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Capping tax breaks for housing could help reduce house prices and ensure that property is not concentrated in the hands of older and wealthier Australians, according to a new report by the Organisation for Economic Co-operation and Development (OECD).
The report suggests that capital gains tax exemptions can disproportionately benefit higher-income and wealthier households and drain government budgets. In Australia, there is no capital gains tax on a person's principal place of residence and the tax levied when someone sells an investment property is heavily discounted.
One of the OECD's recommendations to governments, including Australia's, is to "consider capping the capital gains tax exemption … to ensure that the highest-value gains are taxed".
It suggests this could "reduce some of the upward pressure on house prices".
The estimated cost of the capital gains tax exemption for main residences was $64 billion in 2021.
The report, Housing Taxation in OECD countries, says in both Australia and the United Kingdom, the capital gains tax exemption for the main residence is the country's largest tax concession. But removing it "would not necessarily raise the equivalent of the foregone tax revenue".
"Additional tax revenues would depend on dynamic effects such as lock-in effects and changing house prices," the report said. Economists have long taken issue with the 50 per cent capital gains tax discount, which allows wealthier investors to flip properties at a profit without hefty tax bills and costs the federal budget about $10 billion annually.
In 2019, Labor had a policy to reduce the CGT exemption from 50 per cent to 25 per cent, but it dumped that policy in the lead-up to this year's federal election, as well as its previous plan to limit negative gearing to new homes
The OECD also noted that wealthier households benefit from capital gains tax exemptions and discounts, while young people were being locked out of the housing market. The report suggests that "OECD countries have experienced unprecedented growth in house prices in the last three decades; a trend that accelerated during the pandemic".
It said among OECD nations, including Australia, housing was the main asset for most households and "plays an even more important role for the middle class, with owner-occupied housing representing on average 60 per cent of middle-class wealth".
It said as a result of tax breaks like the CGT discount, "the chance of becoming a home owner may be increasingly dictated by household income and wealth". The OECD says most household wealth is tied up in housing. The OECD report cites research from senior economist at the Australia Institute Matt Grudnoff showing that the CGT discount goes mainly to wealthier households.
