side and one less family wanting to rent on the demand side. Overall no change

You're missing the supply side of the equation. If property is a less attractive investment, less houses/units will be built. Very simply there are two groups of people - those who can afford to buy a home to live in, and those who cannot, and rent. Not everyone in the second group moves on to become a member of the first group. And the second group, the renters, rely on someone else to build the home for them to rent. If the population is static your argument might hold, but as the population grows, the 30% who rent want someone to stump up the money to pay for their property to be built. Focus on why supply is so poor - slow approvals, abysmal productivity in the construction sector which leads to increased construction costs etc.

Why not simply revert to the old CGT method.

Increase the cost base by inflation and tax the after indexation gain

Logical - there is no logical reason for a 50% discount, it is an arbitrary number, indexing has an inherent logic

There was - and is - a logical reason. 50% was chosen as a proxy for the inflation uplift over the average holding time for investments. This was an excellent simplification of the calculation, which is otherwise a little complex and open to dispute about what inflation was over the holding period.
By all means review the policy, but please understand that it was logical. It remains logical though a smaller discount would be justifiable since inflation is far less than it was in the past.

It seems the 50 % discount could be considered "logical" only if people cannot do simple arithmetic and the ATO cannot list a cost index (by State or region) on their website.

Well, Ian, in practice the complication was that instead of just putting the purchase and sale prices in, the ATO had to verify the purchase and sales dates. Not just a case of publishing indices but verifying that the taxpayer had used the ones that aligned with those dates. Led to arguments about who was right and a lot of extra administrative checking. One of the first rules fir good tax policy is to keep it simple and minimise the administration costs. So it was perfectly logical to anyone who passed Public Finance 1.01.

I totally disagree with the "simplicity" argument for Costello's introduction of the 50% discount on capital gains. While it wasn't so egregious when there was the high inflation of the 1980's, it's ridiculous now with the low inflation up till 2022. What is particularly ridiculous is that there is zero discount up to 365 days, and 50% discount from day 366 on! That means that I retain shares until the 1 year is up, then sell them!
Far better was Keating's taxation based on the real capital gain - ie after allowing for inflation. That reflected the true realised earnings. It was a doddle to administer: just maintain the index of whatever the inflation measure was, and apply that.
Please bring back the one thing that Keating did well!

But like all tax "reforms" it presented as a tax reduction, when in fact it was a tax increase.

In the past, the tax rate was marginal rate on 20% of the gain multiplied by 5, whereas the "tax reduction" process added half the profit to your other taxable income. You therefore paid more at a higher tax rate

But that is what "reform" means - increasing tax, and presenting it as a reduction or simplification

The whole rationale for the indexation for inflation on capital gains needs to be re-examined. The practice of first, not taxing capital gains was formed when the only the landed gentry owned assets - and controlled the Government - and only income was taxed. The latter introduction of indexation for inflation on capital gains is a holdover from those times.

To lift economic growth we need to encourage productive work in Australia, not give tax concessions to reward passive investment. The way to do that is to lower tax on business and employment income and offset this drop to revenue by removing or reducing the many tax concessions that litter the pages of tax legislation in this country.

Currently a retiree in the Eastern Suburbs or the Lower North Shore is paying a far lower share of tax on their income than a worker in the Western Suburbs of Sydney. I know. I'm one of the former. This is great for me but not good for the future of this country.

For many young educated Australians our low professional wages and high income tax means working overseas is very attractive. They can earn far more and get ahead in life, Meanwhile in Australia the way to get ahead is to work tax concessions. No wonder our productivity and per capita living standards are in decline. Unless we make major changes soon, Australia is headed for serious problems. We will become as Lee Kwan Yew warned "the white trash" of Asia.

Oh please! You conflate logic with laziness. "A little complex"? Calculating capital gains was never difficult, in the modern world of the internet its a picosecond of your computers time to do it for you. Another simplification which did help was to only use 20% of the gain to calculate the marginal tax rate which was then applied to the whole gain, lest you end up in the top tax bracket for most of the gain. A better option might be to divided the (real) gain by the number of years you owned the asset, calculate the marginal tax rate and apply this to the whole gain. This would address one the most egregious problems of capital gains taxes - many years of gains are pushed into one years tax return as assessable income. Of course the Greens may get around this if they push for a capital gains tax annually, whether you've disposed of the asset or not!

Exactly! The current system rewards the short term investor (more likely speculator), who holds an asset for a year and a day and punishes the long term investor who has held an asset for decades, where inflation erodes real returns!

So, the above study shows, in general, that the arguments against negative gearing are total BS. Negative gearing supports landlords, allows more rental properties to be available in the marketplace, provides income support via the tax system which puts a dampening effect upon general rental levels. I would have thought that all of those impacts were generally good for Australians. There is no case to be made out for abolishing negative gearing as per the deluded Greens, who appear to have a marxist view only and ignore the economics - as you would expect!

Australia is about the only country in the world that has negative gearing.
In the USA, the land of capitalism, home owners are allowed tax deductions on mortgage interest payments up till a point, but here in Australia it is investors who must get looked after and the property market supposedly cannot cope without it and it's
sacrilege to consider change. If negative gearing is so good at providing more rental properties, why then is our market here so absurdly expensive, tight and difficult when the rest of world doesn't have negative gearing?

CC, can you explain why it is OK for rental income to be included in your assessable income, but it is not OK to allow as a deduction one of the significant costs of generating that income, namely interest expense?

Neil, my point remains that Australia looks after property investors, rather than home buyers, far more than other countries.

As much as I share your dislike of the Greens, the ideas that "negative gearing supports landlords" and "allows more rental properties to be available in the markets" are equally utter BS. The tax benefit of negative gearing is not worth it if the landlord is bleeding cash, that's why many "investors" sell within 2 years and the holding average is only 4 years, as this article says.

No rational (or at least reasonable) investors would take on a significant amount of debt to acquire a negative yielding assets in the first place, even if it comes with tax benefits.

Agree.
Negative gearing has not worked since about 2000, when GST was introduced and income tax rates were substantially lowered. In addition many who dislike it cannot describe what it is, but it sounds like a good mantra for the Greens to repeat.

It feels like Australia has sold it's soul for a never ending property bubble