Bruce Barbour - October 2020
A person's financial well-being in retirement is greatly
impacted by two factors:
Just having one of those factors is not sufficient.
Consequently housing security must also be considered along
with income security in retirement.
- Having enough savings or a source of income to finance
a reasonable lifestyle (food, clothing, services,
entertainment, healthcare costs, etc.); and
- Having secure housing either through home ownership or
through having enough additional income or savings to
afford the rental payments.
The superannuation system tries to is 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.
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 adopt 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 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
(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 would 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.)
For investment housing the whole capital gain would be
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. This
should dampen demand from investors and consequently dampen
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.
I believe this 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 that
$300,000 already in his or her home is not paying any tax on
returns from that money, in other words the capital growth.
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
The tax treatment of fund contributions and savings would be
the same as proposed for superannuation. That is, the
taxation payable would be concessional compared to money
held outside the Funds, thus encouraging their use.
The maximum value of the Home Fund would be set for each
year of the fund. It would start when the person was, say,
18 at $10,000 and then increase in increments of $10,000 for
each year up to the maximum value of the fund, $400,000 (at
around 58). A person could contribute additional after tax
money into the Home Fund of difference between the after tax
employer contributions and fund earnings, and the $10,000
increment. If the full payments had not been made in
previous years the fund owner can contribute an amount up to
the nominated maximum fund value for that year.
The reason why the maximum fund value needs to be
incremented is that if the fund size was set at $400k from
the start with no contribution limits this would once again
favour the rich who would be able to get the $400k into the
concessional tax environment much sooner than a less wealthy
person. The rich still get an advantage in that they will be
able to ensure the maximum amount is in the Fund at all
times whereas the less well off may struggle to do this.
Also the incremental size of the fund is an issue. If
someone was looking to buy a house at 28 the maximum
size of the fund would be $100K (under the figures
proposed). Certainly not enough to purchase a house
outright. However if there are two people buying the house
then that is potentially $200K. (The couples issues of the
proposal needs to be worked through.) And people can
certainly save additional amounts in normal (not
concessionally taxed) savings outside of the Home Fund(s) if
they are financially able to.
After tax superannuation contributions to the Super Fund
would be limited to $15,000.
If the person buys a house to live in they would have to
withdraw the total amount of the Home Fund as either a
partial payment or a 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 payments for the house. If the house is fully
paid for the employer payments would be transferred to the
If the person subsequently sells the house they must pay the
amount withdrawn from the Home Fund back to the Home Fund.
They could also voluntarily pay an additional amount up to
the maximum fund value set for the year of the Home Fund. It
would then 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.
I believe this approach, or a variant of it, would go a long
way to address housing security in retirement.
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