A Senate inquiry into CGT paves the way for the next wealth tax

With the new super tax in the bag, the Treasurer has been gifted an open door to more wealth taxes with a new Senate inquiry into capital gains tax.

Any move on CGT could have much wider consequences than the new super tax.

With Treasurer Jim Chalmers now looking for his next wealth tax opportunity, a new Senate inquiry into capital gains tax could not have been more timely.

CGT – specifically the 50 per cent discount on the tax payable on any asset held for more than 12 months – is a sitting duck.

The discount much beloved by property flippers is applied to all investments, but it’s the role of CGT inside the housing market that has the potential to make it a red hot issue in the months ahead.

The inquiry has been called by the Greens.

CGT had been in the spotlight before the Treasurer’s tangled efforts to get the $3m super tax off the ground. With this de facto wealth tax due to kick off on July 1 next year, the risk now is that CGT reform follows next.

Any move on CGT has the potential to have much wider consequences than the new super tax and its limited cohort of older and richer investors.

What’s more, CGT arrangements as they stand are under question from influential non-political players.

Tim Sandow, president of the The Tax Institute and a partner at BDO, says it’s been “a pretty generous measure”.

“It would be useful to have a conversation to ask if CGT rules are still appropriate,” Sandow says.

Any dilution of current CGT arrangements will make entrepreneurs across Australia even less likely to take risks. It will also dampen investor activity even at the most elementary level where someone buying an exchange-traded fund expects to benefit from these tax settings if they make a profit having held the asset for more than a year.

CGT discounts work like this. If you buy something for $1000 and sell if for $2000 you will pay tax at your marginal tax rate, which could be more than 45 per cent. If you hold that asset for more than 12 months, the 50 per cent discount kicks in and your tax bill drops closer to 22.5 per cent.

It does not take much imagination to see how this new Senate inquiry set for March will pan out. Politicians against the tax will point to it as the reason house prices surged over the last two decades. The argument will then be made that the tax must be made less attractive to cool prices.

Moreover, those in support of CGT are not all on one side of the house. Queensland-based Liberal National Party member Garth Hamilton called for CGT changes earlier this year.

Of course the reality is that house prices over the last two decades powered higher due to a range of fundamental factors. In the first phase, it was largely due to lower rates. That is the rock-bottom rates post-GFC that pushed house prices structurally higher. More recently, the problem is largely due to lack of supply.

All the same, the CGT discounts clearly helped to accelerate the escalation of prices. Popular television shows based on people fixing up houses and selling them for big profits confirm that pretty clearly.

The CGT discount was introduced by the Howard government in 1999 as a more practical alternative to the previous complex inflation-adjustment mechanism that had been in place.

But the key issue that may turn this inquiry into something more than just another talkfest is Sandow’s underlying argument that the discount in place today reflects the past rather than the future.

The 50 per cent discount seemed a good idea back 25 years ago when inflation ran higher than it does today. Our long-term average inflation rate is close to 4.5 per cent. Even today, after a recent inflation spike, the annualised rate is 3.2 per cent.

In other words, there is scope to suggest the CGT deal has been a discount on a discount for an extended period.

A reversal to the former inflation-adjusted method would immediately mean higher taxes for investors.

Another alternative might be a stepped measure, where investors would get a bigger discount the longer they held onto an asset.

Compared to the tortuous details of the new super tax, these changes would be relatively easy.

What’s more, they would also fit neatly into the government strategy avoiding new taxes, where a crimping of existing benefits embedded across the system will do just as well.