The federal government is considering changes to current capital gains tax (CGT), according to media reports.

Introduced in 1985, the CGT, which treats investment gains as taxable income, was initially tied to inflation. It applies when assets held for at least 12 months are sold and levied on the amount the asset has increased in value, above inflation, since it was bought (the capital gain).

When the Ralph review into Australia’s financial system in 1999 deemed it too complex, a simplified version was introduced that included a flat discount of 50%. As an example, if you sell an asset with a $1 million profit, you are currently taxed on 50% of the capital gain, or $500,000.

With asset price inflation having far outstripped consumer price inflation in the decades since, investors have reaped large benefits.

The federal government had said that generational inequality will be a key focus of the next budget, lending weight to the likelihood of CGT changes. A recent poll by AMLIFY also found that two-thirds of Australians now back the idea of changing capital gains tax concessions and negative gearing to help meet the housing crisis.

Media has speculated that the 50% figure might move to 33% or 25%, but these are arbitrary numbers. An alternative might be a return to the way the tax worked before 1999, so that the discount is equal to the proportion of the gain in value due to inflation (the idea being that inflation is not a real gain and should not be taxed).

While many associate the CGT with property, it does apply to any investment held for at least 12 months, including shares and superannuation.

For investors, this may mean a significant increase in taxes when offloading offsets. One way to temper the effects would be to apply it to new rather than existing investments, but we will need to wait for a formal government announcement to see if and how any changes will be implemented. Should it go ahead, we would recommend a review of your tax planning and investment strategy.

At Newealth, we keep an eye on financial news to keep you informed and on top of your financial goals. For a confidential discussion at any time, please contact us.

General Advice Warning:

The information in this blog is general in nature and does not take into account your personal objectives, financial situation or needs. You should consider whether the information is appropriate for you and seek professional advice before making any financial decisions.
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