Just how long will CGT exemption and CGT-discount stick around?

Caught this in between breaks in the tennis final tonight!
Wasnt sure where to post this, but this is worth a read (open in incognito window if you've maxed your free articles this month/cookie-window):

Cost of tax breaks soars on profits from sale of family homes

I knew it would take a good couple of financial years for these lost-tax-revenues to start being reported. Due to the syd/mel boom years incurring from 2012-2017, it was always gonna take a few years for those wallet-fatted-up PPOR-selling folks benefitting in claimed profits (i.e. sold properties so profit taken off the table, NOT 'paper-profits').

But this report lists the top ten tax-revenue-losing things in the AU economy for both cgt and gst (so, excludes state-based taxes). Look at how frigging massive ppor and investment property (1-year+ ownership discount in cgt), compared to, well, everything else.

So... now that markets are cooling and these kinds of reports are coming out, and the possibility of a labor gov coming in at the federal level... After years of speculation is it likely we will see action on cgt-revenue raising??

Now they wouldnt DARE touch the family home (well, yet... lets revisit that one in 20 years time...) but to me the investor cgt discount seems like fair game right now.

Thoughts?

 

Regarding the CGT discount I would ask anyone supporting the status quo (50% CGT discount after 12 months) to answer these questions:

Do you think capital gains should be taxed at a lower rate than income?
If so, can you justify why someone earning income through an honest days work should have to pay more tax than someone speculating on price growth of assets?
If not (i.e. they should be taxed equally), can you explain how that would work without reducing the CGT discount?

 

No. Should be taxed more than income.

I think the main residence exemption will be greatly reduced. Perhaps 6 year rule removed. Also expect the 50% cgt discount to be removed or reduced.

 

Their is a solid justification and that is due to inflation. The inflationary effects are accounted for in a discount model.

The other option is indexation which has pretty well disappeared but maybe that is brought back in if a discount is removed.

Another reason is to attract foreign capital. Did you know that a non resident is generally not taxed on capital gains made in australia subject to a few rules. If a foreign investor held 200000 shares in BHP and made a capital gain they would pay no tax in australia.

Will the discount be replaced ? I think so on taxable australian property. The tax cuts in the US are forcing countries to lower their corporate tax rates and that is going to have to be paid for through other tax cuts. It will be grandfathered the same as the recent depreciation changes.

 

Yes. Income is taxed as you earn it. So a gradual increase in income over time will see you on the same tax rate.

The increase in capital is not taxed as it gradually increases the wealth of a person. It is taxed at a single arbitrary point in time. All of the persons increase in wealth is thrown in top of the persons other income.

This sharp jolt in the taxable income of a person puts them into a higher tax bracket than they otherwise would be if the increase in capital was taxed as it accrues.

So to compensate for the penalty of taxing that wealth at one point in time - at a higher marginal rate - the government introduces a concessional tax treatment.

 

This is an interesting take @Ross Forrester, probably the best argument I have seen for the discount, not one I had considered or seen mentioned here in the past. Your final line indicates that was the actual purpose of the discount, have you seen any wording to that effect from government?

50% is probably still quite a generous discount.

Ideally the government would provide a tax tool which calculated the discount automatically taking into account inflation & spreading the gains over all tax years owned from a bracket perspective. Something that would have been cumbersome in the past will eventually be made easy with all the data they have access to.

 

I dont know enough about the taxation system in detail but if someone holds say $100 worth of shares that pay dividends each year (lets say they hold for 3 years and then sell them for $220) are they taxed both on the annual dividend payments, AND some CGT on the $120 of profit they made when thet sold them?

Terry - if they get rid of the 6 year rule, do you think they'll grandfather it in? (Meaning they'll have to honor it for for those already in the system/those already using it)?

I ask because my ppor is coming up on time for me to move back into it after having rented it out for about 5 yeara since I moved out of it.

 

Yes.

Dividends are treated as income and taxed. But the tax is reduced if the dividends carry franking credit, and you only pay the difference. In some cases you receive a tax credit.

Capital gains are also taxed, concessions may apply if held for over 12 months.
Marg

 

In my opinion I dont believe that the full CGT concession will be removed for assets held 12mths +. It could be seen as unfair with the former rules allowing a inflationary impact (based on CPI). The simplified method of the 50% discount replaced that under P Costello / Howard.

I would think they could scale the discount back eg allow a 10/20% discount or a lifetime discount (complex?) or some other measure that has limited effect that is also simple to calculate and understand. This could apply to all CGT assets and not just property but they could be selective. The old CGT rules used to also apply a tax smoothing over a five year period to the CGT gain which was truly complex for the average taxpayer to fathom. Ross'explanation about inflation creep above is a example of why that was done. Bringing that back is a bit too complex and a simple X% discount is really simple to understand and I would think this has more chance than any change.

Last year Treasury modelled a lot of scenarios and one of the pre-budget considerations was to consider removing several CGT concessions relating to homes. eg the absence rule etc. They could even tighten up the exemption and remove the option to choose a residence and make it fact based. That could bring forward tax revenue and tighten avoidance. I would not be surprised if they acted on this in either this Parliament or the new Government after the next election. However, the coalition party room might not embrace the change prior to the next election.

One change never proposed previously but considered was to introduce a broader withholding tax regime for all or most property sales. I think it may be costly to administer and for all the exempt properties it would be highly onerous.

If the CGT discount is to be removed / reduced then the other major tax leakage is the low or no effective tax rate to super funds. Measures that could be included:
- Removal of the 33.3% discount for super fund gains > 12mths. The already low tax rate 0-15% would be reasoning for that.
- Cancellation of franking credits or reduction of them for exempt income. (eg pension balances)

The media always like to discuss loss of the main residence exemption but I would think no Government would propose that.

 

Also rather than paying CGT each year as it is delayed until the disposal of an asset that means the capital base is larger and there is much more compounding going on.

Imagine how much more you could invest if you didn't pay tax on your income until say 10 or 20 years after you earned it.

 

I think they should just put GST on fresh food instead.

 

This was the previous system of taxation - with a five year spread to get the tax rate.

It was seen as too complex. So a 50% discount was offered as a way to cut red tape and reduce the cost of compliance with tax law.

Not many assets increase in value at a rate of more than double inflation at a macro scale. Obviously some do short term - but long term, over cycles, no.

 

Hard to get that one past....ALP oppose it. Many states oppose it.
It would be political suicide.

 

I always thought indexation to the CPI was part of the CGT system to allow for changes in purchasing power (ie inflation); and that the 50% discount replaced indexation as a simpler method. Most people would have been unaware of the rate averaging.

Unfortunately for longer-term holders, the discarded indexation system would now give them a better result than the 50% discount does!

 

Agree. It would be political suicide and quickly reversed at change of govts. A govt without majority in the senate would probably never get it passed either.

 

Indexation wasnt discarded !! Its actually still there (and frozen) since 30 Sept 1999.

A person can still choose to use it IF the asset was acquired pre- 21st Sept 1999 (budget night). Nobody would normally find that the discount gain is higher than indexation.Taxpayers with carried fwd capital losses can sometime still consider the issue.

It would be highly complex and give inconsistency if it was reintroduced. eg what is a third element cost ? Indexing annual costs could be a highly complex issue.

 

We would also have our own version of Bastille Day when we all remember the burning of Parliament House.

 

Well, yes but if indexation was able to be used at current CPI values it could give you a better result than a 50% discount would.

 

If CGT provisions were repealed the tax could also be $0. About as likely as indexing being retrospectively allowed.

 

If there was a change I would assume CGT12 month rule on property would be grandfathered? What if you then develop a site purchased before any change to CGT rules? ( I have two sites that I could develop in the next 5 to 10 years )

Ideally I'd like to see no change made to CGT discounting for shares.