The Albanese government says its new capital gains rules will tax real profits rather than gains caused by inflation.<\/p>\n
That sounds reasonable.<\/p>\n
But the way the system works could produce some strange results for Australians who invest in shares.<\/p>\n
Former Treasury official Geoff Francis explains the problem using the four major banks.<\/p>\n
He looked at what would have happened if someone invested $10,000 across Commonwealth Bank, NAB, ANZ and Westpac and held those shares for the past 20 years.<\/p>\n
All four bank shares rose over that period.<\/p>\n
But inflation rose by about 73 per cent.<\/p>\n
<\/p>\n
That means the shares needed to rise by more than 73 per cent just to maintain the investor\u2019s purchasing power.<\/p>\n
Commonwealth Bank comfortably beat inflation.<\/p>\n
The other three banks rose in dollar terms, but failed to keep pace with inflation.<\/p>\n
Put another way, those three shares looked like they made money on paper, but the investor could buy less with the proceeds than the original money would have bought 20 years earlier.<\/p>\n
Across the entire four-bank portfolio, Mr Francis calculated that the investor made a real gain of only about $1250.<\/p>\n
Here is where the problem begins.<\/p>\n
The new system looks at each share separately.<\/p>\n
It taxes the real gain made on Commonwealth Bank.<\/p>\n
But because NAB, ANZ and Westpac still rose in dollar terms, their losses after inflation are not treated as capital losses that can be used to reduce the Commonwealth Bank gain.<\/p>\n
The tax system counts the winner, but does not fully count the shares that went backwards after inflation.<\/p>\n
Mr Francis calculated that an investor on a 39 per cent marginal tax rate could face a tax bill of about $1850.<\/p>\n
So, over the full 20 years, the investor made about $1250 after inflation \u2013 but the tax bill could be about $1850.<\/p>\n
The tax could be greater than the investor\u2019s real return.<\/p>\n
That sounds impossible, because most people naturally look at the portfolio as a whole.<\/p>\n
The tax system does not.<\/p>\n
As Mr Francis says, real investors hold portfolios containing shares that perform differently. Some beat inflation, some fall behind it and some lose money outright.<\/p>\n
His estimate is that this problem could push the effective tax on the real return from a diversified portfolio to around 60 per cent for an investor whose normal marginal rate is 39 per cent.<\/p>\n
The second problem<\/p>\n
The government has also introduced a minimum tax of 30 per cent on real capital gains.<\/p>\n
This matters when someone sells an investment during a year in which they have little or no other income.<\/p>\n
Morningstar gives the example of a person who makes a $50,000 real capital gain and has no other income that year.<\/p>\n
Under the normal income tax scale, the tax would be $5788.<\/p>\n
But 30 per cent of $50,000 is $15,000.<\/p>\n
The investor would therefore pay an extra $9212 to bring the tax bill up to the new minimum.<\/p>\n
So the calculation is:<\/p>\n
Normal tax: $5788<\/p>\n
Minimum tax: $15,000<\/p>\n
Extra tax: $9212<\/p>\n
This could affect a retiree, someone between jobs or a person who takes a year away from paid work and sells a long-held investment.<\/p>\n
Morningstar also finds that the top up does not simply increase with the size of the gain. It peaks at $9212 for some gains between $45,000 and $135,000, then begins falling and disappears once a stand-alone gain reaches $225,746.<\/p>\n
That means some people with smaller or medium-sized gains face the largest top up, while someone with a much larger gain may face no top up at all.<\/p>\n
Why this affects Australian businesses<\/p>\n
The link to jobs is straightforward.<\/p>\n
Imagine an Australian engineering company that wants to expand.<\/p>\n
It needs $5 million to buy machinery, enlarge its workshop and employ more people.<\/p>\n
That money must come from investors.<\/p>\n
Before handing over their money, investors ask how risky the business is and how much they will keep if it succeeds.<\/p>\n
A higher tax bill means they keep less.<\/p>\n
Some investors will still invest.<\/p>\n
Others will demand a higher return to make the risk worthwhile.<\/p>\n
Others may choose overseas shares, global funds or safer investments instead.<\/p>\n
That makes the company\u2019s $5 million harder and more expensive to raise.<\/p>\n
It may then reduce the expansion.<\/p>\n
Instead of buying three machines, it buys one.<\/p>\n
Instead of hiring 40 workers, it hires 15.<\/p>\n
Instead of entering three export markets, it enters one.<\/p>\n
That is the chain.<\/p>\n
Higher tax means a lower return for investors.<\/p>\n
A lower return makes some investments less attractive.<\/p>\n
Less investment means businesses have less money to expand.<\/p>\n
Less expansion means fewer jobs, less industrial development and fewer exports.<\/p>\n
Australia is competing for investment<\/p>\n
Investment capital can move between countries very quickly.<\/p>\n
The maximum US federal rate on long-term capital gains is generally 23.8 per cent before state taxes. The comparable general rate in Britain is 24 per cent. New Zealand does not have a broad capital gains tax.<\/p>\n
The tax systems are not identical, so the rates are not a perfect comparison.<\/p>\n
But investors still compare the risks with what they will keep after tax.<\/p>\n
If Australian investments become less attractive, some money will go elsewhere.<\/p>\n
Housing is different<\/p>\n
The negative gearing changes should be considered separately.<\/p>\n
For existing homes bought after the cut off, rental losses can no longer be deducted immediately against salary or other unrelated income. The losses are quarantined for use against future property income or gains.<\/p>\n
New builds retain more favourable treatment, while properties owned before the cut off are grandfathered.<\/p>\n
There may be unintended consequences. Quarantined losses could encourage some landlords to hold properties for longer.<\/p>\n
But the basic distinction is reasonable.<\/p>\n
Buying an existing house does not add another home to the market.<\/p>\n
Investing in new construction can increase housing supply.<\/p>\n
Investing in an Australian company can pay for machinery, workers, research and exports.<\/p>\n
The government can restrict tax concessions for existing housing without making productive business investment less attractive.<\/p>\n
The bottom line<\/p>\n
Young Australians need affordable homes.<\/p>\n
They also need businesses that are growing, employing people and paying higher wages.<\/p>\n
Those businesses need capital.<\/p>\n
The danger is not simply that investors will pay more tax.<\/p>\n
It is that some investors will change where they put their money.<\/p>\n
When investment moves elsewhere, Australia loses more than the capital.<\/p>\n
It loses the jobs, business growth and export income that capital could have created.<\/p>\n