A report in The Australian today that the government is considering dropping the capital gains tax exemption on homes worth more than $2 million. Now there are lots of details missing including the important one of whether that means $2 million at purchase or $2 million at sale. It is also safe to assume that there would be mortgage interest rate deductions accompanying such a change. Put simply, if not then there can be no pretence of it being to remove a housing distortion as opposed to being some sort of luxury tax that would have distorting impacts on the rental market, etc.
So let’s suppose that it is to move to a more US-style system. It is hard to say what the impact on tax revenues will be but, apart from some crazy retrospective tax grabs, it seems to me that a move to this system will be providing a significant benefit to owners of high-end homes. Those houses face the greatest asset price volatility. So what the Government would be offering is to absorb not only part of that risk but also the risk on the loan cost side by allowing interest rate deductibility of variable interest rates. It is like one big equity sharing arrangement with the likely implication that it will push up the price of such homes as household risk is reduced. This might be one of those golden political opportunities whereby the government could claim to be slugging the rich but actually giving them a gift.