How treasurer could make capital gains taxes ‘fairer’
Finance Minister Jim Chalmers is facing fresh pressure to reform capital gains taxes, with growing pressure from economic think tanks, anti-poverty advocates and even the NSW government to make the system fairer for all Australians.
Critics argue that a Howard-era change to the taxation of profits from investments has excessively increased house prices and worsened inequality in Australia by increasing the burden on less wealthy individuals.
The e61 Institute think tank said in a submission to the Greens-led Senate inquiry that some form of tax relief was necessary as capital gains were partly eaten up by inflation, but the current method was both unfair and inefficient and should be replaced with a fairer approach.
Before 1999, individuals only had to pay taxes on capital gains above inflation.
But a much more generous 50 per cent discount has since been applied to all capital gains on assets held for more than 12 months.
e61 researchers Matt Nolan and Matt Maltman said this often resulted in preferential tax treatment for wealthy asset holders at the expense of asset-poor working Australians.
They argue that instead of the current deduction, individuals should be allowed to spread their tax liability over the life of the asset rather than being charged for a single year.
“Income averaging would ensure that taxpayers with similar lifetime income pay similar tax rates regardless of whether they receive regular wages or receive a one-time variable gain,” Mr. Maltman said.
He said this method would lead to higher taxation on capital gains of high earners and reduce the tax paid on interest and dividend income.
But independent think tank the Grattan Institute and the Australian Council of Social Service (ACOSS) have called for the discount to be phased in to 25 per cent over five years.
ACOSS said the current reduction encourages speculative investment and excessive household debt.
NSW Treasury said the capital gains deduction had encouraged investors to move into the housing market, contributing to rising property prices and declining home ownership.
Since 1994, loans to investors have increased by 1001 percent to $139 billion, while loans to first home buyers have increased by only 520 percent to $64 billion.
“There is a strong case for reviewing the CGT rebate to ensure it is fit for purpose, promotes fairness, efficiency and sustainable economic outcomes, and better aligns with contemporary housing and equality objectives,” the NSW Treasury said in its submission.
But Robert Carling, a senior fellow at centre-right think tank the Center for Independent Studies, argued for preserving the current system.
He said the concession needed to go beyond simply allowing for inflation, as the current 50 per cent discount was simple and well understood and caused a very small increase in house prices compared to the shortage of supply.
The Senate committee is expected to submit its final report by March 17.
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