By Stella Qiu and Wayne Cole
SYDNEY, May 12 (Reuters) - Australia's centre-left Labor government has rolled out the biggest changes to investment taxes this century to help young people break into the housing market, along with cost-of-living relief to cushion the fallout from the Iran war.
Treasurer Jim Chalmers on Tuesday called his fifth budget the most "important and ambitious" in decades, as a landslide election victory last year allowed the government to address the politically thorny problem of intergenerational inequity.
"I acknowledge this is a controversial change, I acknowledge this is a government coming into a different view to the view we held 12 months ago," said Chalmers in a press conference.
"The main change in our thinking is the view that we cannot let the intersection of the housing market and the tax system continue to lock out so many people from getting a toehold in the housing market, particularly the young people."
The centre piece are proposals limiting capital gains tax discounts and negative gearing on assets, policies that have long been criticised for skewing home ownership towards older, wealthier investors and away from first-home buyers.
From 1 July 2027, the government plans to scrap the 50% capital gains tax (CGT) discount on assets held for more than a year, a benefit begun in 1999 that coincided with a sharp and lasting acceleration in house price growth.
Instead, the CGT will return to the pre-1999 policy of taxing inflation-indexed gains, with a 30% minimum tax on net capital gains. It will apply to all assets including housing.
Negative gearing, which allows investment losses to be offset against taxable income, will be limited to newly built homes to support new housing supply.
There will also be a new tax cut for working Australians through a A$250 ($180.88) tax offset, as well as a new A$1,000 instant tax deduction. That is on top of already legislated tax cuts set to deliver up to A$536 in annual savings for taxpayers.
Ratings Agency S&P said in a note after the budget announcement that, since the new housing tax rules are not retroactive, there should be minimal effect on house prices and rents.
Here are the key highlights of the budget:
BUDGET BOTTOM LINE IMPROVES
The government said the investment tax reforms will save over A$3.5 billion over the next four years, with most savings coming in later years.
They will be dwarfed by massive savings from an overhaul of its disability welfare programme - worth more than A$35 billion over the next four years - as well as higher commodity prices from the Iran war and elevated inflation.
Overall, the budget deficit is projected to be A$45 billion lower over the next four years, part of an effort to fight inflationary pressure caused by spiking oil prices.
The Reserve Bank of Australia has already lifted interest rates three times this year to head off the war-driven energy shock, fully reversing the policy easing from last year.
The budget deficit for the current 2025/26 financial year is expected to come in at A$28.3 billion, narrower than the $A36.8 billion tipped in December. This is projected to widen again slightly to A$31.5 billion in the 2026/27 year.
Inflation is forecast to hit 5% by June as the Middle East conflict drives up energy costs, way above the central bank's target band of 2% to 3%. That will keep the RBA wary, raising the risk interest rates will stay high for longer.
Markets are wagering there is an 18% probability that the RBA will have to raise rates a fourth time in June, while a move by September has been fully priced in.
"New fiscal spending could boost aggregate demand, complicating the job of the central bank," S&P said in its note.
Higher interest rates are expected to weigh on the economy, with the budget projecting growth slowing to a sub par rate of 1.75% next financial year. The unemployment rate, which has held low at 4.3%, is seen drifting up to 4.5%.
Treasury also studied a more severe scenario where the oil price peaks at $200 and takes three years to fall back.
"We would still avoid a recession, but unemployment would spike to pre-pandemic levels and inflation would peak above 7%," said Chalmers. "Australians have been paying a hefty price for this war, at the bowser and beyond."
A A$14.8 billion "fuel security and price relief package" was also announced which the government said would to help boost fuel supply and aid households and businesses impacted by surging energy costs.
(Reporting by Stella Qiu; Editing by Sam Holmes and Andrew Heavens)
