The Australian government’s recently unveiled tax proposals, including significant changes to capital gains tax and the introduction of taxes on discretionary trusts, have prompted considerable concern among institutional investors and industry observers. These reforms mark a notable departure from previous government assurances regarding capital gains and negative gearing, leading to questions about the policy shift. Experts suggest the government may have been emboldened by internal polling, despite past political setbacks linked to similar tax proposals, such as former Treasurer Jim Chalmers abandoning a superannuation tax plan and Bill Shorten’s 2019 election loss.
A central point of contention involves the proposed increase in the maximum capital gains tax rate on various assets, including real estate and shares, from 23.5 per cent to potentially 46-47 per cent. Under the new model, capital gains would be taxed above the rate of inflation, with investments indexed to the Consumer Price Index. However, a significant flaw has emerged: investors would not be permitted to deduct inflation-adjusted losses against these taxable gains, only nominal losses. This could lead to a substantially higher tax burden for investors. For instance, an example illustrates a potential 56 per cent increase in tax liability compared to the previous system, making direct investments less attractive and potentially favouring exchange-traded funds or superannuation funds, which are treated differently.
This proposed framework would position Australia’s maximum capital gains tax rate among the highest globally, exceeding many OECD countries, some of which, like New Zealand, have no CGT at all. Critics also highlight the broader impact of bracket creep, with more Australians falling into the top marginal income tax bracket due to inflation. Projections indicate that one in five Australians could be paying 47 per cent income tax within 20 years. Furthermore, the changes are being debated in the context of the government’s projected $267 billion in additional debt over the next four years, partly attributed to an increase in public service spending, raising questions about the budget’s underlying fairness and long-term economic implications.
