Reduction to CGT discount could help abolish stamp duty: Grattan

Speaking before the Committee, Grattan Institute housing and economic security program director, Brendan Coates, said this funding could be used by the federal government to address tax measures that currently make housing mobility more difficult, such as stamp duty.

"Stamp duty is, in my view, the the worst tax that we have in Australia. It is inter-generationally unfair, because it's mainly hitting younger people, and it does lead to inadequate use of housing stock," Coates said.

Coates said while stamp duty is a state government tax, the states currently lack the revenue to abolish it.

"Even if you replace it with a land tax, you need to gradually offer some sweeteners to those that had recently purchased [a house] and now need to pay land tax after paying the equivalent of their entire annual income in stamp duty," he said. 

"The only way that we can see stamp duty reform happening at the state level is the federal government helping fund that transition to a degree."

Coates said using some of the revenue raised from halving the discount to support the states in removing stamp duty would be a substantial economic reform that would also improve housing affordability. 

The Grattan Institute said in its submission late last year that the CGT discount had overcompensated property investors over the past 25 years.

"Since the introduction of the capital gains tax discount in 1999, house prices have grown annually by an average of 6.4 per cent, and the ASX 200 has risen by 4.3 per cent per year on average. Whereas inflation over this period averaged 2.9 per cent annually," the submission said.

The Grattan Institute also argued that taxing capital gains more lightly in comparison with other savings income also created an incentive for investors to choose riskier assets that return more via capital gain.

"In conjunction with generous rules for deductibility of interest costs, the tax system creates strong incentives for debt-financed and speculative investments," it said. 

"The interaction of a 50 per cent CGT discount with negative gearing reduces home-ownership and the discount undermines income tax integrity by creating opportunities for artificial transactions to reduce income tax."

Coates noted that while reducing the CGT discount would contribute to budget sustainability, in terms of improving housing affordability directly, there were other measures that were more effective. 

"As far as a measure to boost supply, it falls a long way behind measures around supply," he said.

"The merits of proposals to reform the discount really rest on their economic and budgetary impacts [rather than] their housing impact."

The revenue from reducing the discount could also be used to boost the supply of social housing, pay for rent assistance or address the budget sustainability challenges that Australia faces as a nation, he said.