If the International Monetary Fund (IMF) has its way, Australians who are high earners or who are considering selling their homes to make a profit might face a tax crackdown.
Australia has come under fire from the IMF for granting a 50% capital gains tax break to anyone who sell their primary house.
It said that reviewing tax exemptions “may make the tax system more equal and effective.”
The capital gains tax exemption for sales of primary homes should be limited since it costs the economy around 2.5% of GDP each year in lost revenues.
The Australian government is also being urged by the Washington-based IMF to reevaluate the Stage Three income tax cuts, which are scheduled to start in July 2024 and would cost $254 billion over ten years.
Jim Chalmers, the Treasurer, recognized the IMF’s recommendation to reduce expenditure or find savings but chose not to support their recommendation to eliminate the capital gains tax reduction.
The IMF is arguing that when there are challenges on the budget, we must ensure that our tax structure can support the financing we want to see in our areas of national importance, he added.
We acknowledge that expenditure discipline, which the IMF supported, has a place when the budget is under the kind of pressure it is right now.
The Stage Three tax cuts, set to take effect in July 2024, were also urged for review by the IMF.
With the cutbacks beginning in the fiscal year 2024–2025, the statement said, “There would be time, if required, to reassess the parameters to adequately balance expenses on the budget and benefits to the economy.”
Dr. Chalmers, however, also rejected the IMF’s request to reevaluate the tax cuts, which would result in the first reduction of tax brackets from five to four since 1984 and a $9,075 tax cut for people making over $200,000 at a cost of $254 billion over ten years.
He said, “That’s not our aim; our policy hasn’t changed.”
The previous Coalition government’s proposal to eliminate the 37% tax rate and replace it with a new 30% tax band for all those earning between $45,000 and $200,000 has the support of Labor.
Members of Congress and other individuals earning more than $200,000 would be subject to a new top marginal tax rate of 46%.
Australian citizens selling a house who have owned it for at least a year and haven’t leased it out in a year are eligible for the current 50% capital gains tax reduction, which went into effect on September 21, 1999.
Capital gains tax is not due by baby boomers who purchased their house before September 20, 1985.
Australians who profited from the current increase in property prices or from future booms might be impacted if the IMF succeeds in persuading Labor to breach an election commitment.
Despite a 13.8% decline in Sydney home and apartment prices in the year to January 2023, CoreLogic data shows that the median value of $999,278 is still 27.7% more than it was before to the pandemic.
Sydney’s typical home price of $1,205,618—even after a 15% drop over the last year—remains 10.4 times the average full-time earnings of $92,030, even after accounting for a 20% down payment on a mortgage.
The banking regulation views it as dangerous for a borrower to owe a bank six times their pre-tax earnings, and opponents of the current capital gains tax discount claim the policy has made it more difficult for young people to join the real estate market.
Brisbane’s real estate prices peaked in the latter part of June and have subsequently fallen by a record 10.7% to $698,204.
However, throughout the epidemic, home prices in the capital of Queensland rose by 42.7%.
Hobart’s house and unit prices have dropped a record 10.8% from the May high to $666,431, but this is not enough to reverse the 37.7% increase from the trough to the peak seen during Covid.
The median home and unit price in Melbourne has dropped 9.3% from the February 2022 high to $746,468; nevertheless, this is still unable to reverse the 17.3% epidemic spike.
Adelaide property prices peaked in July 2022 at $646,045 and have only dropped 2.1% since then, although during Covid, prices increased by 44.7%.
Former Labor leader Bob Hawke enacted a capital gains tax 37 years ago, but current Labor leader Anthony Albanese vowed in 2021 that he would not change the liberal leader John Howard’s capital gains tax discount policy.
Bill Shorten, the former leader of Labor, lost the 2019 election after making pledges to eliminate negative gearing for future purchases of existing properties and reduce the capital gains tax credit from 50% to 25%.
The IMF predicts a Reserve Bank cash rate of 3.85 percent and labels the current level of 3.1 percent as “broadly neutral territory,” indicating that it is more concerned about Australian interest rates than some of the big banks.
According to the report, “the large rate increases to date and uncertainty over the strength and latency of transmission channels suggest considerable uncertainty for monetary policy going ahead.”
The RBA is expected to hike rates by 0.4 percentage points on February 7 in order to reach a high of 3.35 percent, or a level of 3.5 percent.
While Westpac and ANZ estimate a cash rate of 3.85 percent by May, NAB predicts a cash rate of 3.6% by March.
»February 2023 IMF study criticizes Australia’s capital gains tax discount«