We’re about a week away from seeing final recommendations presented to the Senate over the long-standing Capital Gains Tax discount scheme. While we wait, we can now take a look at what Treasury and the ATO have to say about who is using it.
At a hearing in Melbourne, Treasury and the ATO appeared to give evidence. That evidence told a story of how the nation’s richest wheel and deal through trusts and other structures to use the capital gains tax discount the most.
Quick refresh: what the CGT discount does
The capital gains tax discount allows individuals and trusts to pay tax on only 50% of a capital gain when an asset has been held for more than 12 months before sale.
In evidence to the Senate committee, Treasury officials said the structure of the system matters because capital gains are taxed only when an asset is realised — that is, when it is sold — which means gains can build up over many years before appearing in a taxpayer’s income in one hit.
So who’s claiming the majority of CGT discount benefits?
Evidence presented to the Senate inquiry shows the benefits of the capital gains tax discount are heavily concentrated among the highest-income Australians.
Treasury officials told the committee that around 54% of the value of the CGT discount now flows to the top 1% of taxpayers, a notable increase from earlier estimates. When the distribution was examined in 2009, Treasury said the top 1% received around 39% of the total value of the discount.
In their evidence, Treasury officials explained that the trend reflects a basic structural reality of the tax system: capital gains tend to follow existing asset ownership.
Higher-income households are significantly more likely to hold the types of assets that generate capital gains, including shares and investment property portfolios, typically held over long periods of time.
When those assets are eventually sold, the gains can be substantial and the 50% discount applies to the realised gain, meaning the value of the concession grows alongside the size of the asset sale.
Treasury officials told senators this pattern is not unique to the CGT discount itself. Instead, it reflects the broader distribution of wealth and investment ownership across the economy.
It’s all about trust(s)
Another theme raised during the hearing was the role trusts play in the way capital gains show up in Australia’s tax receipts.
ATO officials told the committee that while capital gains can be reported by a range of entities (think individuals, companies, trusts and superannuation funds) a significant share of gains pass through trusts before reaching individual taxpayers.
Discretionary family trusts are commonly used to hold investment assets such as shares, property and business interests. ATO officials told senators this structure is a common feature of the tax system, particularly among wealthier households that hold assets through family investment vehicles.
The ability to distribute gains to beneficiaries of a trust can also allow trusts to allocate income across different taxpayers, depending on how the trust is structured and the distribution decisions made each year.
However, the ATO stressed that this was nothing new, and still sat within the rules of Australia’s tax system. It even added that those falling foul of the rules typically did so because of their complexity, rather than intentional misuse or dodging of taxes owed, adding that CGT is one of the most complicated areas of tax in the country.
We’ll wait and see what this does to the recommendations due to the Senate next Tuesday.
