Capital gains tax (CGT) changes are on the table, and they could affect your wallet. With the government considering reductions to the CGT discount, now’s the time to understand how this might impact your investments, whether in real estate, the stock market, or superannuation funds.
The Basics of Capital Gains Tax (CGT)
Capital gains tax applies to the profit made from selling an asset, whether it’s real estate, shares, cryptocurrencies, or even businesses. If you hold an asset for over 12 months, you’re currently entitled to a 50% CGT discount (meaning you only pay tax on half the gain) as part of a tax simplification introduced in 1999. While it may sound like a win, this discount has long been a point of contention—particularly when it comes to property investors.
Since its introduction, many high-income earners and property investors have benefited greatly, with the system enabling them to pay significantly less tax on real estate profits than they would under the standard marginal tax rates. However, this has also contributed to growing generational inequality, with younger Australians struggling to get into the property market while older generations with wealthier portfolios have benefited from rising real estate prices.
The Potential for Reform
The government’s interest in CGT changes has resurfaced after a well-sourced leak. While Treasurer Jim Chalmers has tried to downplay the changes, he’s also pointed out that housing affordability and generational inequality are central to the government’s economic agenda, reports ABC Net. Essentially, the idea is to address the widening gap between those who own property and those who can’t even dream of buying their first home.
If these changes are implemented, it could reduce the current 50% CGT discount, potentially to 25%, or even introduce further restrictions on negative gearing. Negative gearing, which allows investors to offset losses from their rental properties against their other income, has long been a controversial topic in Australia’s property market.
What Does This Mean for You?
For those holding property investments or other assets, changes to CGT could result in higher tax liabilities on your capital gains. If the government reduces the discount, your overall taxable income from asset sales could increase, meaning more money will be handed over to the tax office. But the impact isn’t just limited to property investors. For those with significant superannuation savings, the CGT changes could affect how your investments perform in the future.
Superannuation funds are some of the largest investors in the Australian stock market, and any changes to CGT will have ripple effects on their returns. It’s worth noting that these changes wouldn’t necessarily come into play overnight. The government is likely to ease in the changes, possibly as part of broader housing policy reforms that could include tweaks to negative gearing, which would further discourage investors from purchasing existing properties.
Wealth Inequality
Let’s be honest: the current system isn’t all that fair. More than $21 billion of potential tax revenue is lost annually due to the CGT discount, according to Treasury’s own calculations. And most of that lost revenue benefits the wealthiest Australians—especially those involved in real estate. With housing affordability becoming one of the biggest issues for younger Australians, it’s clear that the government is under pressure to make these changes.
But will this alone be enough to fix the housing crisis? Probably not. However, it could be a necessary step toward reducing some of the wealth inequality that’s become entrenched in the property market.
