Labor senator forced to defend capital gains tax discount ahead of Jim Chalmers making Budget announcement

A Labor senator has been forced to defend the existing capital gains tax discount on investment properties in a sign Treasurer Jim Chalmers is facing a caucus battle ahead of his plan to wind back concessions in the May Budget.

Richard Dowling, a Tasmanian senator from Labor’s Right faction, expressed his view as the deputy chairman of a Senate committee examining the 50 per cent capital gains tax discount.

“There’s a lot of people on very average wages. They put all that capital into that one investment property and that’s their vehicle for savings,” Senator Dowling told the inquiry in Melbourne on Monday.

“And often if they do sell, then they get put into that top tax bracket, which is not reflective of their earnings over time.”

The Australian Manufacturing Workers Union, affiliated with Labor’s Left faction, wants capital gains tax concessions on housing abolished, with a two-year grandfathering period.

“A house is a place to live but our tax incentives treat them as financial assets, as tools for speculation, as investments and vehicles for accumulating wealth,” the AWMU’s national economic research officer Hamish Gamble told the committee.

The ACTU wants the 50 per cent capital gains tax discount halved to 25 per cent for investors who own more than one property they are renting out.

This is similar to what Labor had proposed at the 2016 and 2019 elections it had lost, when it also proposed allowing negative gearing for new properties.

But ACTU president Michele O’Neil wants negative gearing scrapped for new homes beyond one investment property.

“We don’t think it’s enough to just limit it to new homes. We think it’s important there’s a broader reining in of this tax advantage,” she told the hearing.

The ACTU also called for existing arrangements to be grandfathered for existing investors with one investment property with landlords owning subsequent homes given five years to sell their assets.

“This is balanced and really long overdue reform. It protects small investors and it grandfathers existing arrangements for five years,” Ms O’Neil said.

“We know many working people who don’t necessarily earn a high income really put a lot of effort into to saving and think about what they might do to support their children as well.

“We think it’s a fair thing that people are able to have one investment property because that is often related to how they can support their family and we think that’s a reasonable line to draw that people could have a benefit for one investment property.

“This is going to help more renters become first-home buyers and it’s going to reduce the really unfair advantage that we see for professional landlords.”

Former ACTU secretary Bill Kelty argued unaffordable housing as a result of the capital gains tax discount was driving support for One Nation.

“That is the source of the alienation, because young people do not believe you’re on their side,” he said.

“And where do they go? They go where they always go: they go to extremity. They go to parties of hate. They go to the parties of division.

“It’s not just a bad thing for the Liberal Party. It’s actually a bad thing for this country. It’s a very bad thing for this country and it begins here when people stand up for young people. Stand up for reform of the system.”

Under the existing 50 per cent capital gains tax discount introduced in September 1999, a landlord making a $100,000 gain on a residential property, owned for at least 12 months, only has to declare $50,000 of that on their annual tax return.

That means an average salary worker on $80,200, making this gain as an investor, can stay within the 30 per cent tax bracket for those earning $45,000 to $135,000 when they submit their annual tax return.

But if the discount was halved to 25 per cent, this average worker selling an investment property would need to declare $75,000 on tax. This individual would enter the 37 per cent target bracket applying for those earning $135,000 to $190,000.

An even bigger capital gain would see an average-income earner enter the top tax bracket of 45 per cent for earnings above $190,000.