A former Treasury chief has criticized Australia’s tax system for being rigged against young people, arguing that they are funding the lavish lifestyles of an aging and wealthier population.
Ken Henry, himself a baby boomer who ran the Treasury Department from 2001 to 2011, blamed negative leverage tax breaks for investor owners, low retirement tax rates and shareholder postage credits for worsening generational inequality.
“At some point, maybe even now, the intergenerational social compact will surely be broken,” he said last week at the Tax Institute’s Financial Services Conference.
Ken Henry, a baby boomer who led the Treasury Department from 2001 to 2011, blamed negative tax breaks for investor owners, low retirement tax rates and postage credits for shareholders for worsening generational inequality.
Australia’s gross public debt will pass the $1 trillion mark in 2023-24, as a result of the Coalition spending $300 billion on Covid welfare measures in 2020 and 2021.
Tax Breaks Making Baby Boomers Rich
NEGATIVE GEAR: Investing landlords can claim lost rental income in taxes.
CAPITAL GAINS TAX DISCOUNT: The 50 percent discount helps homeowners selling an investment property.
SUPERCANCELLATION: Retirement savings contributions incur a favorable tax rate of 15 percent, with the rate doubling to 30 percent for those with more than $3 million as of July 1, 2025.
POSTAGE OF CREDITS: Shareholders do not have to pay taxes on their dividends because a corporation has already paid corporation tax.
Despite the debt burden, baby boomers, who already have much more wealth, still receive tax breaks.
They were able to buy back houses when they were much cheaper relative to income and are therefore much more likely to benefit from negative leverage, no matter how much investment property they owned.
Dr. Henry took over as Treasury Secretary, two years after John Howard’s coalition government introduced a 50 percent tax break on capital gains in a bid to increase the ability of the wealthy to buy second and third homes and, therefore, increase the supply of rental homes.
The resulting increase in the ability to spend on real estate meant that housing in Australian cities is now among the most unaffordable in the world.
That made it even more difficult for young people to buy their first home, as well as pay off their student debt, something many baby boomers never had to deal with when college was free and many more jobs didn’t require a college degree.
“This generation of young workers, burdened by HECS (Higher Education Contribution Scheme) debt, burdened with the responsibility of paying off a mountain of public debt and coping with the costs of climate change, are finding it increasingly difficult to buy a home,” he said.
Dr. Henry also criticized the favorable 15 percent tax rate for retirement contributions, which costs the budget more than $50 billion a year in lost income.
Money put into super is taxed at that lower level, rather than the much higher rate it would attract if it were simply taken as income.
That meant that young workers and others who couldn’t afford to make retirement contributions above the minimum paid income taxes on a much higher percentage of their money than the wealthy.
Added to that, older Australians who sell their main home, their main place of residence, pay no capital gains tax on windfall gains and remain eligible for the pension.
‘Those who are sitting on tax-free capital gains on homes that are exempt from the pension asset test, those who are receiving refundable postage credits on stock portfolios, and a mix of publicly funded and tax-free private pensions asset taxes accumulated on lightly taxed assets self-managed retirement funds,’ he said.
Baby boomers, who were able to buy houses when they were much cheaper relative to income, are more likely to benefit from negative leverage, no matter how much investment property they own (image is stock image)
The Labor government of Prime Minister Anthony Albanese has announced that from July 1, 2025 it will double the tax rate for windfall contributions to 30 percent, but only for the very few with more than $3 million in retirement savings.
That measure would be designed to save the budget $2 billion a year.
Former Labor leader Bill Shorten lost the 2019 election after vowing to abolish negative leverage for future existing home purchases and to halve the capital gains tax discount from 50% to 25%.
Shorten had also proposed limiting postage credits, which are tax credits for stock dividends if the corporation had already paid corporation tax on its earnings.
Albanese had distanced himself from Shorten’s fiscal policies, before winning the May 2022 election.
Dr. Henry said that more young workers and their taxes are funding the lifestyles of the elderly in the coming decades.
“In stark contrast to the post-war period, due to the aging of the population, a shrinking proportion of the population, made up of relatively young workers, will have to shoulder a rapidly accelerating share of the burden of government financing,” said.
Then and Now: Interest Rates and Housing Affordability
1989: Interest rates reach 18.2 percent.
The median house price in Sydney was $170,850 when $26,874 was the Australian median full-time wage.
The 20 percent deposit of $34,170 was just over a year’s salary, and someone paying a $136,680 mortgage had a manageable debt-to-income ratio of 5.08.
2023: Interest rates reach 3.6 percent.
Median house price in Sydney is $1,217,308 and a borrower needs a 20 per cent deposit of $243,461.
Someone with an average full-time salary of $94,000 paying off a loan of $973,846 would now have a very dangerous debt-to-income ratio of 10.4.