While there are no immediate threats to Australia’s capital gains tax (CGT) discounts - which halve the profit investors must report as taxable income when selling assets held for over 12 months – there are moves afoot to see this change.
There’s growing speculation that the Albanese-led Labor government could end up kowtowing to mounting pressure to have the CGT discount reduced if not scrapped entirely.
The NSW Treasury, the Grattan Institute, the Australian Council of Trade Unions, together with various other trade unions and advocacy groups, have actively pushed for the 50% CGT discount to be cut or abolished, particularly in relation to investment properties.
However, it’s the repeated calls by the Greens for the 50% CGT discount to be scrapped that are becoming harder for Labor to dismiss.
Labor has long held the position that CGT discounts disproportionately benefit those wealthy enough to hold appreciating assets, and a report by Oxfam Australia tends to support this view.
Oxfam Australia recently revealed that nearly 50% of the CGT discount goes to 24,000 people who earned over $1 million in 2022-2023.
It’s understood that the top 10% of income earners currently receive more than two-thirds of all CGT concessions.
Findings indicated that on average, each of these individuals received $271,000 from the CGT discount on profits from the sale of assets and investments.
This is almost 1500 times the benefit received by an average so-called working-class Australian.
However, despite these revelations, Labor knows all too well that tinkering with this part of the tax system would be tantamount to political suicide.
However, investors should note that Labor regularly relies on the Greens' support because it does not hold a majority in the Senate, and this support clearly has strings attached.
Labor and the Greens recently demonstrated their ability to work together when they passed the Environment Reform Bill last November.
Meantime, what appears to have also gone unnoticed is the establishment of a Senate committee to put the GST discount under the microscope.
In a submission to the Senate Select Committee, e61 Institute suggests replacing the CGT discount with a fairer approach, under which individuals can spread gains over time rather than being taxed in a single year.
Labor and the Greens - aka the red-green alliance – have talked about grandfathering to appease market concerns.
However, prominent investment commentator Noel Whittaker believes these provisions would only distort tax planning, with pre-change assets becoming more valuable because of their tax treatment, while post-change investments would carry a permanent penalty.
Then there’s the Grattan Institute, which wants to see the CGT discount cut to 25% over five years with no grandfathering, based on the time of sale as opposed to the purchase date.
So exactly how does CGT currently work?
It’s not rocket science; CGT is calculated by adding the profit less discount to your taxable income in the year the contract is signed.
Based on our top marginal rate of 47%, including the Medicare levy, the maximum effective tax rate is 23.5%.
Cut the discount to 25%, and the maximum effective tax rate jumps to 35.25%.
Given that pushing tax above the psychological 30% red line has a direct impact on investment behaviour, Whittaker reminds investors that cutting the CGT discount to 25% is something Labor will struggle mightily with.
He cites Treasurer Jim Chalmers' brief flirtation with taxing unrealised capital gains, which, by all accounts, the Labor leader proceeded to veto as being politically damaging.
“If the aim is to raise more revenue by increasing CGT, the biggest weakness in the strategy is that it tackles only one small part of the tax system,” Whittaker notes.
“So lifting CGT isn’t a solution… it distorts behaviour, shifts money around and doesn’t raise tax revenue significantly.”
