Westpac to Jim Chalmers: cut CGT discount, and index incomes to avoid bracket creep
Westpac is making an economic roundtable submission that will suggest Jim Chalmers cut the capital gains tax discount, and index incomes to avoid bracket creep.
Westpac will recommend that Jim Chalmers change Australia’s capital gains tax system back to the pre-Howard and Costello era, remove bracket creep, but leave the GST base untouched in a submission to the Treasurer’s economic reform roundtable to be held next month.
Following the Commonwealth Bank’s submission that urged Dr Chalmers overhaul the GST, introduce wealth taxes and postpone corporate tax cuts, Westpac will now suggest a different tack.
Speaking at independent MP Allegra Spender’s mini economic reform roundtable in Canberra on Friday, the bank’s chief economist and former Reserve Bank official, Luci Ellis, said Westpac would make a submission that would include changes to CGT and indexation.
“Let’s change CGT back to a simpler version of the pre ‘99 system, so that we’re not incentivising capital gains over income producing investments,” she said.
Australia currently has a 50 per cent CGT discount for individuals and trusts on assets they hold for more than 12 months.
Forgone taxes from the capital gains tax discount are about $22.7bn in 2024-25, up from $9.2bn four years earlier.
Before the Howard government introduced the CGT discount, the government taxed capital gains after adjusting for inflation.
Ms Ellis said removing the 50 per cent discount would take away the incentive to structure investments to produce income losses, such as negative gearing.
“Reforming the CGT will eliminate that incentive to make an income loss today, which you can deduct at the full marginal rate,” she said.
She added that instead of using the discount, the tax office could allow for a 2.5 per cent annual discount reflecting inflation. This 2.5 per cent rate could also be used to index salary brackets to prevent bracket creep. Such a mechanism would also help smooth out tax rates during times of big movements in inflation.
“I don’t want to CPI index the tax brackets, because that doesn’t lean against shocks. Let’s escalate it 2.5 per cent – the midpoint of the RBA target range,” she said.
Ms Ellis also diminished the need for GST to apply to a broader range of goods and services.
“GST is a more efficient tax than income tax, but GST revenue is not keeping pace with the economy. Because guess what? The things that are exempt from GST are also those government-subsidised things that the government’s choosing to expand the shared economy.”
The views of Westpac, whose chief executive is Anthony Miller, were aired at a roundtable where former Treasury secretary Ken Henry warned Australia was now on track for a fiscal crisis and that the likely response would be lifting taxes. “We are on track to delivering the fiscal crisis projected in first intergenerational report, which was published way back in 2002,” Dr Henry said.
He said he was against lifting taxes as a share of the economy but that it seemed to be moving that way. “We should be thinking about the design of a tax system that would do the least economic damage as we lift the revenue to GDP ratio over time. Now I can understand that some people don’t want to contemplate that prospect, but we’ve been aware of the need to avoid that prospect for 23 years. I still hope you can avoid it,” Dr Henry said.
Former Labor economic adviser Ross Garnaut, who attended the roundtable, blamed the currently unsustainable budget on a lack of political will to introduce taxes on carbon and mining.
“What was done in 2010 and 2013 in killing rational approaches to carbon pricing and mineral rent taxation destroyed the budget, and we’re still living with the consequences of that,” professor Garnaut said.
Former Productivity Commission chair and E61 chief executive Michael Brennan said more attention needed to be paid to the budget deficits of states which, combined with commonwealth, were not in a “comfortable” place.
He also suggested that any of the federal government changes to superannuation tax concessions should be used with fiscal discipline. “To the extent that we are looking at some things like super tax concessions, which are about addressing that big build up in wealth, I think there’s a very strong argument that that should just go to budget repair,” Mr Brennan said.
Treasury expects that spending as a percentage of GDP, outside of the Covid stimulus, will hit the highest level since 1986 at 27 per cent of GDP in 2025-26. Ms Spender’s roundtable included a raft of policy reforms, including road user charges, carbon and mining taxes, and a preference for a less concessionary tax treatment on capital than incomes.
While Dr Henry featured heavily in the discussions suggesting reforms must restore, “fiscal sustainability”, “fairness”, and economic “resilience”, Dr Chalmers was in Brisbane touting the same message.
“Our economic reform roundtable is all about making our economy more productive and more resilient,” Dr Chalmers said.
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