TAX REFORM!!

tax-reform

The tax reform debate continues to grab media attention.  On Monday last week the chairman of AMP, Peter Mason, came out with the astounding statement that it was time to consider capital gains tax on the family home.  This was followed by headlines in the Weekend Australian claiming the government was considering a review of negative gearing; and taxing contributions to superannuation at the contributor’s marginal rate.

Any government who considered capital gains tax on the family home would be creating a nightmare.  As the law now stands all expenses for non-income producing properties bought since August 1991 can be added to the base cost.  Typical examples are a beach house that is not rented out, or vacant land.

So, if you bought a beach house in 2007 and borrowed money to buy it you could claim all your interest, as well as rates, land tax, insurance maintenance etc.  As the property is not income producing, there is no deduction allowed for these items each year – they are simply added to the base cost and so reduce any capital gains tax payable when the property is sold.

It therefore follows that any proposal to levy capital gains tax on the family home would have to account for all expenses which can be claimed after the home has been purchased.  Given that many people spend more on interest than the purchase price of the property, and interest is generally the biggest expense, I can’t see much capital gains tax ever going to the government.  In any event the record keeping would be horrendous.  It would also be difficult to levy the tax retrospectively as records are not required to be kept for more than five years.  Therefore, the tax would have to take effect from a date in the future, and that would require every property to be valued at the date of introduction of the tax.  It really is a ridiculous idea.

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