Australian investors could pay up to 60 per cent tax on shares, a former treasury official warned in the latest backlash to Labor’s capital gains tax changes.
Geoff Francis warned that Australians with a diversified share portfolio could see their tax rate skyrocket under plans to scrap the 50 per cent CGT discount and replace it with an inflation-adjusted model.
The new model imposes a 30 per cent minimum tax rate but could slug Australians with a 47 per cent rate depending on their income.
Mr Francis said that Australians with a portfolio of shares that grow or fall at different rates might be subjected to a higher rate than under the current model.
“A diversified portfolio of shares will likely fare much worse than housing investment due to a little-understood feature of the pre-1999 rules to which the system is now reverting,” he wrote in The Australian Financial Review on Thursday.
He argued that the new model only results in better treatment of inflation-adjusted losses if they can be offset against real gains.
“The pre-1999 rules prevented this, as they allowed only nominal losses to be offset against capital gains,” Mr Francis said.
“Over time, about 30 per cent to 40 per cent of shares in companies listed on the ASX return capital gains below inflation and the real losses these generate cannot be offset against those stocks that do achieve real gains.”
He said the “real effective tax rate” – which is the total paid after deductions, offsets and inflation are factored in – could average around 50 per cent higher than the taxpayers’ marginal rates.
“Though in some cases could be even higher,” Mr Francis said.
He stressed that for a worker on the 39 per cent tax rate, the real effective rate on the capital gains could average around 60 per cent.
The former treasury staffer also railed against modelling in the budget papers used to explain the change.
The budget papers said that the 50 per cent discount had failed to properly reward investors compared to an inflation-adjusted model.
Mr Francis argued this was flawed as it assumes an investor buys a single stock that matches the ASX index performance and beats inflation.
“In the real-world, investors typically hold a portfolio of shares, with a distribution of capital gains, some higher than inflation, some lower than inflation (where indexation only partially protects against tax), and some negative returns where indexation is useless,” he said.
The former treasury official compared this to an investor who split $10,000 equally into Australia’s four major banks two decades ago.
“After adjusting for 73 per cent inflation over the period, the investment would have provided a pre-tax real capital gain of $1250, or about 1.2 per cent per year above inflation,” Mr Francis wrote.
“However, of the four banks, only one, CBA, has provided a capital gain above the inflation rate. The others have significantly underperformed inflation.
“After moving to inflation indexing, at a 39 per cent tax rate, the tax payable on the total gain is $1850, or nearly 150 per cent above the total real return!”
A treasury spokesperson said the government was not changing how losses are calculated.
“Under indexation, an investor does not have a capital loss if their gain is positive but less than inflation,” the spokesperson said in a statement.
“However, they will no longer pay any tax on a gain in this situation, where they do currently under the 50 per cent discount.
“Tax paid across a portfolio of assets depends on a range of factors including rates of return, inflation and holding period.
“Comparing indexation to the 50 per cent discount for the four bank stocks selected by Mr Francis, under indexation around 2 per cent more tax would have been paid if the stocks were bought in March 2006 and sold 20 years later.
“However, if these stocks were purchased in March 2016, 2 per cent less would have been paid.”
Mr Francis’ warning comes after Treasurer Jim Chalmers revealed plans on budget night to impose the new CGT system from July 2027.
He also revealed plans to roll back negative gearing, only applying it to newly built homes and properties purchased before the budget speech was delivered.