Australia’s public purse missed out on $64 billion last year in tax revenue foregone due to the capital gains tax exemption on the principal place of residence, a tax break that entrenched intergenerational and geographic inequality, a new OECD report on housing and taxation says.

Capital gains tax exemptions, which give more benefit to people who have held them for a long time and to owners of properties in sought-after locations, should be capped or at least balanced in part by ‘‘recurrent’’ taxes such as a broad-based land tax, says the

Housing Taxation in OECD Countries


Australia is one of 20 advanced economies in the OECD grouping that allow full and unconditional exemption from capital gains tax on the family home. Even in OECD countries that tax capital gains on primary residences, nine allow full exemptions and another five allow favourable tax treatment.

In the face of a popular tax incentive, the notion to drop it is bold. It goes further than the now-dropped policy of the Labor Party when it was in opposition to end the 50 per cent capital gains tax exemption for investors in property and other assets.

But while most leaders would not go that far, it could also have far-reaching consequences for housing by raising prices further, warned independent economist Saul Eslake.

‘‘It would be a form of political suicide subject to one point,’’ said Mr Eslake, a critic of Australia’s tax incentives that encourage investment in residential property and drive up the price of housing.

‘‘You would then need to allow mortgage interest as a deduction, an expense of earning that income.’’

This would give people even more cash to put into housing purchases, Mr Eslake said.

‘‘It’s an incentive to borrow more,’’ he said. ‘‘That’s why people do negative gearing – imagine being able to do it on your own house.’’

When it comes to residential property, Australia is just above the OECD average of 68 per cent, with 68.5 per cent of household wealth tied up in the owner-occupied and ‘‘secondary real estate’’ investment property, holiday homes and farmland.

However, it is second only to Luxembourg for average housing wealth in both types.

The OECD argues in favour of removing or capping mortgage interest relief for owner-occupied housing and says capital gains on secondary residential property – or investment properties – should be taxed.

But the Paris-based organisation says capping CGT exemptions for primary residences has the potential to reduce distortions and improve equality while also raising revenue, especially at a time of falling home ownership among younger people.

‘‘Capital gains tax exemptions for the main residence reinforce intergenerational and geographical inequality, given that gains have been concentrated among older generations and specific geographical areas,’’ the report says.

‘‘Older households are characterised by high homeownership rates and housing wealth and have enjoyed significant growth in property prices.’’

The unprecedented gains in residential property values – which have outstripped inflation and wage growth – over the past three decades were due to historically low levels of interest rates and unlikely to be repeated, meaning future home owners will not reap the same benefit, it says.

‘‘Homeownership rates are falling among younger generations, in part due to property value increases that have made it increasingly difficult to access the housing market,’’ the report says.

‘‘Even if younger households are able to access the housing market, they may not experience the large gains of previous generations. Many countries have also witnessed stark differences in the regional distribution of capital gains, with households in large metropolitan areas benefiting from the most significant property price growth on already highly valued property.’’

The report argues in favour of broad-based land taxes on real estate and the elimination of transaction-based taxes, such as stamp duty, saying it would increase efficiency in the housing market.

Tax incentives for energy-efficient housing renovations could also be better targeted to ensure that they reach low-income households, the report also says.

‘‘This could contribute to greater emissions reductions and enhance the equity of tax incentive schemes,’’ it says.