This report argues that the current arrangements for taxation of asset incomes are flawed and recommends changes.

Overview

Prior to the 2014 Budget the Government asked the Shepherd Commission of Audit to report on public spending. They did not include in its remit the cost of tax expenditures – money which could be collected but, because of concessions, is not. Tax expenditures cost the Budget $130 billion per annum – or a quarter of all revenue. The issue of superannuation tax expenditures, costing almost $35b, is the subject of a companion paper to this report. Other large tax expenditures are in the area of housing.

The 2014 Financial System Inquiry, headed by David Murray and the 2015 Tax Discussion Paper have concerns about the disparate effective tax rates on various forms of savings –a concern which echoes the 2010 Henry Tax Review. For example, bank accounts are very heavily taxed, with no account taken of inflation, while assets yielding capital gains or utilising gearing are very lightly taxed. We concur with Murray’s suggestions that the tax advantages on capital gains and negative gearing be reduced, although Murray ultimately suggested these be matters for the Tax Review. The Tax Discussion Paper argues that negative gearing is not inherently concessional, but that geared property investment is encouraged by the capital gains discount. The Paper implicitly targets the latter concession. Our view is that both should be addressed.