How tax planning distorts the property market

20110528. BRW. Torquay. Generic Real Estate. Property, for sale, sold, housing, growth, development, housing market, greater melbourne, home, residential, real estate, home buyer, rent, lease, land, interest rates, building.Photograph by Arsineh Houspian. +(61) 401 320 173. [email protected]苏州夜总会招聘Far from encouraging efficient use of the housing stock and improving housing affordability, proposals to increase the capital gains tax payable on the sale of investment properties could well add to current housing problems. A concerned reader highlighted this point arguing that even today’s CGT levied on 50 per cent of the gain was deterring sales of his several inner-city properties.
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The large appreciation in their values because of inflation and their location means that selling these properties would generate a tax bill of slightly less than 20 per cent of their current value. Even if the property market weakens as expected, the fall in their values is unlikely to be as large as this.

CGT is payable only when a property is sold and by bequeathing them to resident heirs, the tax liability can be further postponed until their ultimate sale.

While not all investment property owners have been so fortunate in accruing such large gains, even smaller percentage gains can be subject to high tax rates for several reasons. The main one is that the applicable tax rate is calculated at marginal rates that increase as the owner’s other taxable income rises.

Also, unlike shares or other managed products that can be sold in small parcels over a number of tax years, selling a property will result in a bulky gain taxed in the one tax year. This increases the likelihood that the taxpayer’s marginal tax rate applicable to the gain will be high.

Recognising this fact, several overseas governments levy their CGT at a flat rate not dependent on the owner’s other taxable income. Clearly, the higher the CGT liability is, the greater the deterrent to realising the gain, especially when transfer in kind at death can further postpone the liability.

It’s most unlikely that a future government would be prepared to reduce the CGT payable on investment properties and property investors could even face higher tax rates. Therefore, new investors need to pay attention to ownership structures when purchasing properties.

For example, the negative gearing tax benefits increase the attractions of making the purchase in the name of a high marginal rate taxpayer. But this decision is also likely to increase future capital tax bills if, as is usual, the objective is to make a large capital gain. For properties likely to appreciate substantially over a relatively short period, ownership by a low-income taxpayer, discretionary trust or super fund can be a more attractive option.

Ownership structure decisions will be even more important if CGT rates are increased further, especially because capital appreciation is such a large component of the returns available from property ownership.

Daryl Dixon is the executive chairman of Dixon Advisory. [email protected]苏州夜总会招聘.au

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