Investors in new home builds can choose whether to stick with the old 50% discount or go with the new inflation-linked approach to capital gains tax.
The Biggest Budget Myths: Why Claims of 'Massive Tax Bills' and an Investor Exodus Fall Short
In the backlash to changes to capital gains tax, many claims have been made and not all of them stack up. The budget announced some of the most consequential tax reform measures in decades. Among them were changes to the capital gains tax – the tax you pay on the profit from the sale of an investment.
The budget measures are yet to be legislated – they may well look different by the time they pass parliament. But here’s what we do know.
Has the Capital Gains Tax Discount Been Scrapped?
No, it has been changed. The rules at present are that if you sell an asset after a year, you pay tax on half of the capital gains. This is the 50% CGT discount. Under changes proposed in the budget, instead of that flat 50% discount, you would adjust your capital gain to account for inflation over the holding period. This way you pay tax on the “real” gains.
Investors in new home builds can choose whether to stick with the old 50% discount or go with the new inflation-linked approach (they can also keep negative gearing). The budget also included a 30% minimum tax on the after-inflation capital gains, with an exception for people on income support payments, like the age pension or jobseeker. The new regime is due to kick off from the middle of next year. If you hold an asset before that date, your eventual capital gains on the investment will get the 50% discount up to 30 June 2027, and profits after will be taxed under the inflation-linked regime.
Are People Who Own and Trade Shares Going to Have to Pay a Lot More Tax?
Maybe, maybe not. Whether you pay more or less than the current 50% CGT discount – on any asset – depends primarily on the relative rates of inflation and return over the holding period. For example, if after one year your shares went up 5% in value and inflation was 2.5%, then you will pay tax on half of the capital gain. Sound familiar? That’s the same as the existing 50% discount. But say you instead earned 10%. Then your discount would only be 25% (the 2.5% inflation as a share of the 10% return). In contrast, if you earn 4% and sell after one year, you only pay tax on the 1.5% real gain. In this case your CGT discount is 62.5%.
But wait, there’s more ... As mentioned, the capital gains made before mid-2027 on existing investments held on budget day will still get the 50% discount, while the returns made after that date will get the inflation-adjusted capital gains discount. That changes the simple equation from above, as it depends how long you held the assets under one regime versus the other. Andrew Lilley, an economist at investment bank Barrenjoey, helpfully crunched some numbers. If you bought in 2023, made 10% a year, and sold in 2030, he calculates 55% of your capital gains will be taxable. “This isn’t far from the old 50% flat regime,” Lilley says.
Are Small Businesses Going to Be Hit with 'Massive Tax Bills'?
Not if the business is still classified as “small” when it’s sold. Any business with annual turnover below $2m, or below $6m in assets, will remain eligible for CGT concessions. The treasurer’s office has highlighted tax data showing that nine out of ten small businesses get these concessions, “meaning they can pay reduced or zero CGT when they sell their business”. But many small business owners hope to one day be a big business-owner. For them, they may well end up paying more tax on the eventual sale of their business.
Will the Government End Up Taking 47% of a Start-up?
There is an issue for entrepreneurs who start their business on a shoestring – a laptop and hours and hours of work. The initial cost base is close to zero, so how do you account for inflation on a zero base? Here’s where we get the AI-generated meme campaign about Anthony Albanese as an unwanted co-founder taking 47% of a business’s profits. The 47% is the top personal income tax rate, plus the 2% Medicare levy. It’s possible that if you eventually sell your start-up business for, say, $500m, then the tax paid on the gains would essentially be 47% as there is no cost base to adjust by inflation. Still, Jim Chalmers reckons this smacks of misinformation. “The 47% campaign, for example, pretends that there’s no CGT discount any more. That’s obviously not true. We’re just calculating the discount differently,” he told the 7am podcast.
Will the CGT change be the difference between deciding to start a business or not, or whether to take your great idea overseas? Maybe for a few, although it’s hard to imagine that this is the death of Australian entrepreneurship as we know it. Paul Keating this week said if you’re making huge amounts of money from the sale of your business, then “the level of wealth makes any discussion of the tax rate absolutely secondary”. The budget said Treasury planned to do more consultation on what the proposed changes mean for start-ups before finalising the legislation – which we need to remember is yet to be introduced into parliament, let alone passed.
Will the Changes to Negative Gearing and CGT Increase Rents?
Perhaps by a little. Treasury officials reckon the flight of investors from the market could eventually mean the median weekly rent is $2 higher, and an analysis by the CBA agrees with that. But then, maybe the fact that investments in new builds can choose to stick with the 50% CGT discount and are able to negatively gear will deliver a bigger-than-expected boost to housing supply. And fewer investors in the market should mean more homeowners.
Should People with Big Investments in Shares or Property Sell Up Now to Avoid a Big Tax Bill?
It depends on your circumstances, and it could be worth waiting to see the actual legislation introduced into parliament. It’s worth remembering that existing investors can keep negatively gearing, and the new inflation-linked CGT discount only applies to gains made after 1 July next year.
