A better way to tax capital gains. By Chris Brycki in The Australian.
Supporters of reform are also right about one thing. The current 50 per cent CGT discount can produce overly generous outcomes for short-term windfalls. Someone who flips an asset in 12 months shouldn’t be treated the same as someone who spends 20 years building a business or investing patiently.
The real question is whether Australia can reform capital gains tax without discouraging the productive risk-taking the economy depends on. …
Should labour and capital should be taxed the same? No, and here’s why not:
First, investing involves risk and time in a way ordinary wage income doesn’t. Investors are putting already taxed savings at risk and there is no guaranteed return, no minimum wage, no sick leave, and very often significant losses.
Second, economies rely on people willing to defer consumption and commit capital toward businesses, housing and innovation. If the after-tax reward for taking long-term risks falls too far, less capital gets invested and more gets consumed, parked in lower-productivity assets such as cash or moved offshore.
Third, capital is mobile globally. Entrepreneurs and investors can choose where to build companies and allocate capital. If Australia taxes long-term investment much more heavily than comparable countries, over time that risks pushing investment, businesses and talented workers elsewhere.
Labor’s new taxes are particularly unfair:
The proposed 30 per cent floor is also difficult to justify economically. If the government’s goal is to align capital gains tax more closely with ordinary income tax, then why should someone taking long-term investment risk still face a minimum capital gains tax of 30 per cent, while someone leaving cash in a bank account simply pays ordinary marginal tax on guaranteed interest income?
The proposed indexation model also creates several practical problems.
One is grandfathering. By exempting existing assets while imposing a harsher regime on future investments, the government creates a deep sense of unfairness between generations. Older Australians keep the old system while younger Australians inherit a significantly worse one.
Another problem is the lock-in effect. When investors fear losing favourable tax treatment, they become less willing to sell assets, recycle capital or invest in new opportunities. That reduces liquidity and capital mobility across the economy.
Most importantly, indexing a cost base can become most punitive precisely for those who have taken the greatest risks or used capital most productively. Someone who spends 20 years building a successful company from nothing can end up facing dramatically higher tax because much of their gain reflects genuine value creation rather than inflation.
That’s why so many business founders reacted so strongly, joking they may as well reserve a permanent seat at the shareholder table for the Prime Minister because the government gets an effective 47 per cent claim on the upside they spent decades building.
The 47 per cent figure refers to the maximum tax rate that could apply under the proposed changes to the CGT discount — up from the current ceiling of 23.5 per cent — when a business owner sells their company, lists it publicly, or enables secondary share sales.
this problem extends far beyond technology founders and venture capital.
The architect, physio, newsagent or small-business owner who spends decades building a business to fund their retirement and succession planning faces exactly the same issue.
Creating carve-outs for politically connected or fashionable sectors such as technology only makes the system more complex and more unfair. Australia doesn’t need more special-interest exemptions, it needs a simpler and more broadly defensible system.
So use a tapered system — simpler and fairer:
Under this model, investors would earn a 5 per cent CGT discount for every year an asset is held, up to a maximum 50 per cent discount after 10 years.
Own an asset for two years and receive a 10 per cent discount. Five years would deliver a 25 per cent discount. Hold it for 10 years and the investor receives the full existing 50 per cent discount.
This would solve many of the legitimate criticisms of the current system while preserving incentives for genuinely long-term investment and stopping the perverse outcomes created by an arbitrary 30 per cent CGT floor.
Shorter-term windfalls would receive less generous treatment and therefore generate more tax revenue. But Australians who spend a decade or more building businesses, funding housing or investing patiently would not suddenly face punitive tax increases.