The Australian Housing and Urban Research Institute’s (AHURI) latest report has found “incremental” reform to the age pension assets means test is needed to produce an equitable and sustainable tax system.
This recommendation comes with the finding that between 2002 and 2014, the proportion of people approaching retirement (between 55 and 64) who own an investment property grew from one-quarter to 30 per cent.
At the same time, the value and existence of owner-occupied homes in asset portfolios has grown. In 2002, the family home made up about one-third of pre-retirees net worth. That figure had grown to 40 per cent by 2010.
“[This] discussion has important implications for housing policy, given the role of housing as one of the pillars of the retirement income system and the recognition that changes to any one pillar will have ramifications for the remainder of the tax and transfer system,” said researchers Stephan Whelan, Kadir Atalay and Lachlan Dynan.
Emphasising that any reform needs to be long-term to allow Australians time to prepare, AHURI said there are “sound grounds” for significant changes to the tax treatment of housing in retirement.
Combined, investment properties and holiday homes make up the third-largest portion of pre-retirees’ wealth, after equity in the family home and superannuation.
However, by 2014 its prevalence had grown to make investment properties the third-largest component of wealth among this group.
“It is unlikely that widespread support exists for some of the fundamental changes that have been mooted – such as the removal of the exemption of housing from the assets means test,” the report acknowledged.
“Rather, reform will need to be incremental, recognising the relative value that home ownership confers and the relative light taxation of it over the life-cycle.
“Changes to the age pension assets test that address these issues in a fiscally sustainable manner are likely to offer opportunities to enhance both the efficiency and equity of the tax system over time.”