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The forecast cost of tax concessions on everything from high-priced homes to cream on summer pavlovas has soared by $50 billion in a single year, prompting calls for an overhaul of the nation’s tax system to prevent ordinary workers from bearing even more responsibility for fixing the federal budget.
New figures from the federal Treasury reveal it expects the cost of forgone tax through the capital gains tax concessions on the family home, investment properties and shares alone will reach a record $81.8 billion this year.
Every year, Treasury estimates the cost of concessions embedded in the tax system. They stretch from the lower rates of tax on superannuation, to the 50 per cent CGT concession, to the lower rate of excise imposed on brandy compared with other spirits.
The largest concessions – super, capital gains, the GST, rental deductions and work-related expenses claimed by workers – will this year cost the budget an estimated $184.1 billion. It’s a $13.4 billion, or 8 per cent, increase on what Treasury last year forecast for 2025-26.
Between 2024-25 and 2027-28, Treasury has increased its estimate for the cost of these concessions by a combined $50 billion.
The single largest change has been to the cost of the CGT concession, which Treasury has revised up by $20 billion on last year’s forecast.
Strong growth in property and share prices has driven up the value of the various CGT concessions. It has also pushed up the cost of the lower tax on superannuation by $8.9 billion by 2027-28, while rental deductions, used by landlords to reduce their taxable income, have grown by $3.2 billion.
A Senate committee is due to report in March on the current CGT concessions, their impact on the housing market, the size of the concessions and if they draw money away from productive parts of the economy.
A particular concern is the 50 per cent concession on the capital gains tax, introduced by the Howard government in 1999, that critics believe has contributed to the surge in house prices this century.
In its submission to the inquiry, the Grattan Institute noted that since the concession was introduced, house prices had climbed by 6.4 per cent a year compared with a 4.3 per cent annual lift in the ASX 200. Over the same period, inflation had averaged 2.9 per cent.
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Arguing the concession should be cut to 25 per cent over a five-year period, Grattan said such a change would raise $6.5 billion a year that could reduce “more economically harmful taxes and lower the tax burden on younger Australians, or pay for more support for low-income renters by boosting Rent Assistance”.
Tax expert Bob Breunig, director of the Tax and Transfer Policy Institute at the Australian National University, said the current concession on CGT might be too generous.
He said any change would have varied impacts across the economy. Reducing the concession would increase the overall tax rate on household savings, which would reduce the burden of tax on workers’ incomes, which is dominated by younger people.
This month’s mid-year budget update revealed income tax on workers is on track to account for 69 per cent of federal income taxes. Last year, it made up 66.5 per cent.
The increase is despite the impact of legislated tax cuts due to start on July 1 next year and in 2027.
Despite the growing tax take, the budget is forecast to remain in deficit for the next decade.
Treasury’s report confirmed that the cost of excluding certain goods and services from the GST continues to grow, reaching $32.7 billion this year. Between 2024-25 and 2027-28, Treasury has revised upward the cost of the concession by $4.1 billion.
As part of John Howard’s deal to win support for the GST, certain areas of consumption were excluded from the tax, including fresh food. Financial services, childcare, health, most education services, and utilities such as water, are also GST-free.
But e61 economist Josh Clyne said the GST exclusions were distorting consumption while also adding to administrative costs for businesses.
For his holiday-themed example, Clyne said a chicken roasted at home for Christmas lunch is GST-free, but a cooked chook bought at a supermarket attracts the tax.
“For dessert, the Christmas pudding and pavlova purchased from the supermarket will be served with GST,” he said.
“But the cream and custard that go with them will not. And for those who enjoy their pudding with yoghurt, it will come with GST if it’s from the freezer, but not if it’s from the fridge.”
Clyne said the government should consider an overhaul of the GST, starting with an examination of exemptions.
The GST will raise about $100 billion in revenue that goes back to the states and territories. The government has ruled out making changes to it.
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