Let me break down what these proposed capital gains tax changes could mean for property owners, share investors and everyday wealth builders.
Three-more Tuesdays to go before the Budget is handed down and the latest leak is that the capital gains tax discount will go back to the pre-Howard reforms. Those reforms gave investors a 50% discount if the property was held for a year or more. These possible changes to CGT won’t excite property investors. These changes will be more complicated and much more work for accountants, and therefore costly.
When Paul Keating constructed that tax treatment for capital gains, it applied to both property and shares, and it’s likely (if this leak is on the money), share players will also have to cope with the changes we hear about on May 12.
For investors, this could turn out to be a horror Budget!
How the old system worked (pre-1999):
- The cost base of an asset for inflation had to be kept.
- The capital gain was the sale price minus the adjusted cost base for inflation over the years of owning the asset.
- Only the real gains (gains above inflation) were taxed.
- For the tax impact of large capital gains realised in a single year, averaging was allowed.
- The taxpayer’s average tax rate was added to the net capital gain to reduce the overall tax hit in one year, preventing taxpayers from being pushed into higher tax brackets due to a one-time large capital gain.
After reading the above, no wonder they changed it! So why is Chalmers set to go back to what was so complicated? Could it possibly be money?
Driving these Treasury proposed changes is a belief that the 50% discount on capital gains plus negative gearing has led to too much property speculation by investors, which has driven house prices up.
The SMH’s Shane Wright reminds us that in those days: “Before the change, most landlords were positively geared; afterwards, the majority were negatively geared.”
However, in those days, governments provided a lot more public housing and added to home building, but now it’s the private sector driven by investors that help boost the housing stock for renters. So, this change could easily lead to a surge in rents and fewer properties available for renting as investors leave the sector.
Wright also looked at a Resolve poll that “found 42 per cent of the 1807 respondents backed a reduction in the 50 per cent concession. Opposition was just 9 per cent, while 39 per cent were unsure.”
He added: “It remains one of the better supported tax changes open to Chalmers, alongside an overhaul of negative gearing (43 per cent), an increase in taxes on mining companies (51 per cent) and lifting taxes on banks (54 per cent).”
One important point is how will changes like this affect investor behaviour? I’d argue that they impact non-retired wealth-builders harder than retirees, who are largely in the zero tax zone, when it comes to their shareholdings in their super funds — they don’t pay a capital gains tax on these assets!
