By Cliona O’Dowd
Sharemarket investors have found themselves in the firing line as the federal government threatens to launch an all-out assault on wealth creation.
The bold move being finalised by the Albanese government to axe the 50 per cent capital gains tax discount in favour of inflation indexation on new investments across every asset class threatens to widen so-called generational inequality.
Industry experts warn it’s younger investors that have chased sharemarket returns after being priced out of the housing market who will become collateral damage in the government’s revenue hunt.
Older, wealthier investors could be protected from partial grandfathering under a budget plan revealed in The Australian.
Property investors have been bracing for an overhaul of tax rules following weeks of speculation around negative gearing and CGT reform the government framed as essential to restoring intergenerational equity.
But the prospect of shaking up the tax rules for all asset classes, including equities, is being viewed as nothing more than a tax grab dressed up as levelling the playing field between young and old.
“It would be a spectacular own goal in the pursuit of intergenerational prosperity to bring in reforms that make long-term saving less attractive,” Betashares chief executive Alex Vynokur said.
Anyone looking to buy shares after budget night, including younger investors looking to build wealth and top up their housing deposit, will be at risk of a greater tax hit if the government goes ahead with its plan.
Mr Vynokur is concerned it could discourage long-term investing and crimp wealth growth.
“Over decades, millions of Australians have turned to investment markets to build long-term financial security, especially as an alternative to buying a home as home affordability has been declining,” he said.
“Tinkering with a system that encourages long-term savings is very dangerous. It will penalise exactly the Australians who are taking responsibility for their financial futures.”
The inflation-indexation model currently under consideration would see the capital gain on an asset adjusted down for inflation, with the remainder then taxed.
If inflation runs far lower than capital growth, the tax discount will be far lower than the current 50 per cent. But if inflation runs hotter than growth, as has happened more recently, the discount could be larger.
Revenue grab
Financial adviser Olivia Maragna of Aspire Retire Financial Services said the prospect of the CGT change hitting all asset classes showed the reform was simply a revenue-raising exercise.
She said she was not surprised the government was looking at applying the CGT change to all asset classes.
“If you look at the underlying intention of the current government, it is to raise revenue. That is their intention and they want the growth over the last five years,” she said.
“But there should be some sort of adjustment for people who hold property currently,” Ms Maragna added.
She said if the government was to implement grandfathering through indexation rules it would be “horrific” for accountants and advisers, who would be going back to the more complex tax rules that were in place before the Howard government reforms.
The case for grandfathering
Wilson Asset Management founder Geoff Wilson pushed back against the prospect of not grandfathering tax changes, warning it would undermine trust in the entire tax system.
“Australians make long-term investment decisions based on the tax rules in place at the time, and if those rules are changed retrospectively, it sends a very clear message that the goalposts will always be changing,” Mr Wilson said.
“Once that confidence is lost, capital becomes more cautious, demands a higher return, or simply moves elsewhere, which is damaging for both the broader economy and equity market formation.”
He said indexing had merit in that it ensures real gains are taxed rather than inflation, but that on its own is not an economic reform.
“Unfortunately indexing capital gains across all asset classes might clean up the tax system, but it doesn’t fix Australia’s productivity problem. It treats all investments the same and that’s exactly the issue,” Mr Wilson said.
“We already have too much capital flowing into passive assets like existing residential property and not enough into businesses that create jobs, drive innovation and lift productivity. Indexing doesn’t change that. It simply locks in the status quo.”
Mr Vynokur pointed to other countries actively encouraging retail investors to step into the sharemarket as a means of building wealth. He urged the Albanese government to rethink any plans to apply the tax shake-up to the sharemarket.
“Policies in the UK and Japan are opening up investments to younger people more and more and encourage good investment behaviour. We don’t want to go in the opposite direction,” he said.
“If the effective outcome of the changes is to penalise those that are saving and compounding investments long-term with a higher rate of tax, I think that would be a mistake and should be avoided.”
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