This thread is about budgeting or more specifically, the federal budget.
With election fever now over and one of the ratings agencies putting our nation's politicians on notice, perhaps it's time to unpick the budget policies of the major parties to see where there's scope for genuine reform.
A major area was where Labor entered the field with CGT and NG changes. The Coalition in response did nothing after being scared away from a $ cap on NG of residential properties.
In the past on this forum, I've advocated a reduction in the CGT discount in conjunction with the option of CPI indexation of the cost base. The former would reduce shorter term speculation and the latter would ensure the inflation component of any CG was not taxed. Given the complexity that CPI indexation introduces, I've considered a simpler option for individuals as follows,
For investments held < 1yr: No CGT discount (as present).
Investments held 1 to 4yr: 25% CGT discount (Labor's proposed rate).
Investments held 5 to 9yr: 50% CGT discount (as present).
Investments held 10 to 14yr: 75% CGT discount (lower CGT rate than present).
Investments held 15yr+ No CGT.
With the above, existing investments would be grandfathered from the 1 to 4yr 25% discount rate (as Labor has proposed). This would naturally expire after 5 years.
For the rates 10yr+, the clock on existing investments could be set to start ticking from the date of implementation to prevent a short to medium term impact on the budget. As an example, an investment that's been held for 20 years at the implementation date would have to be held for a further 10 years to gain the 75% CGT discount above.
The above would still yield a budget improvement in the short to medium term and in the longer term, the added incentive to invest would help to grow the size of the economic pie. The reduced CGT discount in the shorter term would also assist in reducing speculative investment in the shorter term time frame and thus assist with managing investment heat in residential property.
An issue with applying a cap (against salary income for example) as the government at one point considered is that it increases the risk to the investor of variations in market parameters such as interest rates.
If we're to take the view that NG should be restricted in some for a specific asset class such as residential property (I've previously had that view), a more stable option could be to restrict the number of properties an individual can own and offset an income loss from an investment property against salary income.
An example could be 2 properties per individual. If they own a PPOR and one investment property (IP), they could only NG that single IP and only one IP at any time. The 2 properties per individual would be regardless of residential use. For example, the owner of a PPOR and a positively geared IP wouldn't be able to NG a third property against salary income. Existing investments would be best grandfathered as Labor has proposed.
The CGT and NG changes outlined above would in my view reduce shorter term investment speculation, improve budget revenue in the short to medium term and enhance incentives for longer term investment. It would overall strike a better balance of investment incentives between shorter term and longer term investment in a relatively simple way and improve the federal budget position.