IMF criticises Australia’s capital gains tax discount in February 2023 report

Australians thinking of selling their home to reap a profit or who are high-income earners face a tax crackdown if the International Monetary Fund (IMF) gets its way.

The IMF has criticised Australia for allowing a 50 per cent capital gains tax discount for those who sell their principal place of residence.

‘Reviewing tax exemptions could make the tax system more efficient and equitable,’ it said.

‘The capital gains tax exemption for the sale of main residences, costing around 2.5 per cent of GDP annually in foregone revenues, should be restricted.’

The Washington-based IMF is also calling for the Australian government to review the Stage Three income tax cuts due to begin in July 2024, at a cost of $254billion over a decade.

Treasurer Jim Chalmers acknowledged the IMF’s call to cut back on spending or find savings, but declined to endorse their call to scrap the capital gains tax discount.

‘The point that the IMF is making is that when we’ve got these pressures on the budget, we’ve got to make sure we’ve got the tax system that can sustain the funding that we want to see in our areas of national priority,’ he said.

‘We recognise when the budget is under as much pressure as it is now, there is a role for spending restraint which the IMF endorsed.’

The IMF also called on Australia to review the Stage Three tax cuts due to come into effect in July 2024.

‘With the cuts taking effect from financial year 2024-25, there would be time, if needed, to re-assess the parameters to appropriately balance costs on the budget and benefits to the economy,’ it said.

But Dr Chalmers also rebuffed the IMF’s call to review the tax cuts, which will reduce the number of tax brackets from five to four for the first time since 1984, and give a $9,075 tax cut to those earning more than $200,000 at a cost of $254billion over 10 years.

‘That’s not our intention, our policy hasn’t changed,’ he said. 

Labor has backed the former Coalition government’s plan to abolish the 37 per cent tax bracket and create a new 30 per cent tax bracket for all individuals earning between $45,000 and $200,000.

The International Monetary Fund has criticised Australia for allowing a 50 per cent capital gains tax discount for those who sell their principal place of residence

A new top marginal tax rate of 45 per cent would apply for those earning more than $200,000, which includes the likes of members of parliament.

The existing 50 per cent capital gains tax discount came into effect on September 21, 1999 and is available for Australian residents selling a home who have owned their property for at least 12 months and haven’t rented it out for a year.

Baby boomers who bought their home before September 20, 1985 don’t pay capital gains tax.

But should the IMF get its way, and convince Labor to break an election promise, Australians who benefited from the recent jump in house prices, or future booms, could be affected. 

While Sydney house and unit prices plunged by 13.8 per cent in the year to January, 2023, the $999,278 median value is still 27.7 per cent better than before the pandemic, CoreLogic data showed.

Treasurer Jim Chalmers acknowledged the IMF’s call to cut back on spending or find savings, but declined to endorse their call to scrap the capital gains tax discount

Even after a 15 per cent fall during the past year, Sydney’s median house price of $1,205,618 is still 10.4 times an average, full-time salary of $92,030, even with a 20 per cent mortgage deposit factored in.

The banking regulator considers it risky for a borrower to owe a bank six times their pre-tax salary and critics of the existing capital gains tax discount argue the policy has made it harder for younger people to enter the property market.

In Brisbane, property prices peaked a bit later in June and have since dived by a record 10.7 per cent to $698,204.

Home prices in the Queensland capital, however, soared by 42.7 per cent during the pandemic.

Hobart’s house and unit price has dived by a record 10.8 per cent to $666,431 from the May peak, but this would be insufficient to undo the 37.7 per cent trough-to-peak surge during Covid.

Melbourne’s mid-point house and unit price has fallen by 9.3 per cent since the February 2022 peak, back to $746,468, but this would still be insufficient to unwind the 17.3 per cent pandemic surge.

Adelaide home prices have only fallen by 2.1 per cent since peaking in July 2022, to $646,045, but prices climbed by 44.7 per cent during Covid.

While a former Labor prime minister Bob Hawke introduced a capital gains tax 37 years ago, the incumbent Labor PM Anthony Albanese promised in 2021 that he would not touch the capital gains tax discount policy introduced by Liberal PM John Howard.

Former Labor leader Bill Shorten lost the 2019 election by promising to scrap negative gearing for future purchases of existing homes and halve the capital gains tax discount to 25 per cent from 50 per cent.

The IMF is more worried about Australian interest rates than some of the major banks, forecasting a 3.85 per cent Reserve Bank cash rate and describing the existing 3.1 per cent level as ‘broadly neutral territory’. 

‘The significant rate hikes to date and uncertainty about the strength and lags of transmission channels imply high uncertainty for monetary policy going forward,’ it said.

The Commonwealth Bank is expecting a 3.35 per cent peak, or a 3.5 per cent level if the RBA raises rates by 0.4 percentage points on February 7.

NAB is forecasting a 3.6 per cent cash rate by March while Westpac and ANZ are predicting a 3.85 per cent cash rate by May.