Calls for a transformation in Australia’s capital gains tax (CGT) regime have emerged, with a proposal to revert to the pre-1999 taxation methods using modern technology. Economists from the e61 Institute argue that the current CGT discount is not effectively addressing the financial challenges faced by individuals with irregular capital gains from investments.
The 50 percent CGT discount currently in place allows investors to reduce their capital gains tax liabilities, but the e61 Institute claims it disproportionately affects low-income earners. The institute suggests that reinstating an income averaging system would provide a more equitable approach to taxation.
Understanding the Proposal
The e61 Institute’s submission to the federal government highlights that irregular capital gains from selling properties, shares, and businesses can lead to individuals being pushed into higher tax brackets, resulting in over-taxation. According to Greg Kaplan, chairman of e61, “Even with the current discount, someone earning less than $50,000 per annum pays a higher tax rate if they earn their income through irregular gains.”
For example, an average income earner who realizes their capital gains every two years could face a tax rate of 30 percent. This rate increases to 45 percent for individuals who realize their gains every 20 years. The e61 Institute argues that moving to an income averaging system, which would spread out the tax payable over several years, would rectify these discrepancies.
Technology’s Role in Taxation
One of the key hurdles in implementing the pre-1999 income averaging system was the administrative burden associated with accurately collecting data on individual assets. This data included purchase and sale prices, along with extensive historical tax information. The current CGT discount system prioritizes simplicity, requiring less data, but it has not necessarily reduced compliance costs for taxpayers.
Taxation expert Chris Evans from the University of New South Wales supports the abolition of the discount. He states, “Although the discount was intended to simplify the CGT regime… CGT complexity and compliance costs have not materially decreased.” Taxpayers continue to face challenges in meeting eligibility criteria for the discount, resulting in significant professional fees for compliance.
The e61 submission emphasizes that advancements in administrative technology, such as digital record-keeping and improved systems from the Australian Taxation Office (ATO), could facilitate a return to a system that aligns tax liabilities more closely with actual economic income. “A discount-based system offers simplicity, but at the cost of significant inequities and distortions,” the submission notes.
The proposal to abolish the CGT discount and implement income averaging aims to create a fairer and more efficient taxation system, addressing the complexities and inequities inherent in the current framework. As discussions around tax reform continue, the e61 Institute’s recommendations could significantly impact how capital gains are taxed in Australia.
