Australia Senate Reviews Capital Gains Tax Discount: Will It Change?

A 50% discount on capital gains tax in Australia is being reviewed by the Senate. This could change how people are taxed on profits from selling assets.
By Newsroom | Taxation, Australian Economy |

The future of Australia's capital gains tax (CGT) discount is under intense scrutiny, with prominent figures and economic experts advocating for its removal. A Senate committee is currently examining the discount's impact on economic inequality and the housing market, a process that has fueled debate and calls for significant tax reform.

A capital gains tax is levied on profits made from selling assets. Currently, Australia offers a 50% discount on capital gains, meaning individuals only pay tax on half of the profit made from selling an asset. This concession is a central point of discussion in ongoing parliamentary hearings, as stakeholders debate its fairness, economic effects, and alignment with broader tax policy goals.

Key Figures and Organizations in the Debate

  • Bernie Fraser: Former Governor of the Reserve Bank of Australia (RBA). He has publicly stated that he would abolish the CGT discount if he had the authority.

  • Senate Committee: Currently reviewing the CGT discount's influence on inequality and the property market.

  • Economists and Tax Experts: A collective of economists are advocating for changes to the CGT concession, increasing pressure on the government for reform.

  • Greens Party: Through their treasury spokesman, Nick McKim, have highlighted the broad support for CGT changes and are involved in a parliamentary inquiry into the concession.

  • Former Government Figures: Peter Costello and John Howard have voiced opposition to proposals to alter the CGT discount.

  • Financial Commentators: Figures like Scott Pape, "The Barefoot Investor," have expressed strong opinions, labeling the policy as "boneheaded."

A Closer Look at the Capital Gains Tax Discount

Capital gains tax is paid on the profit made from selling an asset that has increased in value. In Australia, the current system allows for a 50% discount on these profits for individuals. This means that if an asset is sold for a profit of $10,000, only $5,000 is added to the individual's taxable income. This discount is a significant point of contention in the current tax reform discussions.

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AspectCurrent SituationProposed Changes / Concerns
CGT Discount50% discount on capital gains for individuals.Calls to abolish the discount entirely or make significant changes.
Taxable GainOnly 50% of the profit is added to taxable income.Concerns that this discount disproportionately benefits wealthier individuals and exacerbates inequality.
Impact on PropertySeen by some as a factor influencing property market dynamics and prices.Opponents argue cutting the discount could increase housing costs.
Economic EqualityCritics argue it contributes to wealth inequality, with a small percentage of taxpayers benefiting significantly.Supporters of change posit that its removal could lead to a fairer distribution of the tax burden.
Tax Reform LandscapePart of broader discussions about tax reform, with pressure mounting for budget decisions.Some believe ad hoc changes are insufficient and a comprehensive reform is needed.
Economic TheoryDebates exist on whether it incentivizes investment or creates market distortions.Concerns that taxing savings can be detrimental to investment and economic growth.

Arguments for Abolishing the Discount

Proponents for change emphasize the role of the CGT discount in exacerbating wealth inequality. Data suggests that a small fraction of high-income earners benefit most from this tax break.

Former RBA governor calls for capital gains tax discount to be scrapped - 1

  • Bernie Fraser's Stance: The former RBA governor directly told a Senate committee that he would remove the discount if given the chance, citing its impact on fairness.

  • Economist Consensus: A group of leading economists are reportedly advocating for changes, suggesting that the current system is unsustainable or unfair.

  • Inequality Concerns: The top 0.89% of taxpayers reportedly accounted for 29% of all capital gains, highlighting a significant concentration of benefit among higher earners.

  • "Toxic Tax Debate": Fraser has characterized the discussion around the CGT discount as "toxic," indicating a deeply divided opinion on its merits.

Opposition to Changes

Conversely, some influential figures and groups express strong reservations about altering or removing the CGT discount, arguing it could have negative economic consequences.

  • Former Treasurer Peter Costello: Has painted a grim economic outlook for Australia and has been critical of proposals that could be seen as additional taxes.

  • John Howard's View: The former Prime Minister has also expressed disapproval of the CGT proposal, framing it as another tax increase.

  • Impact on Housing: Tim Wilson, the new shadow treasurer, has suggested that reducing the CGT concession could negatively impact housing prices.

  • Investment Decisions: Scott Pape, "The Barefoot Investor," while calling the policy "boneheaded," cautioned against making investment decisions solely based on proposed tax changes. He also noted that prior to the discount, capital gains were indexed to inflation, suggesting a shift in how gains are treated.

Broader Tax Reform Context

The debate over the CGT discount is occurring within a wider discussion about Australia's tax system. Some experts argue for a more comprehensive approach to tax reform rather than piecemeal changes.

  • Call for "Full Buffet": Bill Kelty has suggested Australians are looking for a complete set of tax reforms, not just adjustments to specific breaks.

  • "Neo-feudal" Trajectory: An ANU tax expert has described the current tax system's approach to savings as "all over the shop" and warned of a "neo-feudal" societal path.

  • Treasurer's Narrative: The Treasurer's justification for considering changes, particularly concerning "intergenerational equity," frames the CGT discount as a key issue.

  • Potential Budget Impact: Changes to the CGT discount could form part of the Treasurer's budget decisions, with expectations for major tax reform.

Expert Analysis and Signals

The intervention of former RBA Governor Bernie Fraser adds significant weight to the calls for change. His direct testimony to a parliamentary committee underscores the gravity with which the issue is being treated by some senior economic figures.

  • The Senate committee's review is a critical juncture, providing a formal platform for diverse views to be aired.

  • The divide between former economic leaders like Fraser and figures such as Costello and Howard indicates a deep ideological split on fiscal policy.

  • The participation of numerous economists suggests a professional consensus is forming around the need for CGT reform, potentially increasing pressure on the government.

  • The "Barefoot Investor's" nuanced take highlights the practical considerations for individuals and the potential for unintended consequences in tax policy.

Conclusion and Implications

The ongoing parliamentary review into the capital gains tax discount has brought the issue to the forefront of national economic discussion. A clear divergence of opinion exists, with former RBA Governor Bernie Fraser and a coalition of economists advocating for its abolition, citing concerns about inequality. This perspective is countered by former government figures like Peter Costello and John Howard, who view potential changes as detrimental tax increases and warn of negative impacts on housing.

The debate highlights a broader appetite for tax reform, with some experts arguing for comprehensive solutions rather than isolated adjustments. The outcome of the Senate committee's findings and the government's subsequent policy decisions in the upcoming budget will be closely watched.

  • The evidence strongly suggests that the CGT discount is no longer a settled issue in Australian tax policy.

  • The pressure on the government to address tax reform is increasing from multiple influential sources.

  • The opposing viewpoints indicate that any decision regarding the CGT discount will likely face significant political and economic debate.

  • The findings of the Senate committee will be instrumental in shaping the public and political discourse moving forward.

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Frequently Asked Questions

Q: What is the capital gains tax (CGT) discount in Australia?
In Australia, individuals currently get a 50% discount on capital gains. This means they only pay tax on half of the profit made when selling an asset like shares or property.
Q: Why is the capital gains tax discount being reviewed by the Senate?
The Senate committee is looking at how the CGT discount affects economic inequality and the housing market. Experts and politicians have different views on whether it should be kept or removed.
Q: Who wants to get rid of the capital gains tax discount?
Former Reserve Bank Governor Bernie Fraser and several economists want to abolish the discount. They believe it helps rich people more and makes inequality worse.
Q: Who is against changing the capital gains tax discount?
Former Treasurer Peter Costello and former Prime Minister John Howard are against changing it. They think it would be like adding another tax and could harm the economy and housing prices.
Q: What could happen if the capital gains tax discount is changed?
If the discount is changed or removed, people might pay more tax on profits from selling assets. This could affect investment decisions and potentially impact housing prices, but supporters say it would be fairer.