Scott Morrison leaves open possibility of capital gains tax reform

Scott Morrison has left open the possibility of reforming the capital gains tax discount, saying the government would prefer to use a “scalpel” to adjust housing tax arrangements, with no interest in abolishing negative gearing.

But the shadow treasurer, Chris Bowen, says the government can no longer ignore how negative gearing is distorting Australia’s housing markets, after the Reserve Bank governor warned the tax arrangement was supporting a surge in interest-only loans.

The RBA governor Philip Lowe warned on Tuesday evening that current problems with some capital city property markets were complicated, and were generally caused by a lack of supply. But the lack of supply has been exacerbated by easy availability of credit which has amplified demand, he said.

He called on Australia’s banks to stop issuing so many interest-only loans in the tight-supply environment, saying too many loans were being made to borrowers with the “skinniest of income buffers.”

He singled out particular “taxation arrangements” – negative gearing and the capital gains tax discount – for encouraging a surge in interest-only loans in the last 12 months.

“Over the past year, close to 40% of the housing loans made in Australia have not required the scheduled repayment of even one dollar of principal at least in the first years of the life of the loan; only interest payments are required,” Lowe said.

“This is unusual by international standards.”

Bowen jumped on the governor’s comments on Wednesday, saying the RBA’s job would be much easier if the government listened to Lowe’s argument about tax distortions.

“It just adds to the long list of people who’ve called this out,” Bowen said.

“That negative gearing, as the most generous property tax concession in the world, combined with the capital gains tax discount, is making housing affordability worse, [is] a drain on the budget, and is a key source of financial risk in our economy.

He said negative gearing was the “most important lever at the policy disposal of the government” but the government was refusing to use it.

Morrison dismissed Bowen’s comments, telling ABC radio that the government risked making things worse by taking a “sledgehammer” to the property market.

But when asked if he could reduce the capital gains tax discount to help rebalance some property markets, he did not rule it out. He merely cautioned against using national tax arrangements to fix individual property markets like Sydney and Melbourne.

“You’ve got to be very calibrated about this,” Morrison said.

“The biggest risks to the Australian economy are obviously things to our north, how China continues to perform ... but the other shock which is referred to by ratings agencies and others is if there were to be a housing shock in Australia.

“I don’t think we’re at risk of that, but what could produce those sorts of results are the sort of sledgehammer policies that the Labor party have been proposing particularly on abolishing negative gearing. I mean just abolishing negative gearing – that is a sledgehammer.”

Labor’s policy is to restrict negative gearing to first home buyers. It does not advocate abolishing the tax arrangement.

Two recent freedom-of-information requests have shown that Treasury, in the early months of this year, has been quietly working up options to limit the capital gains tax concession.

Wayne Byers, the chairman of the Australian Prudential Regulation Authority, said on Wednesday that despite steps taken by Apra in recent years to moderate investor lending, the risk environment in the housing sector “certainly hasn’t moderated.”

He said last week’s move to encourage banks to tighten their lending practices on investor and interest-only loans was designed to promote a “higher-than-normal degree of prudence” among lenders and borrowers.

“This latest step is a tactical response to current market conditions – we can and will do more as conditions evolve,” he said.

Greg Medcraft, the chairman of the Australian Securities and Investments Commission, echoed concerns from RBA governor Philip Lowe about the number of interest-only loans in Australia.

He told ABC radio that two years ago he started surveilling the issuance of interest-only loans, and “what we found was fairly appalling.”

“This is about responsible lending,” he said.

“What we don’t want is the misery of people who get in over their heads and lose their homes, which is something I’ve seen unfortunately far too often.

“The banks have a legal obligation to ensure that people are not in over their heads.”

Malcolm Turnbull said on Wednesday that Lowe mentioned housing supply constraints at least four times in his speech because supply was the fundamental problem in markets like Sydney and Melbourne.

“The key to dealing with the housing affordability issue is building more houses, or building more dwellings,” he said.