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Keep socialist blog En Passant going - donate now
If you want to keep a blog that makes the arguments every day against the ravages of capitalism going and keeps alive the flame of democracy and community, make a donation to help cover my costs. And of course keep reading the blog. To donate click here. Keep socialist blog En Passant going. More... (4)

Sprouting sh*t for almost nothing
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My interview Razor Sharp 18 February
Me interviewed by Sharon Firebrace on Razor Sharp on Tuesday 18 February. http://sharonfirebrace.files.wordpress.com/2014/02/18-2-14-john-passant-aust-national-university-g20-meeting-age-of-enttilement-engineers-attack-of-austerity-hardship-on-civilians.mp3 (0)

My interview Razor Sharp 11 February 2014
Me interviewed by Sharon Firebrace on Razor Sharp this morning. The Royal Commission, car industry and age of entitlement get a lot of the coverage. http://sharonfirebrace.com/2014/02/11/john-passant-aust-national-university-canberra-2/ (0)

Razor Sharp 4 February 2014
Me on 4 February 2014 on Razor Sharp with Sharon Firebrace. http://sharonfirebrace.files.wordpress.com/2014/02/4-2-14-john-passant-aust-national-university-canberra-end-of-the-age-of-entitlement-for-the-needy-but-pandering-to-the-lusts-of-the-greedy.mp3 (0)

Time for a House Un-Australian Activities Committee?
Tony Abbott thinks the Australian Broadcasting Corporation is Un-Australian. I am looking forward to his government setting up the House Un-Australian Activities Committee. (1)

Make Gina Rinehart work for her dole
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Sick kids and paying upfront

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Save Medicare

Demonstrate in defence of Medicare at Sydney Town Hall 1 pm Saturday 4 January (0)

Me on Razor Sharp this morning
Me interviewed by Sharon Firebrace this morning for Razor Sharp. It happens every Tuesday. http://sharonfirebrace.com/2013/12/03/john-passant-australian-national-university-8/ (0)

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Election 2019 – capital gains tax reforms

Labor has announced a few tax proposals. Let’s have a go at explaining the capital gains tax changes.

Until 1985, capital gains in Australia were not taxed. As any tax economist will tell you, capital gains are income. As any tax lawyer will tell, the judges say they aren’t.  

When Keating made net gains taxable, he opted to only tax real gains (i.e. to take inflation out of the gain.)  Let’s say I bought an asset (e.g. a block of land) for $510,000 in year 1.  (Year 1 sounds a bit Orwellian doesn’t it?)

Ten years later, in year 11, I sold the untouched block for $1,500,000.  I spent nothing on it. Let’s assume inflation over that period of time totalled 33 1/3 percent, so the increase in price in the asset caused by inflation would be from $510,000 to $680,000) – $510,000 plus (1/3  x $510,000). In other words, the real gain, the gain over and above inflation, was $1,500,00 less $680,000 or $820,000. After working out the average rate of tax on 1/5th of that gain, that rate would be applied to the whole gain.

Assuming I was on the top marginal rate of tax already, and I had adequate private health insurance I would pay tax almost at the rate of 45% plus the Medicare levy of 2%. So, ignoring the five year averaging, 47% tax out of the gain of $820,000 (i.e. $385,400) leaves us with an after tax amount of $434,600 plus of course the untaxed inflation gain amount of $170,000, or $604,600.

In fact, this specific adjustment for inflation was (more or less) abandoned in 1999. A rough and ready but simpler calculation instead allows a taxpayer to only include half the capital gain in taxable income – the capital gains discount.

In our example the difference between the purchase price and sale price (the net capital gain) was $1,500,000 less $510,000. Under the 50% rule I would include only half the capital gain, i.e. half of $990,000, or a net $490,000 in my taxable income. Again, assuming I am at the top marginal tax rate, the 45% tax plus 2% Medicare levy paid on that half gain would be $230,300, leaving me with $264,700 after tax PLUS the $500,000 untaxed, or in total $765,000 in my pocket.

Other income, such as wages, interest, rents and the like, is not adjusted for inflation. On the other hand, those income amounts are received on a regular basis through the year, whereas capital assets can be held for years before the gain is made.  So, in my example, the gain is not spread over the ten income years I made it in but is taxed in the year of sale, putting me into the top 45% plus 2% rate.  If the $990000 gain were spread over ten years, then that would be $99,000 a year if we spread it crudely, working backwards.

The point is that if I were below the top marginal tax rate (say on the minimum wage of $37,000) then the rate of tax I paid each year on the $99,000 gain would be much less than the top marginal tax rate. Including half the gain of ten years in the final year, i.e. the year of sale, puts me in the highest marginal tax rate for much of the gain, given the size of the gain, even if I were on the minimum wage.   The 50% discount supposedly counterbalances the increased tax.

However capital gains are made by and large by the top 20% of income earners, and the higher the income, the greater the capital gain. So, this 50% discount rule benefits those wealthy people who make their income in the form of capital gains.

Labor’s proposal is to cut the discount from 50% to 25%. It recognises that the 50% discount overcompensates rich people for inflation.

Personally, I’d be in favour of abolishing the discount altogether. Treat capital gains like all other income. Do not adjust capital gains for inflation until the tax on wages is adjusted for inflation (e.g. by increasing the various levels at which tax kicks in by the rate of inflation.)

It would then be a case of spreading the gain over the income years in which it arises. Of course, the tax would not be paid until realisation. A simple calculation device could do that, I assume. Certainly, the ATO with its billions of dollars in technology could devise a simple system to arrive at the correct amount of tax. The fact that the tax money has not been paid in years one to 9 in my example means interest might have to apply to those amounts. So add in an amount of interest on top to compensate the revenue for the lack of payment over the previous years.

Labor’s proposed reduction in the capital gains tax discount from 50% to 25% brings those whose income is from capital gains closer in line to the treatment of, for example, currently unindexed wages income, but gives some compensation for the possible increased taxation effect of taxing the gain in the year the asset is sold, rather than spreading the gain over the number of years the asset was held.

So if we are going to have a crude estimate of these complex factors, a discount of 25% seems fair. It is certainly better than a 50% discount.

One other thing Labor could fix is the exemption for non-residents from CGT, except where the asset is land. Why should a non-resident who owns shares in say an Australian bank and sells them at a profit not be subject to Australian capital gains tax?

John Passant is a former tax academic and a former Assistant Commissioner in the Australian Tax Office. He is a freelance member of the Canberra Press Gallery. Mainstream or other media wishing to reprint this article should contact John to discuss the rates for doing so.

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