This legislation is fair, balanced, and should be passed by the Senate.
The budget changes will improve equity and housing affordability.
The combination of changes to capital gains tax (CGT) and negative gearing will make property investment less lucrative, making it easier for first home buyers to enter the property market. It will have little impact on development activity or rental prices, because capital improvements are tax deductible, and buildings depreciate over time, thus CGT is mostly a tax on growth in land values.
There will also be a minimum tax rate of 30 per cent on trust distributions, with an exemption for farmers. This will prevent mostly high-wealth Australians from minimising tax by re-arranging their affairs. As noted in Budget Paper 1, the impact of these changes is heavily concentrated among the highest income earners. Importantly, this is not merely because capital gains push investors into higher income tax brackets. One-third of all capital gains are realised by individuals who earn incomes in the highest 1 per cent during their working lives, and more than half of all gains are realised by the highest 10 per cent.
The revenue raised will help fund a $250 Working Australians Tax Offset (WATO), effectively raising the tax -free threshold from $18,200 to $19,985.6 This is highly progressive, because low-income earners will receive more money as a share of their income.
There is a case for incentivising innovation and entrepreneurship
There is a case for government intervention to encourage innovation and entrepreneurship, because new ideas are a public good. It should be noted that startups and small businesses are already eligible for various CGT concessions and exemptions. For example, there is a 10-year exemption on CGT for investments held as shares in early stage innovation companies (ESICs), such as startups, with high growth potential. The budget is also funding a more generous refundable research and development credit.
However, there is room for discussion as to whether these incentives are sufficient and proportionate to the potential societal gains. The government should review the potential case for further concessions or exemptions for investment in entrepreneurial activity, whether through the CGT system or other tax settings.