The capital gains tax discount should be replaced with a fairer approach. A potential direction for reform would be to instead allow individuals to spread gains over time rather than taxing them in a single year, according to the e61 Institute.
In a submission to the Senate Select Committee on the Operation of the Capital Gains Tax Discount, e61 said the discount is inequitable and distorts the way Australians work, save, invest, and finance their investments.
“The current treatment of capital gains income incentivises individuals to invest in capital gains-generating assets, borrow too much, and reclassify earnings as capital gains,” said e61 Research Manager Dr Matt Nolan.
“However, simply lowering or abolishing the discount is not the answer. The discount is intended to address the impact of inflation and the lumpiness of gains, which can push low and middle-income Australians into higher tax brackets in a single year. Any reform must still address these two legitimate issues.”
e61 said a better system would reduce taxable capital gains by inflation and allow individuals to smooth their tax liability over the life of the asset, an option that was available until 1999.
“Income averaging would ensure that taxpayers with similar lifetime income would pay similar tax rates regardless of whether they earn regular wages or have a volatile one-off gain,” said e61 Research Economist Matt Maltman.
“Improved technology including digital record-keeping, pre-fill, and improved ATO systems raises the possibility of returning to a system that more closely aligns tax with economic accrual.”
Applying this approach to all capital income would lead to higher taxation of the capital gains of high-income earners while reducing tax paid on interest and dividend income, thereby improving the equity and efficiency of the tax system.
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Charlie Moore: 0452 606 171
