The Australian government's latest budget has introduced significant tax reform measures, particularly changes to the capital gains tax (CGT). These proposals have sparked widespread debate, with various claims circulating about their potential impact. This article aims to clarify the facts behind the myths.
Has the Capital Gains Tax Discount Been Scrapped?
No, it has been modified. Currently, investors selling an asset after one year pay tax on only half of the capital gain—the 50% CGT discount. Under the proposed changes, instead of this flat discount, investors would adjust their capital gain for inflation over the holding period, paying tax on the real gain only. Investors in new home builds can choose between the old 50% discount and the new inflation-linked approach. They can also continue to use negative gearing.
The budget also introduces a 30% minimum tax on after-inflation capital gains, with exceptions for those on income support payments like the age pension or JobSeeker. The new regime is scheduled to start from mid-next year. For assets held before that date, the 50% discount applies to gains up to June 30, 2027, with subsequent gains taxed under the inflation-linked system.
Will Share Investors Pay Much More Tax?
Not necessarily. Whether an investor pays more or less depends on the relative rates of inflation and return. For example, if shares rise 5% in one year with 2.5% inflation, the tax is on half the gain—identical to the current 50% discount. However, with a 10% return, the discount falls to 25% (inflation as a share of return). Conversely, a 4% return with 2.5% inflation results in a 62.5% discount. Additionally, gains on existing investments before mid-2027 still receive the 50% discount, complicating calculations. Economist Andrew Lilley from Barrenjoey estimates that if an asset bought in 2023 earns 10% annually and is sold in 2030, 55% of gains are taxable—close to the old 50% regime.
Are Small Businesses Facing Massive Tax Bills?
Not if they remain classified as small. Businesses with annual turnover under $2 million or assets under $6 million remain eligible for CGT concessions. The treasurer's office notes that nine out of ten small businesses use these concessions, often paying reduced or zero CGT. However, small business owners aspiring to become large businesses may face higher taxes upon sale.
Will the Government Take 47% of a Startup?
This concern arises for entrepreneurs with minimal initial costs, like a laptop and labor. With a near-zero cost base, inflation adjustment is negligible. The 47% figure represents the top personal income tax rate plus Medicare levy. If a startup sells for $500 million, the tax on gains could effectively be 47%. However, Treasurer Jim Chalmers dismisses this as misinformation, asserting that the CGT discount still exists, just calculated differently. Labor MPs expect eventual concessions for startups after backlash.
Will the Changes Increase Rents?
Perhaps slightly. Treasury officials estimate that a potential investor exodus could increase median weekly rent by $2, a view supported by CBA analysis. Conversely, allowing new build investments to retain the 50% discount and negative gearing might boost housing supply. Fewer investors could also mean more homeowners.
Should Investors Sell Now to Avoid Higher Tax?
It depends on individual circumstances. Waiting for the actual legislation is advisable. Existing investors can keep negative gearing, and the new inflation-linked CGT discount applies only to gains after July 1 next year.
