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Bruce Barbour - October 2020

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 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.

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 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 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 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 taxable.

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 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 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 be addressed.

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 Super Fund.

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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