The federal government has been advised to reform the capital gains tax (CGT) system by abolishing the current discount and reinstating a pre-1999 income averaging regime. This recommendation comes from economists at the e61 Institute, who argue that modern technology can support this shift, addressing issues created by irregular capital gains from investments.
According to the submission presented to the government, the existing CGT discount disproportionately affects low-income earners. Irregular and significant capital gains, such as those from selling investment properties, shares, or businesses held for over 12 months, can push individuals into higher tax brackets, leading to what the e61 Institute describes as over-taxation. The submission highlights that the current 50 percent CGT discount under-compensates those with lower incomes.
Greg Kaplan, chairman of e61, emphasized the fairness of income averaging. He noted that individuals earning less than $50,000 per annum already face higher tax rates if their income results from irregular gains. For instance, an average income earner realizing gains every two years could pay a tax rate of 30 percent, while someone realizing gains every 20 years may see their rate rise to 45 percent.
The proposal suggests that moving to a system of income averaging would mitigate these disparities. Income averaging would allow taxpayers to spread their capital gains over several years, ensuring that individuals with similar lifetime income pay comparable tax rates, regardless of whether their income comes from regular wages or fluctuating investment gains. This system was in place before 1999, when the Howard government implemented the current CGT discount.
Matt Maltman, a research economist at e61, stated, “Income averaging would ensure that taxpayers with similar lifetime income would pay similar tax rates.” This approach could make the tax system fairer by providing a more accurate reflection of an individual’s economic situation.
A key challenge with the pre-1999 system was its administrative complexity, which required detailed records of individual assets, including purchase and sale prices. The current CGT discount was introduced to simplify tax compliance and reduce the administrative burden by requiring less data. However, this simplicity has not necessarily translated into lower compliance costs for taxpayers.
Academic expert Chris Evans, who specializes in taxation at UNSW, supports the abolition of the discount. He argues that while the discount aimed to simplify the CGT regime, it has not significantly reduced complexity or compliance costs. Taxpayers still encounter challenges in determining eligibility for the discount, leading to high professional fees and burdens that disproportionately affect small investors and those without professional representation.
The e61 submission contends that advancements in administrative capabilities, driven by modern technology, could change the balance between simplicity and accuracy in tax systems. Improved digital record-keeping, pre-filling of tax documents, and enhanced systems from the Australian Taxation Office (ATO) could facilitate a return to a tax structure that aligns liabilities more closely with actual economic income.
In its conclusion, the e61 Institute argues that while a discount-based system offers simplicity, it does so at the expense of fairness and equity. A tax system that correlates tax liabilities with real economic income is preferable, but it requires more sophisticated administrative capabilities and accurate data collection. As the government evaluates the current CGT regime, the insights from e61 could prompt a reconsideration of how capital gains are taxed in Australia.
