The failure of Jim Chalmers

It also catches all the small businesspeople who work for a take-home pay less than average in the expectation of selling their business at some stage for a profit. And the entrepreneurs, who are building the productivity boosting financial unicorns of the future, who can get a much better CGT regime incorporating in New Zealand, Singapore, or Switzerland, and might just do that now.

Nor will it have much of a long-term effect on the housing market. As everyone agrees, supply is the key to increased housing affordability, and the budget admits there will actually be fewer houses built as a result of these ‘reforms’.

We’ve modelled the last 10 years of housing investment for the existing tax regime, along with the counterfactual of what would have happened had Chalmer’s regime been in place over the same period.

What that shows is, counter to popular opinion, that the homeowner gets the biggest tax advantage, not the investor. This is because they don’t pay any capital gains tax at all, and as they are effectively also their own landlord, they ‘pay’ themselves rent in before-tax dollars.

These tax advantages more than make up for the ability of the investor to deduct expenses from income, and they are already paying a CGT, even if only on half their profits.

When we run our simulations, we find that over the last ten-year period the top marginal rate homeowner would have got a theoretical return on their investment of 16.08 per cent after tax if they borrowed 95 per cent of the value of the residence, and 11.90 per cent if they borrowed only 80 per cent. This compares to the investor on 15.19 per cent and 9.99 per cent respectively on the same tax rate and borrowing conditions.

When they’ve both paid off their mortgages the homeowner is still well ahead with a return of 7.6 per cent versus 5.14 per cent.

Under the Chalmers’ regime the returns are not as good, but they’re not much worse either. On the leveraged scenarios the top rate homeowner gets the same return, while the investor drops to 13.54 per cent and 9.81 per cent respectively.

Is this enough to keep them out of the market or will there still be investors for residential housing? Well, on our hindcast the alternative investments we looked at of superannuation, shares and cash all returned much less. 8.21 per cent for super, 5.83 per cent for shares and 1.05 per cent for cash.

Investors will eventually work this maths out and the dips we are currently seeing in the markets will most likely reverse. Particularly as there is no evidence the government intends to slow immigration.

As reported by The Australian: ‘Labor is arguing the opposition Leader’s plan to bring net overseas migration below 200,000 a year would cost about $50bn over nine years.’

Immigration is now a profit centre for the government, returning more than their CGT and negative gearing ‘reforms’ entirely.