Treasurer Jim Chalmers’ proposed changes to capital gains tax (CGT) discounts, aimed at combating intergenerational inequality, could significantly alter Australian investment behaviour, according to Goldman Sachs Australian strategist Matthew Ross. While the exact details remain speculative, Ross’s analysis of media reports suggests Australia might soon uniquely combine the most favourable tax treatment for dividends with the least favourable for capital gains globally.
Currently, long-term capital gains are taxed at 16 per cent for median-income earners and 23.5 per cent for high-income earners after existing CGT discounts. However, if discounts were indexed to inflation, as speculated, effective CGT rates over the past 30 years could have averaged 22.5 per cent for median earners and 33.1 per cent for high earners, representing an increase of about 40 per cent. This shift would likely make yield stocks and defensive assets more attractive, particularly to top earners, while diminishing the appeal of growth stocks, which would need to trade at significantly lower valuations to offer comparable post-tax returns.
The ramifications extend beyond individual investment choices. Ross highlights that higher effective tax rates linked to increased returns and longer asset holding periods could deter founders and start-ups seeking early-stage capital. He also warns that corporate payout policies could swing further towards dividends, potentially reducing reinvestment rates and future economic growth. Furthermore, raising the cost of capital on the ASX might inadvertently encourage Australian companies, many with substantial offshore revenue, to list on overseas markets, intensifying outbound capital flows. However, superannuation funds, pooled investment trusts, and exchange-traded funds are reportedly exempt from these changes, potentially benefiting them. The full details of the new CGT regime are expected next Tuesday, with potential grandfathering provisions to prevent immediate market disruption.
