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Bruce Barbour - October 2020 - updated May 2021 and April 2022.

A person's financial well-being in retirement is greatly impacted by two factors:
  1. Having enough savings or a source of income to finance a reasonable lifestyle (food, clothing, services, entertainment, healthcare costs, etc.); and
  2. Having secure housing either through home ownership or through having enough additional income or savings to afford the rental payments.
Just having one of those factors is not sufficient. Consequently housing security must also be considered along with income security in retirement.

The superannuation system tries to address the first item: sufficient savings or income. I have looked in detail at some changes in the superannuation system to address the equity issues. It is now time to address the second factor: secure housing.

Housing equity in society has numerous issues associated with it, not just for retirement. The way housing ownership and access is set up at present the rich get a greatest level of benefit and the greatest level of concessions.

Capital Gains

The main concession associated with housing that advantages the rich over the less well off is that the growth in value of an owner occupied house is tax free when the house is sold. It does not matter whether the house is worth $400,000 or $4,000,000 the capital grow is still the tax free when the house is sold. Logically a rich person is going to own the $4,000,000 house and the capital growth of that house is going to be much larger than the capital growth of the $400,000 house that is owned by a less well off member of society. This disparity will be at least a factor of about ten to one, but could be more as the expensive house likely to be in a "better" area that may have greater capital growth. This is intrinsically unfair.

However if you accept the argument that home ownership is a good as it provides security of accommodation especially during later stage working life and into retirement then it is logical that some concessional tax arrangement should be implemented to encourage it. However it should not be an arrangement that drastically favours the rich over the less well off. Following this logic the policy could be that, say, the first $600,000 of a person's house that they live in is capital gains tax free. This is for everyone regardless of wealth or the value of the house. Consequently the $400,000 house would be capital gains tax free but for the $4,000,000 house only the first $600,000 would be capital gains tax free and the rest subject to the tax.

How would this work? Say the $4M house was purchased by its live-in owner for $3M three years ago. There is a $1M capital gain. Under the current arrangements that would all be capital gains tax free, regardless of the wealth of the former owner or their income level. However under this proposal the capital gains would be payable on $1M x ($4M - $0.6M)/$4M = $1M x (1 - 0.6/4) = $0.85M. And what tax rate would be payable? I would suggest that the tax rate payable should be the average of the top marginal tax rates payed by the former homeowner over the last three years on income. These are the three years that the house's capital gains accumulated.

Another example. A house is sold for $1M. It was purchased for $700K five years ago. There is a $300K capital gain. Under the current arrangements that would all be capital gains tax free. However under this proposal the capital gains would be payable on $300K  x (1 - 0.6/1) = $120K. And what tax rate would be payable? I would suggest that the tax rate payable should be the average of the top marginal tax rates payed by the homeowner over the last five years on income.

(While this averaging is the fairest way if a house has been owned for a long period of time this average may be difficult to determine. However considering that it is quite likely that the previous capital gains arrangements would be "grandfathered" the records of marginal tax rate paid will be kept by the tax department going into the future. However equally it may be decided that the tax rate to be used is just the average over up to the previous 10 years - to be determined.

The capital gains arrangement may need to be a bit more complicated than this. For example if the homeowner did a $100K upgrade to the house this might need to be deducted from the capital gains. There are other costs of ownership such as rates and insurances that might need to be adjusted for (probably with a small nominal percentage discount to cover these costs). This is detail that can be worked out prior to implementation. Always remember these are just seeds of ideas - not fully detailed regulation/law.)

For investment housing the whole capital gain would be taxable rather than the current 50% concession granted. The tax rate applicable would be determined by averaging as in the earlier examples. (Effectively this averaging arrangement may still provide some tax concession to the investor and home owner because if the house value growth was treated just as normal income then the tax rate payable in the year of sale may push the person's income into a higher if not the top tax bracket.)

I have used the sum $600K as the value of the home that is capital gains free. It may be determined that another figure, higher or lower, is more appropriate. For example perhaps it should be the median price of houses. Perhaps it should be different for different areas around the country. Whatever the figure(s) are they should be adjusted regularly (if not annually) to ensure that the capital gains tax exempt value remains up to date.

One of the side benefits of this is that it may keep house prices a bit more under control seeing this proposal would remove the massive tax benefit in home/house ownership to live in and for investment. It should dampen demand from investors and consequently dampen prices.

What could the income from a capital gains tax be used for? As stated elsewhere on this site the income could be used to lower other taxes or increase social support services. However here is another suggestion. The income from the capital gains tax could be used  to fund the construction or purchase of more social housing. It would provide a massive injection of funding into a sector that has been badly neglected of recent times.

Home Fund

I believe the housing capital gains adjustments would address the inequity between rich homeowners and the less wealthy home owners. But what about non-home owners. A non-homeowner might have $300,000 in savings which they plan to spend on the purchase of a house in the future. They are paying tax on any interest or other return made on this money. The homeowner that has $300,000 already in his or her home is not paying any tax on returns from that money, in other words the capital growth (even after the suggested capital gains adjustment). Home owners are getting a tax benefit that is not available to non-home owners. There is intrinsic unfairness in that.
My proposal to address this unfairness is the establishment of a concessionally taxed Home Fund for each person above working age from the time they commence employment. A person would have both a Home Fund and a Super Fund. The arrangement for the Home Fund would be similar to the current superannuation funds and would probably be managed by the same companies. However there would be a number of differences compared to the superannuation funds which I will list below.

The maximum Home Fund size would be limited to, say, $400K. The maximum Super Fund size has been decreased to $800K making a total combined fund size of $1.2M held in a concessional tax environment (less than the current maximum of $1.6M for superannuation, for the reasons stated on the superannuation page).

The employer superannuation guarantee contribution would now be split (and renamed) with one third going to the Home Fund and two thirds going to the Super Fund. When the guarantee reaches 12%, which it should in the next few years, that would be 4% to the Home Fund and 8% to the Super Fund. For a person earning $80,000 the employer payment would be $3200 for the Home Fund and $6400 for the Super Fund per annum.

The reason why the diversion of superannuation funds to the Home Fund is warranted is explained in the first paragraph on this page - a person's well being and security going into retirement is affected not just by their superannuation position but also their housing position. They both need to be addressed.

The tax treatment of fund contributions and savings may be similar to that proposed for superannuation. That is, the taxation payable would be concessional compared to money held outside the Funds, thus encouraging their use. Because people will be able to access the money from the Home Fund when they buy a home and the savings will be in a concessional tax environment I would expect people will use the Home Fund to save for the purchase of their future home much more than they would have made additional contributions to the old superannuation funds. This is a massive tax benefit for savings for housing. If the tax rate discount is 22%, as suggested on the superannuation page, this would amount to approximately $80,000 benefit due to the Home Fund on the maximum $400k fund size. If it is determined that this is too high the tax discount rate might need to be decreased for the Home Fund,  say to 10 or 15% discount (in combination with the Super Fund tax benefit decrease or independently - the two funds could have different tax rates). Due to this new benefit any first home owner grants would be cancelled.

The combined employee after tax superannuation and employer contributions to the Super Fund and Home Fund would be limited to $25,000 per annum. If the Home Fund receives $25,000 then the Super Fund should receive zero however if a person is employed that would not be possible as the employer would be contributing 8% of the employee's salary into the Super Fund. To clarify this take the earlier example - a person earning $80,000 per annum. At 12% Super Guarantee the employer payment into the Home Fund would be $3200 and $6400 for the Super Fund per annum - a total of $9600. That leaves $15,400 that the employee can make as a concessionally taxed salary sacrifice to the funds. They can elect to pay that amount into either the Home Fund or the Super Fund. If they make the additional contribution most people will elect to pay into the Home Fund  - which will be the default option - as they will be able to access this funding at the time that they want to buy a house to live in (unlike the Super Fund which won't be able to be accessed until retirement age). If the discount tax rate is less for the Home Fund than the Super Fund then a choice would need to be made by the taxpayer on what approach is best for them.

If the person buys a house to live in they would have to withdraw the total amount of the Home Fund as a partial payment/deposit on the house. That is, it would be against the rules to have significant money in the Home Fund and to also own a house to live in. The future employer payments would be made available from the Home Fund to contribute to interest and capital repayments for the house. If the house is fully paid for or the fund is at $400K the employer payments and earnings would be transferred to the Super Fund. If a person owns a home where they live then the Home Fund should have a zero balance - they can't double dip and have both. The Super Fund could have up to $800K.

If the person subsequently sells the house they must pay the amount withdrawn from the Home Fund (including the later employer contributions) back into the Home Fund. It would be withdrawn again if they purchase a new house to live in at a latter date.

If a person gets to retirement age (or some nominated age close to retirement age) and has not bought a house the Home Fund would be opened up so withdrawals could be made for the payment of house rental - or just consolidated into the Super Fund.

This arrangement by itself could act to increase house prices due to potentially additional money being available for house purchase. To an extent it would be counteracted by the capital gains tax adjustment proposed at the top of this page, and the elimination of all other first home buyer grants. Another proposal to address this issue is to increase the volume of housing built by Government (sometimes called social housing) proposed elsewhere on this site.

The current (2022) massive increase in house prices which makes home ownership by potential first home owners difficult, if not impossible for many, should be seen as a market failure. The reason that it is not widely seen in this light is that people that currently own homes and investors that may own multiple houses benefit greatly from the lack of supply which pushes up house prices and consequently their net wealth. However for equity reasons I believe it is still a market failure which Government should address by being active in the house building market. The Government building houses would increase supply which would put a dampener on the massive house price increases. Government built housing need not just be for the socially disadvantaged but would also address an overall lack of housing supply in the market and consequently housing cost, both to buy and to rent.

I believe this approach, or a variant of it, would address housing security in retirement and also affordability of new houses to first home buyers and housing rent.

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