The ALP’s proposed ban on negative gearing has been well publicised and debated. However, its proposed changes to Capital Gains Tax (CGT) have received far less attention. I suspect that this is because investors tend to overestimate short-term consequences and underestimate more significant long-term outcomes. But, since most of us are long-term investors, I’d suggest that we should adopt a more balanced view.
How does capital gain tax currently work?
At the moment, only 50% of the net capital gain is included with your other taxable income (except for companies which are not entitled to the 50% discount) if you have owned the asset for more than 12 months. The net capital gain (or loss) is calculated as follows:
Net sale proceeds – being sale price less any selling costs including agent fees and so on.
Less
Written-down acquisition cost – including purchase price, stamp duty, buyers’ agent fees, legal fees, inspection fees and so on; less any depreciation claimed in prior years.
Equals
Net gross capital gain (or loss). This amount is discounted by 50%. The discounted amount is then added to your income and taxed according to individual marginal rates.
What has the ALP proposed to change?
The ALP has announced that if it wins the election on 18 May, it will halve the CGT discount from 50% to 25%. This effectively increases that amount of tax you’ll pay by 50%.
For example, under current arrangements, only $50 of a $100 capital gain would be added to your taxable income. If you are on the highest marginal tax rate of 47%, you would pay $23.50 in tax. However, under the ALP’s proposed arrangement, $75 would be added to your taxable income and your tax payable would increase to $35.25 – an additional $11.75 or 50%.
These CGT changes apply to investments, including property and shares, purchased on or after 1 January 2020 (for property, this is likely to be based on contract date, not settlement date). All investments made prior to 1 January 2020 will be fully grandfathered and entitled to continue to claim the 50% CGT discount.
High growth assets will be impacted the most
Unlike the changes to negative gearing, these changes to CGT will impact property and share investors to a similar extent.
And investments that provide the majority of their total return in capital growt
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