Labor’s controversial taxes on capital gains outside property are a recipe for failure, former Reserve Bank governor Philip Lowe has warned in a striking intervention against the “redistribution agenda” of Anthony Albanese and Jim Chalmers.
The Albanese government made a last-minute backflip on its tax policies on Thursday by dumping a “widows’ tax” that would have taken away grandfathering tax protections from Australians going through a divorce or the death of their partner.
The passage of the first budget bill through the upper house prompted a burst of applause from Labor senators.
After weeks of anger from businesses and young investors, the Treasurer hailed the parliamentary passage of his legislation – secured in a deal with the Greens – as a “really important day for economic reform, for tax reform … for workers and first home buyers”.
“The old intersection between the tax system and the housing market helped make housing unaffordable … We are taking action because doing nothing would have consigned another generation to that broken status quo,” Dr Chalmers said in a statement.
“Today is a really important day for economic reform, for tax reform, for our economy and our country and it’s a very good day for workers and first home buyers in particular.”
Budget won’t fix housing supply
Dr Lowe said on Thursday that while he supported changes to tax concessions on property investment, he warned that the budget would not lift housing supply and would only reconfigure ownership The changes outside property would damage the very investment Australia needed to lift lacklustre productivity,’’ he said. “I was disappointed that they, the government, extended the capital gains tax treatment to non-residential assets, and I think that will be to our detriment that they’ve done that,” Dr Lowe told Future Generation chief investment officer Lee Hopperton in a presentation on Thursday.
“I think it’s a mistake, to extend the changes to capital gains tax to risk-bearing assets because … what we want to do is to make Australia a great place to invest, expand, innovate, and hire people, and increasing capital gains taxes on assets whose value rises because of enterprise works against that.
Dr Lowe warned that the Albanese government’s overall “redistribution agenda” would not boost productivity or economic growth. “We don’t have a growth agenda; we now have a redistribution agenda,” he said. “We’re arguing over how we redistribute rather than make a bigger pie, and I feel like we’re losing our way. Too much political discourse is focused on how we cut the pie rather than grow the pie, and we grow the pie by investing, innovating, building new businesses, and hiring people with good skills.”
Business confidence
Dr Lowe’s intervention came after a business survey watched by the RBA showed more than 45 per cent of businesses felt the federal government’s policies were hitting confidence, while Angus Taylor on Thursday vowed to repeal the taxes with immediate effect and Pauline Hanson ramped up her fight against Labor’s budget reforms.
Labor’s removal of the 50 per cent capital gains tax discount for inflation indexation, along with a minimum 30 per cent rate, and a grandfathered ban on negative gearing for transactions on existing property have been received poorly among the investment community and dented the government’s polling.
The Prime Minister tried to use the passage of the tax bill to reframe the economic debate and attack both the Coalition and One Nation as opponents of workers and first home buyers.
RBA governance board member Jennifer Westacott said she shared Dr Lowe’s views and urged the government for broader scaled tax reform.
The pair’s comments came after the NAB business survey showed both business confidence and conditions had fallen sharply in the wake of the budget.
“The share of businesses reporting geopolitics or federal government policies as issues affecting confidence rose about 16 percentage points and about 7 percentage points respectively,” the survey said.
“Business confidence dropped sharply in Q2, with businesses pointing to uncertainty from the Middle East conflict and the federal budget as drivers.”
Widow’s Tax
Labor will now focus on getting its trust taxes through parliament, minus a “death tax” on discretionary testamentary trusts that Anthony Albanese removed from the ALP’s plans last week.
After a push from independent senator David Pocock for Labor to amend the tax bill to address what has been dubbed the widows tax, Finance Minister Katy Gallagher revealed divorcees and widows would get grandfathered negative gearing and CGT protections back.
“We have made clear from the get-go, from the evening the budget was announced, that we were aware that there would be tranches of legislation … that would require us to work through some particular and specific interactions of tax law in subsequent legislation,” Senator Gallagher said. “So we were aware of some of the issues that Senator Pocock is raising around grandfathering and shared ownership, and we were working through them in the usual way, and we intend to address these, the arrangements for jointly owned assets in circumstances like inheritance, or divorce in subsequent legislation.”
The government won’t support Senator Pocock’s amendments to the legislation but will instead make the change in its second tranche of legislation targeting trusts and CGT exemptions for start-ups.
The Australian reported that Senator Pocock would move amendments in the upper house on Thursday, despite Dr Chalmers claiming the hit to divorcees and widows was “consistent with the existing CGT arrangements”.
“I’m concerned that people will lose legitimate access to grandfathered CGT concessions for jointly held assets when, for example, one partner dies – similarly when property transfer in the case of divorce,” Senator Pocock said. “I questioned Treasury officials about this during the Senate hearing into this bill and they confirmed that ‘In the event of a transfer of an interest or part of an interest, the new owner of that part of an interest would no longer benefit from the exemption’.”
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