Something else to consider is that "speculators" that buy and hold vacant land do NOT pay capital gains tax.They pay tax on the full profit.What's the difference?A capital gain is subject to a 50% discount before being taxed (as long as asset is held for more than 12 months)-this was a simplification to the indexation rules that we had,designed to cut down on compliance costs.Where the investment is speculative (less than 12 months),or designed to be resold at a profit (vacant land),any profits are taxed as normal business profits.If the example above is for vacant land,the tax impact is actually 46.5% marginal rate on a profit of $460,000,and tax roughly is $193,500 (big difference).

Yabby,I agree with you about individuals speculating on the price of their own homes.Your own home IS an investment in that it increases in value in line with other housing, and potentially more if you make improvements to it.Currently this is tax-free,but encourages a lot of people to buy and live in "dumps" and do up themselves to make a tax-free profit.If it is your intention to make a profit,then the gain will be taxable anyway,but who is going to admit that!The argument that this should be treated differently because any gain is eaten up in your next purchase is fallacious.This same logic can be applied to almost any investment.Eg,I sell shares that have made a gain,with a view to purchasing different shares-I could make exactly the same argument. But in this case I need to set aside some of the proceeds of the sale in order to pay tax,so I cant buy as big a parcel of new shares as I would like. n the same fashion with owner-occupied housing,I would have to set aside some proceeds to pay tax,and I couldnt upgrade quite as much as I would have been able to otherwise.We have to put aside money for stamp duty on the new place-paying income tax is no different.Its just that as a nation we see housing as different to other investments,more of a right,so we extend preferential tax treatment to owner-occupied housing.

Country Gal, do you make some good points. However, ultimately, the goal is to encourage investors to prefer investments that add to the housing stock, or that contribute towards productivity growth by providing capital to businesses. If the best way to achieve that may not appear to be fair or even consistent on the face of it, but if it leaves everyone better off in the long run, or at least *avoids* significantly disadvantaging young families trying to get into the housing market for the first time, then this needs to take priority over simplistic ideals of what's fair and/or consistent.

But regarding the difference between profits from occupied homes and profits from shares: yes, there is a difference! Every time you sell a home you have to find somewhere else to live. Every time you sell off part of an investment portfolio, you don't have to reinvest it - indeed, there are some people that simply bank the whole amount and retire living off the interest and occasional withdrawals.
Of course, if mortage payments were tax-deductible, the situation would be different - indeed, that's how it is in the U.S. Given this obviously works there, there's no reason it couldn't work here. What I don't know is whether capital gains tax in the U.S. varies between housing and, say, shares. Personally, I'd be happy to see capital gains tax scrapped entirely, and look at new ideas like carbon taxes, windfall taxes and speculation taxes such as the Tobin tax.

If I understand Country Gal correctly, the interest cost incurred while holding VACANT land is treated as a capital loss and as such is deductible against ANY future capital gain -- not necessarily that on the said land. So negative gearing deductibility still applies, except that the gains and losses are discounted 50%.

She then asserts: "yes wage earners ALSO get to deduct any costs associated with earning their income."

Oh no they don't. The three biggest expenses related to earning wages are:

(1) The additional cost of accommodation within commuting distance of a job (as opposed to a remote location) -- NOT deductible, although the full cost of BUSINESS accommodation is deductible.

(2) Transport to and from one's place of work -- NOT deductible, although transport costs incurred by corporations are deductible.

(3) Childcare -- not rebateable until recently; and still the cost in excess of the rebate is NOT deductible.

So the system really DOES discriminate against wage earners. That incidental expenses are deductible against taxable income is not the principle on which the income tax system is built, but the BIG LIE on which the POLITICS of the system is built. And Country Gal has fallen for it.

Moreover, the 50% discounting of capital gains manifestly treats capital gains more generously than earned income. If depreciation is not discounted before being deducted from taxable income, neither should capital gains be discounted before being ADDED to taxable income.

And I repeat: Even if the tax system were consistent, which it isn't, that would NOT be a valid argument against confining negative gearing of property to new construction, because analogous things can be done in other asset markets -- e.g. confining negative gearing of shares to new floats.

By claiming that "speculators" don't get the discount on capital gains, Country Gal falls for another Big Lie: that the difference between investment and speculation depends on the time for which the asset is held. In fact it depends on the nature of the asset -- in particular, whether acquisition of the asset constitutes or induces additional creation of wealth, as is the case with (say) plant and machinery, but not with land (because they ain't makin' any more land).

When the asset in question in vacant land, the 12-month threshold for discounting of capital gains merely distinguishes between two classes of speculators: those who don't mind if their unearned gains are small as long as they are quick, and those who don't mind if their unearned gains are slow as long as they are big. Of course the reason why the latter can afford to wait is that they are better off in the first place. Yet the system discriminates in favour of the latter! Thus we see that the homage paid to "Mum and Dad investors" by defenders of the status quo is yet another Big Lie.

grputland is right again on the distinction between speculation and investment.

A "good" capitalist who invests a large sum of money in providing for a short-term need and satisfied that need through goods, services and providing wages is engaging in investment.

A "bad" landlord, who purchased vast tracks of natural resources say, after the breakup of the Soviet Union, and has nothing to extract wealth or survey for further potential value, yet will receive a windfall when they finally sell is still speculating. It doesn't matter if they hold those resources for one, ten or one hundred years. It still does not provide a single job, a single good or a single service.

Yet they do receive an income. From where does this income come from?

That question I shall leave to gentle reader to ponder.

(Why they're at it, p'rhaps they can consider why it is that that a tax on a good or service causes the price to go up and is passed on to the consumer... whilst a tax on land causes the price to go down and cannot be passed on to the renter..)

Lev, re your good capitalist vs bad landlord example, you're really just comparing wealth creation vs wealth transfer. While land speculation is no doubt one of the more blatant forms of wealth transfer, it's hardly the one one - most forms of insurance involve minimal wealth creation, and while lotteries and forms of gambling arguably provide an entertainment service, one could hardly argue that generating 6 random numbers is creating millions of dollars worth of wealth, and I'm sure other examples could be easily found.

In an ideal world it would only be possible to make money by creating wealth, but it's hard see how you would ever create such an environment. But you'd like to think a sensible taxation system could at least keep "wealth-transfer"-type enterprises to a minimum.
(And no, I'm not talking about the sort of wealth transfer that allows us to balance out income inequalities - there is, and probably always will be, a legitimate need for that).