Jury’s Out on Budget Tax Reforms, But Infrastructure Boost a ‘Big Win’

Treasurer Jim Chalmers’ fifth budget may be his most politically adventurous, delivering reforms to housing taxes amid a swathe of measures that are sure to unsettle the electorate (and renege on election promises). And while the property industry has largely welcomed the budget’s focus on both demand-side and supply-side reform of the housing sector, multiple stakeholders have said that “the jury’s out” as they begin to digest the detail. Independent economist Nicki Hutley told The Urban Developer that Chalmers should be commended for “doing something which doesn’t deliver a return within this electoral cycle” at a moment when global disruption and business sentiment are reaching Covid levels. “I think the tax changes needed to be made, and somebody had to have the courage to to do it, and I’m glad that they have,” Hutley said. “There’ll be a lot of hullabaloo about them, but you can’t really argue that the sky is falling… This is a problem that’s decades in the making and it’s not going to be solved overnight.” Under the incoming rules, which will take effect in July 2027, negative gearing will be disallowed,and capital gains tax will no longer benefit from a discount, except for new build properties. Hutley said that while the Budget contained a slew of different measures tackling the housing crisis from all angles, including the headline taxation amendments, there’ll be plenty more work to be done. “They don’t change the fundamental nature of the problems that Australia is facing in terms of slow productivity and economic growth. They certainly make a good contribution to housing, but again, it’s not solved overall.” ▲ The industry is coming to grips with the detail of the Treasurer’s changes to housing taxation. Property Council of Australia chief executive Mike Zorbas said that the jury was “well and truly out on whether the person funding a new home today will proceed with the investment when it becomes a more highly taxed ‘existing’ home at the point of future sale”. “We’ve seen previous legislation differ from the headline announcement. Grandfathering provisions must be clear and simple. Likewise, the definition of a new home must be black and white to avoid additional confusion,” Zorbas said. “If [the] proposed changes pass the Senate, the government needs the policy courage to monitor these settings and amend them to support the delivery of new homes if the secondary effects are worse than they expect.” Urban Development Institute of Australia president Oscar Stanley told The Urban Developer that it was a “pro-housing supply budget”. “I believe the diversion of investment capital over time into new housing developments, townhouses and house and land, is a positive. “Roughly 82 per cent of investor capital across Australia’s lending is in established housing. The billion-dollar question is how much of this will flip across to new housing and increase housing supply?” Implementation, market impacts unclear The changes to housing taxes contain a number of provisions and exceptions, with new build developments able to access many of the more generous existing arrangements. Industry representatives are warning that a period of confusion is likely to follow, as investors and accountants work out how to treat their assets (and how other market participants will react). While negative gearing has been disallowed for existing properties held before Budget night, for example, losses (including maintenance costs) may still be carried forward and applied to residential income in later years or to capital gains, albeit with a 30 per cent floor now in place for capital gains tax. Chartered Accountants ANZ policy executive Geraldine Magarey told The Urban Developer that this “changes the economics materially”. “Under the old rules, properties that were not positively geared still provided cash flow help. Under the new rules, if you don’t have positively geared residential property, you’re waiting to realise that benefit,” Magarey said. “Investors need to look at cash flow impacts and capital growth as part of the overall return on investment. ▲ Newly built properties will benefit from more generous tax settings under the new rules. “This is exactly the kind of complexity that requires proper professional advice, not a quick read of the Budget papers. Our members are already fielding questions on this.” Commercial property and other asset classes can still access negative gearing, as can residential properties held in trusts and superannuation funds. Targeted exemptions will also exist for build-to-rent developments, and private investors in government housing programs. Magarey said that “the new-build definition also has nuances that matter in practice”. “Dwellings constructed on vacant land qualify, as do properties where an existing building is demolished and replaced with a greater number of dwellings. But a knockdown-rebuild or substantial renovation that doesn’t increase supply won’t be eligible. “And new-build status includes where the builder was the first owner and the property was unoccupied for no more than 12 months. We’re still working through the detail on these changes and are in active discussions with the Treasurer, Assistant Treasurer and Treasury officials.” ▲ A period of market uncertainty may follow while the tax changes are absorbed. Stanley agreed that “any change to a taxation structure can sap momentum from the market”. “I’m concerned that the changes coming to capital gains tax and negative gearing might take time to understand and revise buyer behaviour, and therefore what the impact is. I am concerned that the grandfathering window of 12 months means that that flow to new housing might not be immediate,” Stanley said. “Therefore, we potentially have a period where there’s 12 months of confusion before we find out what that medium-term demand looks like.” Hutley said that Treasury modelling, which was broadly in line with modelling conducted by many other sources, shows the changes will dampen prices by around 2 per cent. Chalmers argues that 75,000 Australians will be able to access the property market for the first time thanks to Budget measures, but Hutley said that some of the government’s initiatives were working at cross-purposes. “They also say the impact of that will be that there will be 35,000 fewer houses built over the short term. When you net that out from the 65,000 new houses emerging from the infrastructure spending… it means that the changes overall are not, in any sense, going to revolutionise access to housing,” Hutley said. According to Hutley, the 5 Per Cent Deposit Scheme, which was extended in the Budget, is producing valuation growth for properties below the price cap at an average rate twice as fast as those above the price cap; potentially an unhelpful market distortion. Infrastructure, planning measures applauded Other Budget’s measures won a much warmer welcome, with the $2 billion commitment to enabling infrastructure the standout. Only a handful of large line items were budgeted, with beneficiaries including the Suburban Rail Loop in Melbourne , as well as Defense projects (including $110 million over five years to support housing for the Submarine Rotational Force—West). However, Stanley said, the enabling infrastructure fund was “the biggest win”. “It’s last-mile infrastructure such as sewers and roads—the catalytic work that developers need to get going. It’s not the big ribbon-cutting infrastructure which doesn’t directly impact supply,” Stanley said. “This is good supply policy and is directly what was being asked for by UDIA. It is now critical that state and local governments align policy to expediate supply. ▲ Roads, sewers, and electricity infrastructure supporting new housing will receive $2 billion in funding. “That’s why, at a headline level, I think it’s great policy. But as with all these things, it’s now how it’s administered locally which is very important, and what we’re calling for from the Minister of Housing is that industry remains involved in helping set the criteria for that investment.” The infrastructure will be tied to state-based efforts to simplify, accelerate and standardise regulations and assessments. Of the funding, $500 million will be specifically allocated to regional housing. Separately, another $500 million has been put towards improving environmental approvals. “Our data from the National Housing Pipeline report suggests that, between infrastructure and environmental approvals, 40 per cent of designated housing supply across Australia is being held up,” Stanley said. “So, they’ve listened to industry and put some serious commitment and capital in place. ▲ Industry leaders say that the states need to coordinate with Budget measures. While the Treasurer has already won praise and criticism for his efforts, Hutley said that housing reform was done “bit-by-bit, and built up brick-by-brick”. “These are measures intended to make substantial, long-lasting change. There’s not a magic formula for change overnight, even with more broad-based tax reform,” Hutley said. “These things take time to work through the system.”

Jury’s Out on Budget Tax Reforms, But Infrastructure Boost a ‘Big Win’

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