Changes to cap­i­tal gains will be cru­cial

The Sunday Mail (Queensland) - - NEWS -

The Bare­foot In­vestor for Fam­i­lies: The Only Kids’ Money Guide You’ll Ever Need d (H (Harper­Collins) R RRP $29.99 On sale now fr from Dy­mocks a and all good b book shops. The Bare­foot In In­vestor holds a an Aus­tralian F Fi­nan­cial S Ser­vices L Li­cence (302081). This is gen­eral ad­vice only. It should not re­place in­di­vid­ual, in­de­pen­dent, per­sonal fi­nan­cial ad­vice. CAP­I­TAL gains tax will be a ma­jor topic as we race to the next fed­eral elec­tion. Trea­surer Josh Fry­den­berg was on the at­tack last week, point­ing out that if La­bor’s cap­i­tal gains tax (CGT) pro­pos­als be­come law, Aus­tralians will be pay­ing CGT at one of the high­est rates in the West­ern world.

Our top marginal in­come tax rate is 47 per cent, in­clud­ing Medi­care. This means a top-rate tax­payer now pays 23.25 per cent CGT when the 50 per cent dis­count for hold­ing an as­set for more than 12 months is ap­plied.

La­bor in­tends to raise the top marginal rate to 49 per cent by re­in­stat­ing the 2 per cent Bud­get Re­pair Levy. And to re­duce the 50 per cent CGT dis­count to 25 per cent.

If La­bor suc­ceeds in mak­ing both these changes, a top-rate tax­payer will sud­denly find them­selves pay­ing CGT of 36.75 per cent – an in­crease of al­most 58 per cent.

La­bor reck­ons the tax hike is nec­es­sary to bring the bud­get back into sur­plus, and they are pro­ject­ing a sav­ing to the bot­tom line of around $12.6 bil­lion over 10 years. But, like many of La­bor’s cost­ings, this one seems rather op­ti­mistic.

For starters, they are promis­ing the in­creased rate of CGT will ap­ply only to as­sets ac­quired after the changes be­come law. If they do get elected in May, it’s al­most cer­tain that the leg­is­la­tion will not be en­acted un­til mid-2020. There­fore, it should only af­fect as­sets pur­chased after that date. Next, the dis­count ap­plies only to as­sets held for over a year. So no as­sets would be af­fected by the pro­pos­als for at least three years from today.

Now think about the type of peo­ple who buy in­vest­ment prop­erty, which is where the CGT rate is most im­por­tant. Most are sus­pi­cious of su­per­an­nu­a­tion, re­gard shares as a bit of a punt, and try to se­cure their long-term fu­ture by putting to­gether a sta­ble of in­vest­ment prop­er­ties so they can live off the rents when they re­tire. It’s highly un­likely that they will be cash­ing them in any time soon. There has been a lot of spec­u­la­tion about what La­bor’s pro­posed CGT changes would do to the econ­omy in gen­eral, and the hous­ing mar­ket in par­tic­u­lar. There is no ob­vi­ous an­swer. Given that La­bor has promised the tax sta­tus of ex­ist­ing as­sets will be un­af­fected, there would be no rea­son to sell as­sets now and in­cur un­nec­es­sary CGT.

One likely short-term re­sult would be a spate of buy­ing prior to the changes, as investors rush to beat the rule changes, fol­lowed by a slump.

Cer­tainly, if the rules do change, investors will be re­luc­tant to sell as­sets pur­chased after the rule change be­cause the cost of do­ing so would be much higher. In any event, I have long be­lieved that tax is just one of many fac­tors that in­flu­ence in­vest­ment de­ci­sions. If you can make a great profit now, and you be­lieve the as­set has peaked, it still makes per­fect sense to reap the re­wards im­me­di­ately and pay what­ever tax is due.

One thing is cer­tain – any changes to CGT will be ben­e­fi­cial to shares. Prop­erty and shares are the two ma­jor in­vest­ment as­sets, but shares have one unique as­set – the abil­ity to sell in part. Think of two re­tirees – one has $1 mil­lion in shares, the other has $1 mil­lion in two in­vest­ment prop­er­ties.

The share in­vestor can sell as­sets at a slow rate as funds are needed, keep­ing them­selves un­der the tax-free thresh­old, and will al­most cer­tainly pay no CGT. It’s a dif­fer­ent mat­ter for the hap­less prop­erty in­vestor – they can’t sell the back bed­room, so the only way they can re­lease money to live on will be to sell one of the prop­er­ties and pay a big chunk of CGT. Noel Whit­taker is the au­thor of Mak­ing Money Made Sim­ple and nu­mer­ous other books on per­sonal fi­nance. [email protected] noel­whit­taker. com. au

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